Are you investing or gambling in the sharemarket?
Markets have never been more accessible, but investing has also become more gamified. Understanding whether you're an investor, trader or punter can help you manage risk and avoid costly mistakes.
Many years ago, when I first started as an aspiring stockbroker in London, it was a very different game.
Commissions were fixed.
To become a client of a stockbroker, you almost had to be invited into an exclusive club. For those outside that club, the stockmarket was seen as little more than a casino where rich people gambled, sometimes winning, sometimes losing. It certainly wasn't viewed as a mechanism for building wealth for ordinary people.
Prices moved glacially. Things happened far more slowly. Trading floors and telex machines were churning out market-moving news from far-off countries.
Price discovery relied on an army of young pem ople armed with clipboards and comfortable shoes walking around the floor of the London Stock Exchange.
Things were slightly different in Australia, but there was still a trading floor and the market was still largely considered a plaything for the wealthy.
Of course, all that has changed over the past four or five decades.
Markets are now accessible to almost everyone, at any time of the day or night and, in many ways, they have become far more like the casino they were once perceived to be.
The gamification of investing has been astonishing.
Wall Street and other financial centres have continued to innovate, constantly finding new ways for clients to make and lose money, while the investment banks clip the ticket all the way through.
When I was a young broker, we focused on company fundamentals, searching for news that could trigger a re-rating.
Charting was viewed as something akin to astrology, with technical analysts poring over enormous sheets of graph paper, filling in boxes and joining the dots.
Are you an investor, a trader or just a punter?
- If your stock fell 20% tomorrow, would you buy more, sell or panic?
- Do you spend more time looking at charts or annual reports?
- Is your average holding period measured in days, months or years?
- Before you buy a stock, do you already know when you'll sell it?
- Are your decisions driven by analysis or excitement?
It is important in investing to 'know thyself'. Be cognisant of how you react and how you assess risk and, more importantly, how you deal with a loss or, for that matter, a gain.
The most important ingredient is honesty.
- If you're an investor, invest.
- If you're a trader, trade.
- But if you're just a punter, at least admit it to yourself.
At the end of the day, the market usually knows the difference long before you do.
How technology changed investing forever
Today, everyone can be a technical analyst. Everyone has access to sophisticated charting software. Everyone can overlay their favourite indicators and chase momentum.
It is fair to say that momentum has fundamentally changed the way markets trade. Long gone are the days when valuations and price-earnings (PE) ratios dominated the conversation. Today, leverage, momentum and the path of least resistance often seem to matter far more.
We have completely gamified the markets, and I am not convinced that is a good thing.
We have seen the risks of crowded trades, excessive leverage and momentum investing on numerous occasions, from the dotcom boom at the turn of the century, to the global financial crisis (GFC) and, more recently, the extraordinary rise in semiconductor stocks.
Eventually, the bubble bursts and markets suddenly look far more vulnerable than anyone imagined.
Take South Korea. The Korea Composite Stock Price Index (KOSPI) has become extraordinarily volatile for what is supposed to be a broad market index. We have seen it rise 10% in a single day, only to fall 10% the next. That is not normal behaviour for an index. It is the sort of volatility you expect from a highly leveraged gambling vehicle.
Even the regulator responsible for approving some of these leveraged products now reportedly regrets allowing that level of risk to permeate the market.
Concentration risk has become a massive problem, with a few stocks dominating not only the US market but also global markets.
The rise of ETFs has seen passive money flow like a torrent into the same names, feeding on itself and pushing those prices ever higher in a self-fulfilling spiral.
Which is always fine when stock prices are going up, but as things turn, that spiral can quickly turn into a graveyard spiral, where investors 'lose contact with the horizon' and experience 'spatial disorientation'. It is easy in this situation for investors to react in a manner that increases the risks and dangers and accelerates the market towards the 'ground'.
In this environment, it is more important than ever for retail investors to understand what sort of investor they really are.
Knowing where you sit on the investment spectrum makes life much simpler. It requires a little honesty. You need to understand your motivation, your risk appetite and, perhaps most importantly, your own personality.
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