One Cornell business student explained: “All my friends love using Snapchat to communicate, and because I can’t see myself switching to any other app I think it’s a good investment.” I asked him what the company’s projected earnings are. He shrugged.
The Internet Age has made it easier than ever to invest in publicly listed equities. Thanks to the advent of zero-commission mobile applications such as Robinhood, investing in The Coca-Cola Company (KO) or Apple Inc (AAPL) can be as easy as hailing a ride on Uber. And that’s the scary part.
Among some college students, it has become a common conversation topic to discuss how one’s Robinhood portfolio is performing, and whether or not Snapchat’s parent company Snap Inc (SNAP) is a good buy. Some of these young people are enrolled in economics or business programs, so they may feel like they are qualified to act as investors. They’re not.
For decades, empirical studies about the effects of casual investing have reached the same conclusion: amateur stock picking has the same outcome as gambling at a casino; some will get lucky, some will lose, but the house always wins. In this case, the house is the vast network of professional equity analysts—from hedge funds to investments banks—who closely monitor each stock and at times, illegally, trade on insider information. A cautionary point should be made about the collective wisdom of these highly-trained institutional investors: recent events like the 2000 Dot-com bubble and the 2008 Financial Crisis have demonstrated that even they, although the most advanced group, can be completely wrong.
Today, many younger players in the stock market have strong opinions about Snap Inc, which they justify because they themselves are users of the disappearing messages app (the burgeoning field of behavioral finance calls this the familiarity bias).
One Cornell business student explained: “All my friends love using Snapchat to communicate, and because I can’t see myself switching to any other app I think it’s a good investment.” I asked him what the company’s projected earnings are. He shrugged. What about the P/E ratio? No answer. How about the founders Evan Spiegel and Bobby Murphy’s highly unusual decision to keep all voting shares for themselves? He was confused.
Possibly the greatest investor of all time, Warren Buffet, calls this type of behavior speculating, which is a nicer word for gambling. For the past six decades, the Oracle of Omaha has spent most hours of his day reading and analyzing equities, but even that has not guaranteed him loss-proof performance.
This is not to be read as a call for young people to stay away from equities. As the stock market’s history has demonstrated, one would probably be foolish not to participate. The real question is how to invest. The Internet Age has also brought some good tools to use when investing responsibly, most notably portfolio allocation tools such as Betterment and Wealthfront. Given their low fees, young people should consider these as preferable alternatives to traditional wealth managers.
If you do choose to continue picking stocks without a professional background, recognize that you are only gambling by competing against highly trained professionals, and of course, the market itself.