One day in 1929, a wealthy day trader exited his office building and went over to a shoe shine stand. He struck a conversation with the boy working the stand, who unexpectedly volunteered stock tips to the businessman. Surprised by this encounter, the day trader then returned to his office and immediately sold his holdings. As the story goes, one of the best sell signals is when a person off the street can tell you what stocks to buy.
In light of the rise of Robinhood, we are now starting to question the validity of this story; perhaps anyone can be an investor. With its mission to democratize finance, Robinhood is amassing a cult following of retail investors, who are casually buying into the firm’s narrative that “you were born [an investor].” In May 2020, the commission-free trading service reported that half of its customers were first-time investors. Since its founding in 2013, the tale of this company seems to be one of empowerment and the American dream.
However, as we learned on Jan. 26 when the stock price of GameStop skyrocketed from $40 to $400 in a matter of days, it is also a tale of remarkable volatility. Although accessibility to financial services is in and of itself desirable, it is only meaningful if people are capable of making informed decisions about their trades. For most college students, trading is yet another trend they cannot miss out on, especially with indefinite lockdowns and pandemic boredom weighing down on them. What some young adults need to realize is that the stock market cannot be taken lightly; even taking into account the likelihood of a fast-approaching economic recovery from COVID-19, it is as dangerous as ever to start investing.
Anyone whose social media feed is even tangentially related to stocks has likely seen this new wave of investing referred to as “gambling.” Unfortunately, that’s because it is. After their accounts are approved, users are immediately set loose to buy and sell however they please, without trading applications making an extensive effort to educate first-time investors. Like a gambler, you thus make decisions without all the possible information. You blame bad luck for any losses and take credit for lucky turnarounds. And, most importantly, you are perfectly content playing a game in which the odds are in favor of the house. When people buy stocks, they are essentially buying shares that are priced at the net present value, which accounts for projected growth. One of the primary ways investors make or lose money is when there is a discrepancy in people’s estimation of the NPV. However, this asymmetry of information clearly favors financial banks, whose data collection capabilities are far superior to those of the average retail investor — let alone a trend-seeking college student.
For those examining recent trends in a vacuum, entering the stock market now may in fact seem not so much like gambling as it is investing at an opportune time. Since last March, the S&P 500 has surged roughly 70%. Booming firms like Tesla are up 800% over the past 12 months. It is worth noting, however, that things could come crashing down as soon as this year. Bank of America strategists warn that a rapidly expanding bubble points towards a market correction in the near future. Hopping onto the Robinhood bandwagon without considerable forethought does not bode well for most first-time investors.
In the aftermath of some risky investments like options trading, a series of unwise decisions or overall inexperience could ultimately lead to devastating consequences. Alex Kearns, who committed suicide in June 2020 due to the mistaken belief that he was $730,000 in the negative, is a poignant case in point. Robinhood has since vowed to improve the user interface and implement experience-based restrictions on certain tools.
If you’re thinking that Kearns’ death could be an outlier, you’re right. He is not representative of most people’s experiences with Robinhood. I know many classmates at Penn who are, by my standards, well informed and enjoy the platform purely for the learning. By this same logic, however, the outliers of success that you observe on social media or among your friends should also not be the reason you start investing.
At a university renowned for its business school and financially literate student body, I cannot be the one to tell you to stop investing, especially if you consistently do adequate research or consider trading to be preferable to a 401(k) or Roth IRA. Instead, I urge you, as a college student, to invest for the right reasons. Don’t invest to earn quick cash, or to subvert the establishment for fun. Invest if you are truly informed or want the stock market to be your sandbox. Otherwise, sit back and watch others gamble away.
ANDY YOON is a first-year student in the College and Wharton from Seoul, South Korea. His email address is firstname.lastname@example.org.