Released in 2018, “The Hype” is a catchy alternative rock song by Twenty One Pilots. It’s not a song about investing. However, two lines of the lyrics imply that thinking for oneself is better than relying on a crowd: “But you’ll be just fine. Just don’t believe the hype.”
This past week’s financial news was dominated by confusion, excitement, and – I dare say – hype about “Reddit investing.” Retail investors, fueled by excitement generated in online forums, seem to be following each other’s leads in investing in otherwise non-newsworthy companies. Namely, GameStop and other individual stocks have been the target of recent money flows en masse, which has driven the share prices to incredible levels for no fundamental reason.
Some say the Reddit-related trading fanfare reminds them of studying the Dutch tulip craze in the early to mid-1600s. Speculation drove the value of tulip bulbs to extremes during that time. The bubble eventually burst. Today, the “tulipmania” serves as a parable for the pitfalls that excessive speculation can lead to.
My concern is that retail investors who follow trends like these tend to have a short attention span, like so much of modern society. I think these trends could be short-lived because anxious investors might pivot quickly to the next thing. What may be the hottest and best-performing asset last week, month, or year may not be it this week, month, or year. In fact, it probably won’t.
The crowd’s next target and the timing of its occurrence is impossible to predict with accuracy. Although a phenomenon like GameStop will work to generate wealth for some, it won’t generate wealth for everybody. It brings with it huge price volatility. The average daily swing higher or lower in the S&P 500 stock index for over 40 years is about 1.4%, according to Crestmont Research. Daily swings of 25%-100%+ are common in frenzied assets like GameStop stock over the past week.
Everyone wants to participate in the swings higher, but the likelihood of tumbles lower is the risk. In our view, chasing performance, especially of assets with high price volatility, remains a suboptimal strategy for most long-term investors. Remaining diversified according to an enduring plan should provide a more predictable and less stressful wealth generation experience.
You’ll be just fine. Just don’t invest blindly into the hype.