Betting on Stocks Just Isn’t Worth It

When everyone you know and even your mother is talking about the stock market, clearly something is up. Though it may be tempting to join in on the excitement, the key to sustainable wealth is ignoring the noise and focusing on the long term. 

By now, I’m sure you’ve heard the story  – fueled by a Reddit page called r/WallStreetBets, many everyday investors feverishly bought stock in GameStop, driving the price up more than 1,000% before it came crashing back down barely more than a week later. Other companies were next, including AMC (more than 300% price increase) and Blackberry (more than 120%).

Though the initial goal of many on r/WallStreetBets was to “short squeeze“ powerful hedge funds who had bet against these companies’ success, many just saw an easy opportunity to get rich quick. In the midst of the fervor, it was common to see articles lauding stories of people who bought a few GameStop shares and now could pay off their debt or buy a house. But shortly after the stock crashed, the tone changed. The Washington Post profiled people who lost their personal savings almost overnight, and the Wall Street Journal interviewed a man who took out a $20,000 personal loan to buy GameStop shares, only to see the price come crashing down shortly afterward.

Although this case is especially extreme, given that there was no business justification for GameStop’s 10x increase in valuation, people have been trying to pick “hot stocks” before Reddit (or even the Internet itself) existed. Not to mention, short-selling stocks is not a new phenomenon. But, technology is making it easier for independent investors to treat the stock market like a betting game, convincing themselves they can win by watching a few YouTube videos or reading a forum like r/WallStreetBets. 

Much of this trend is personified in Robinhood, a popular startup that has made stock and options trading easier and more accessible to the layman over the last few years (and was at the center of the GameStop controversy). This is only the beginning – the Wall Street Journal recently reported on an “online-trading startup that aims to let people wager on questions about future events ranging from economics to the weather to public health.” It’s expected to launch in March. 

People want to make money quickly, and there are plenty of websites that will try to persuade you that quick riches are just around the corner if you only subscribe to their “premium” services. CNBC Pro offers a $299 annual subscription to help you “invest like a pro,” and The Motley Fool offers newsletter subscriptions from $149 to $13,999 / year, offering “best of the best” stock picks and tips that could potentially “double your returns.”

A friend reached out to me the other day with this note: “I’ve been deep diving into Motley Fool recently and I’m actually pretty convinced that by following their advice and adding some of our thinking (based on our business backgrounds) we can beat the market.”

My response: That’s exactly what they want you to think.

Ironically, about a year ago, The Motley Fool published an article called “9 Investing Tips from Investing Icon John Bogle That You Shouldn’t Ignore.” Within the article are great tidbits of advice from the founder of The Vanguard Group, Jack Bogle, like his bold statement that “attempting to beat the market is a loser’s game.” But book-ending Bogle’s wisdom is The Motley Fool’s bright yellow “stock picks” button at the top of the page. After the article is a “buy alert” for some “under-the-radar California company” that has “revolutionary potential to change the industry – and potentially your bank account.” 

Many people fall victim to these sales pitches, believing that the only thing between them and investing success is reading more articles to learn about these “under-the-radar” companies.  The reality is that individual, casual investors are up against full-time traders and investment managers. And those professionals are supported by a small army of computer scientists with powerful algorithms, who can research more companies and analyze more data in one day than you can fathom. Even with all these tools at their fingertips, finance professionals don’t have a great record of creating long-term wealth. In 2008, Warren Buffett made a famous $1 million bet that a hand-picked portfolio of hedge funds couldn’t beat a simple, low-cost index fund that tracked the returns of the overall stock market. (He won.) Research has consistently shown that the vast majority of “actively-managed” funds (that usually come with high fees) fail to consistently outperform the overall market. A new project called The Returns Counter, run by my friend, Wells King, reveals how private equity funds, venture capital funds, and hedge funds often underperform the S&P 500 Index.

If you’re looking for the thrill of an unlikely quick win and don’t care that you could be throwing your money away, feel free to pick stocks. (Or for that matter, just buy lottery tickets – it’s easier and you don’t need a brokerage account.) 

However, for those of you who care about building sustainable wealth to buy a house, send your kids to college, and live a comfortable retirement, don’t go chasing investment fads or seeking out stock tips from the likes of The Motley Fool. Instead, take Bogle’s advice: “The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing.”