Risk, uncertainty and the uninitiated: recipe for disaster? or opportunity of a lifetime?

Jaime Rogozinski may be a household name to some, but few have ever heard of him; however, many have heard of his creation, especially those interested in the equities and derivatives markets. His claim to fame is the inventor of r/WallStreetBets a Reddit forum that rose to popularity over its daring derivative strategies; many of its exploits are glorified with as much reverence given to significant wins as well as losses.[i] It establishes itself as anti-Wall Street, a kind of Robinhood figure, stealing from the rich and giving to the poor. Its most recent exploits involve the short squeeze on GameStop (GME), which forced investment management firm Melvin Capital to cover its (short) position by purchasing GME stock to cover its margin calls.[ii] In short, the rag-tag bunch of keyboard warriors managed to force the vanguards of Wallstreet to kneel before them. It was a major victory, a transfer of wealth which resulted in increased scrutiny from US regulators. These exploits are often revered amongst young, inexperienced traders.

During the pandemic, the United States and Australia have seen significant increases in the number of young people entering the equity and derivative market for the first time. Whilst Australia is somewhat unique in having a more regulated market than that of the US, it has not been immune to the increased participation and interest in low commission trading platforms like Robinhood.

Many young Australians who were out of work took to the markets to earn income or preserve wealth. CommSec’s executive general manager Richard Burns recently commented in the AFR (Australian financial review) that there is a thirst for knowledge amongst young people who want to learn a new skill and make money whilst doing it.[iii] However, it was noted that the information young people sought was more operational (how to place a trade) rather than strategic, i.e. exponential moving averages which can give an investor an indication of when a stock is about to move up or down in price. 

Whilst some young Australians have embraced the current market volatility, by recognising what is important in a particular companies long run growth, and how the pandemic hinders (airline and travel stocks) or benefits (Mining and iron-ore) in the short-run, those with a long term investing mindset can look past short-run issues and enter the market cheaper pre-pandemic, such as Christopher Moeller, who purchases small capitalisation stocks and holds them for the long term.[iv] Others have embraced riskier and complex-to-price derivatives products that can be detrimental in the hands of novices.

Alexander E. Kearns, a 20-year-old student from the University of Nebraska, committed suicide after using Robinhood’s zero brokerage trading platform to exchange highly risky options contracts. In a note to his parents, he remarked that he had no idea what he was doing; his options account showing a debit of some US$730,000. In reality, his account was in credit, the account showing a debit until the underlying assets that the securities are based on clear.[v] Robinhood, following his death, made a public announcement and commitment to providing more articles disseminating the risks and dangers associated with such highly leveraged products. Although the game like nature and ease with which trades can be placed has drawn criticism for undermining the seriousness and risk involved in investing.[vi]

Whilst Robinhood is currently unavailable in Australia; there is a growing trend for low brokerage or zero commission trading platforms. Stake, an Australian-born productallows investors to trade in US securities and derivative products with zero commission. Of its current 300K user base, just under half are Australians under 35. During the pandemic, 18% of new ASX traders were Gen Z (aged 25 or less).[vii] 

The pandemic has inflated the valuation of certain sectors of the economy such as healthcare and technology firms. Stocks like Moderna with its messenger RNA vaccine technology (Up 228.3%) and Zoom Video (272.6%) in the first quarter of 2020 alone.[viii] These rises often aren’t based on long term valuations and overexaggerate the future earnings of the underlying companies. In times of crises, it is usually best to purchase companies with a solid outlook that are undervalued rather than those on a bull run. As Warren Buffet has notably said: “… be fearful when others are greedy and greedy when others are fearful.”[ix]

Therefore, for those young Australian’s who enter the market now with an investors’ rather than trader’s mindset, they may be sowing the seeds for greater financial independence.

[i] Schwartzel, E., & Otani, A. (2021). Reddit’s WallStreetBets founder sell life story to movie producer RatPac Entertainment. The wall street journal. Retrieved from https://www.wsj.com/articles/reddits-wallstreetbets-founder-sells-life-story-to-movie-producer-ratpac-entertainment-11612440001?st=tdo39jhd8fmqzbe&reflink=desktopwebshare_permalink

[ii] Kochkodin, B. (2021). How WallStreetBets pushed GameStop share to the moon. Retrieved from https://www.bloomberg.com/news/articles/2021-01-25/how-wallstreetbets-pushed-gamestop-shares-to-the-moon

[iii] Vickovich, A. (2021a). CommSec doubles Millennial, Gen Z footprint. Financial Review. Retrieved from https://www.afr.com/companies/financial-services/commsec-doubles-millennial-gen-z-footprint-20210212-p5722x

[iv] Vickovich, A. (2021c). This 20-year-old investor is planning 10 years ahead. Financial Review. Retrieved from https://www.afr.com/wealth/investing/this-20-year-old-investor-is-planning-10-years-ahead-20210304-p577pt

[v] Klebnikov, S., & Gara, A. (2020). 20-Year-old Robinhood customer dies by suicide after seeing a $730,000 negative balance. Forbes. Retrieved from https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance/?sh=45e218151638

[vi] Popper, N. (2021). Robinhood has lured young traders, sometimes with devastating results. The New York Times. Retrieved from https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html?smid=url-share

[vii] Vickovich, A. (2021b). First-time traders hit 400,000 during pandemic. Financial Review. Retrieved from https://www.afr.com/companies/financial-services/first-time-traders-hit-400-000-during-pandemic-20210311-p579qm

[viii] Wieczner, J. (2020). The best stocks of 2020 so far have made pandemic investors much richer. Retrieved from https://fortune.com/2020/07/01/best-stocks-to-buy-2020-coronavirus-markets-economy/

[ix] Frankel, M. (2019). The 100 best Warren Buffett Quotes. Retrieved from https://www.fool.com/investing/best-warren-buffett-quotes.aspx