Return of the “Degens”
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By Ben Dolan, CFP ®
I love the free market! To quote Milton Friedman, “the only way that has ever been discovered to have a lot of people cooperate together voluntarily is through the free market. And that's why it's so essential to preserving individual freedom.”
When markets are free, the individual is free to choose if and how they want to participate. Given this freedom, wildly divergent opinions on how the individual should participate (i.e. invest) in the market will co-exist. For example, when speaking with a prospect, I always outline our firm’s investment philosophy:
- Think Long-Term - Over the long-term, investors are likely to be rewarded for the capital they provide.
- Discipline is Required - Fear and greed cause the average investor to underperform market returns.
- Asset Allocation and Diversification Matter - Diversification can keep a portfolio that is too concentrated from blowing up.
- Focus on What You Can Control – Keep costs low and consider the impact of taxes.
In short, I believe that when our investment philosophy is followed, the compounding of market returns through time can build tremendous wealth for investors.
A competing investment philosophy is that of the “degens,” short for degenerate traders, who are back in the headlines recently. The star of this group is Keith Gill, known online as “Roaring Kitty.” According to a June 8th article in the Wall Street Journal by Hannah Miao and Gunjan Banerji, Gill “helped lead the meme-stock revolution in 2021 by betting big on GameStop and posting about his investments online.”
An appropriate question for this group would be, what is your investment philosophy? According to Miao and Benerji, while Gill is quick to point out that he is expressing his opinion and not giving investment advice, the group piles “into long-shot trades that proudly have nothing to do with conventional ways of assessing investments. Some are flinging cash at specific stocks or cryptocurrencies just to be part of a movement.”
For example, on Friday of last week Gill posted a YouTube video promoting stock in GameStop. He believes CEO Ryan Cohen will be able to turn the company around, and therefore, it is a buy (note, Gill supposedly already has a large position in GameStop, though this has not been verified). Miao and Benerji are quick to point out that “a boom in long-shot bets tied to GameStop and other degen favorites has helped send average daily volumes in options to almost 47 million this year, the highest level on record going back to 1973. Much of this activity is concentrated in short-term trades that allow investors to score big, or lose everything.”
While I love the freedom that allows for these degenerate traders to gamble in the market, there is an ugly backdrop to such activity: “some degens say returns from more staid investments just aren’t enough. They are hungry for fatter profits and hoping a big win could make a meaningful difference in their lives…Young people especially see record-high home prices and mountains of student debt, and some of them worry they will never make enough money to reach the milestones prior generations did.”
Some of these degen investors will make huge profits by luck (but won’t see it as luck). Others, probably the majority, will be hurt badly.
Sadly, the fear of not having enough is letting greed take the wheel.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data are historical and are no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.
Nothing in this material should be construed as investment advice offered by Dolan Capital Advisors, Inc. This market commentary is for informational purposes only and is not meant to constitute a recommendation of any particular investment, security, portfolio of securities, transaction, or investment strategy. No chart, graph, or other figure provided should be used to determine which securities to buy, sell or hold. No representation is made concerning the appropriateness of any particular investment, security, portfolio of securities, transaction, or investment strategy. You should speak with your own financial professional before making any investment decisions.
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Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors, Inc., a SEC-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.