“The American marketplace is an economic jungle. As in all jungles, you easily can be destroyed if you don’t know the rules of survival. … But you also can come through in fine shape and you can even flourish in the jungle—if you learn the rules, adapt them for your own use, and heed them.” — Sylvia Porter
Is it just our imagination, or has there been an uptick lately in exciting new trading tactics for seizing riches from exotic new markets?
Unfortunately, as Sylvia Porter observed above in her 1,200-page, best-selling “Sylvia Porter’s Money Book,” excitement isn’t necessarily an investor’s best friend. Respecting the jungle rules is the wiser way to endure. Using caution, common sense, and knowing what you’re getting into (and especially how to get out of it) has and will always serve us well.
What’s Old Is New Again
Firstly, who is Sylvia Porter? A 20th century financial author and journalist, Porter challenged financial and social norms alike during her extensive career, which launched in the 1930s and peaked in the 1970s. Making her way in a male-dominated business, she initially wrote under the name S.F. Porter, to conceal her gender. By 1975 (when her Money Book was first published), she was syndicated across 350 newspapers as well as the Ladies’ Home Journal. [Source]
Porter is credited as having created the role of personal financial journalist, writing for and by the people. And yet, few remember her name. This in itself is telling of how readily financial times, tides, and fortunes can ebb and flow.
But let’s return to the here and now, and the current incubator of hot new trends. After a year of sitting at home, an excitable generation of do-it-yourself traders has been replacing traditional leisure-time activities with online pursuits—including aggressive, Tweet-worthy trading for fun and profit.
The result? Waves of volatile financial feeding frenzies and overnight sensations, egged on by a brood of freshly hatched social media stars, and a spate of flashy new trading platforms with captivating names like Robinhood and WeBull.
When SPAC-Man Speaks
A SPAC isn’t exactly new. SPACs are essentially a formation of a company specifically for the purpose of acquiring another company. The SPAC has no business plan, and often is just a conglomeration of investors placing their trust (aka: money) in the operator of the SPAC to make the right investment at the right time. The current movement roughly launched in January 2021, when a Reddit-driven rally abruptly sent the prices of several unloved stocks like GameStop through the roof. More recently, special purpose acquisition companies (SPACs) have captured a lot of attention. “When SPAC-Man Chamath Palihapitiya Speaks, Reddit and Wall Street Listen,” observed a recent Wall Street Journal column. “Amateur traders hang on [Palihapitiya’s] every word for clues about his next target—and for the insults he hurls at the high-finance elite.”
Non-fungible tokens (NFTs) have also been taking the trading world by storm. As described in this the Hustle article:
“An NFT can represent any kind of digital asset: a piece of artwork, an audio file, a video clip, a plot of virtual land. The NFT isn’t actually the piece of artwork itself; it’s a piece of code on a digital ledger (blockchain) that points to where the artwork lives — usually on a server somewhere else.”
If you think of an NFT as being like a collectible—say, an autographed baseball card—but in digital format, you’re getting close to envisioning its worth. Similar to playing cards, people are collecting these pieces of code, typically exchanging them in cryptocurrency such as bitcoin.
How much is an NFT actually worth? However much the market decides. Some are currently trading in excess of $1 million each. As the Hustle article describes, NFTs “have caught the attention of tech investors (Mark Cuban), the high-brow art world (Christie’s auction house), and major corporations (Nike) alike. And everyone from Lindsey Lohan to the rock band Kings of Leon is flooding the market with high-priced virtual creations of their own.”
Innovations vs. Investments
These and similar get-rich-quick possibilities may seem shiny and new. And some of the underlying infrastructure truly is groundbreaking. Like the Internet, electricity, and the wheel, intriguing innovations like blockchains, cryptocurrency and NFTs may lead to incredible applications we can’t even imagine at this time.
Plus, at least on paper, there are those who have amassed rapid fortunes by being in the right place at the right time. Trading into the innovations, they’ve caught a wave of risk-laden opportunity; some have gotten very rich in return. Much of the action is highly reminiscent of the 1990s tech bubble, when a trade at nearly any price into nearly any company with a high-tech name seemed sure to pay off handsomely … right up until most of them no longer did.
Time will tell whether these brave speculators manage to convert their good fortune into lasting wealth once today’s trends fizzle or fly. Because beneath it all, the laws of the jungle remain the same. Among these immutable laws is determining whether you want to be a sprinting speculator or a long-distance runner in the wilds of the stock market—and trading accordingly.
In his book, “The Psychology of Money,” Morgan Housel describes two types of market participants—short-term traders and long-term investors—and why it’s essential to know which one you are:
“Short-term traders operate in an area where the rules governing long-term investing—particularly around valuation—are ignored, because they’re irrelevant to the game being played. Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.”
97-year-old billionaire Charlie Munger (Warren Buffett’s long-time Berkshire Hathaway partner) is even more blunt about the differences between short-term speculators versus long-range investors. Some “may call it investing,” he said in a recent interview, “but that’s all bulls**t. It’s really just wild speculation, like casino gambling or racetrack betting.”
In yet another powerful piece, “Financial Implications of Robinhood Investors,” financial author Larry Swedroe took a look at a recent academic study that analyzed the new breed of stock market participants using Robinhood’s no minimum, zero-commission trading platform. The study found that Robinhood participants tend to be younger; less wealthy; and hungry for more frequent, higher-volatility trades. In aggregate, “zero-commission investors behave as noise traders,” with a market impact similar to past noise trading and inventory risk models.
Thriving in the Jungle
In other words, hot trends are business as usual in the financial jungle. Fortunes will rapidly rise overnight. But many will fade just as suddenly. A few will strike it rich. Far more will be left licking their wounds … if they’re lucky.
That’s a dicey way to patiently pursue your long-term financial goals. You may be seeking to harvest returns from the same market, but your end goals are entirely different from those of noise traders on the prowl. Remember these differences if you ever feel a little left out of all the excitement. It should address your concerns about whether they know something you don’t.
As 16th century Renaissance mathematician and gambler Gerolamo Cardano reportedly once said: “The greatest advantage in gambling lies in not playing at all.” In a similar, but not exact manner, we regularly advise clients who are determined to engage in such speculations not to completely ignore their speculative instincts. But, instead carve out a small portion of their liquid net worth to engage in such activities and track the results. As with any real-world endeavor, the results are “mixed” to put it mildly. If, after trying and succeeding, that should not give one clearance to go all-in. Remember, luck can play a significant and misleading role leading up to a massive failure. Especially when it comes to speculative-type investments; success can lure us in only to create a bigger surprise. Best to heed the rules of the jungle.
