The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors Review

My first book review that really isn't a book review

It wasn’t that long ago that we were all locking down to some degree trying to figure out if we were ever gonna go back to work in person. Many interesting things came out of those good ol’ days that now feel like a lifetime and 27 rate hikes ago. I found the meme stock phenomenon particularly fascinating due to the psychological aspect of humans and their understanding of the public markets. Still today there are plenty of people who believe in GME and AMC with their “diamond hands” and will likely ride their holdings to 0. Many of these “apes” are perfectly rational and intelligent people who would likely score better than myself on a standard IQ test.

I mentioned a few times that I don’t finish nearly as many books as I start. I’ll be honest, I will likely never provide great book reviews. This isn’t a book review as much as it is my own reflections on interesting parts of the book.

I took at stab at organizing some of the more memorable highlights (these are not in order as they appear in the book):

General confusion on how things work

This isn’t limited to the average person, I have been surprised by how some of our elected officials fail to connect the dots on how things like lockdowns affect supply chains, increasing money supply aggressively in a short time increases inflation, and failing to produce more energy than you consume leads to higher prices. We seem to love pointing fingers rather than understand complex systems. As well there is still quite a bit of confusion among the general public on how company’s make money that offer a “free service”.

• Citadel Securities isn’t a bank or a stock exchange, but it acts as a market maker or wholesaler and now trades more shares on behalf of small investors than any competitor by far. It is Robinhood’s largest single source of income, paying it for the right to execute its stock and options orders in lieu of their being sent to an exchange where those transactions are visible to everyone. That practice, “payment for order flow,” would attract some uncomfortable questions at the hearing.

Overconfidence in one’s abilities

This is my favorite and I find this so fascinating. We all know that we are generally poor judges of our abilities, but that still doesn’t stop us from thinking we are better at things than we are. Investing is no exception. I have had many give me investing advice that don’t know how to read a financial statement. It seems to be mostly men based on my anecdotes. If the results are failure, there seems to be so much energy dedicated to blaming others rather than reflecting and learning something.

• The phenomenon called the “illusion of control” was first described in the 1970s in an experiment by the psychologist Ellen Langer. She gave study participants the ability to buy a lottery ticket for a dollar with half given random numbers and half able to choose their lucky numbers. They were later offered cash for the tickets. The group that chose their own numbers asked for several times as much money and were less willing to sell, despite identical odds.

• Because of another bias described by the psychologists David Dunning and Justin Kruger, people who know relatively little about a subject tend to be more confident than those who have an average amount of knowledge.

• You can democratize finance to the hilt and throw in financial education, but most people have no business coming up with a fair value for stocks. Analysts with MBAs and years of experience are fairly awful at coming up with target prices too. They often tied themselves in knots to do so during the dot-com boom, harming many retail investors who trusted them and leading to an industry crackdown. But at least they had to come up with a projected profit that could be scrutinized. Now prices of securities or cryptocurrencies were just a number tied to a symbol or name, and the experts in suits had missed the boat again and again.

• Plenty of Robinhood’s core demographic, young men, already are reckless without any encouragement.

• Anything that gets us to make decisions more frequently is likely to cost us and benefit someone else.

Statistics that are interesting

These are just some reminders and other data that I found interesting or a valuable reminder. Might be worth sharing to friends that are looking to start investing.

• “Trading Is Hazardous to Your Wealth,” a classic study of retail-investor returns by Brad Barber of the Graduate School of Management at the University of California, Davis, and Terrance Odean of the Haas School of Business at the University of California, Berkeley, looked at data from more than sixty-six thousand retail brokerage accounts in the 1990s.[1] It showed that, even without the effect of commissions, the more people traded, the less they earned on average compared with just being passively invested in stocks. The most active fifth of investors had a net return 6 percentage points less than the average market return. That is a huge difference. For example, someone saving a set amount each year between the ages of twenty-five and sixty-five would have 80 percent less money by retirement day than someone who just earned the long-run market return in an index fund.

• in just a single day of the meme-stock squeeze, Robinhood attracted more customers than the thirteen-year-old millennial-focused robo-adviser Betterment, which puts its clients in cost- and tax-efficient index funds.

• SPACs are too new for a comprehensive history, but IPOs aren’t. Buying into one at its market price makes for a pretty lousy lottery ticket. A database on the performance of nearly eight thousand IPOs maintained by Dr. Ritter shows that only 1 percent of stocks bought at their first-day closing price would have made you at least ten times your money over five years while four in ten would have lost you at least half of your money.

• Hendrik Bessembinder, a finance professor at Arizona State University, looked at twenty-six thousand stocks that have traded on US exchanges since the 1920s, most of which no longer do. Less than half of stocks made any money at all over their lives. The most common return for a stock over that time was to have gone to zero, and just eighty-six stocks made up half of all stock market profits—three tenths of 1 percent.[13] But two things can be true at once: most stocks don’t make money, but the stock market as a whole makes lots of it over many decades. The difference between going to the racetrack and putting your money in the market is that you can’t possibly profit by betting on every horse—the house has a built-in edge. Buying an index fund that contains all the stock market’s future winners and losers—the entire haystack, as it were—is a proven way to build wealth in the long run. And it costs a lot less too.

Grifters, Swindlers, Politicians, Journalists, Influencers and Opportunists looking to make a quick buck

I must admit that I have fallen victim to those with charisma and a seemingly righteous cause. I try very hard to keep my mouth shut if I don’t know anything about a specific subject and I tend to suffer from imposter syndrome. This has led me to be vulnerable to others who have a big voice. I don’t just mean picking stocks I have taken powerlifting advice from someone who has never competed, doesn’t perform the lifts to technical specifications, and pound for pound is not as strong as me. I have now moved to the mindset that I borrowed from Ian Cassel, “Don’t listen to anyone who hasn’t done what you are trying to do”.

• Studies of social media impact show that those who are the surest of themselves tend to attract far more attention.

• Executives who complain that short sellers are trying to ruin their companies either don’t understand this or more often do understand it but are appealing to the general public and politicians who might not.

• But being effective is one thing and being good for the customer is quite another. When it comes to grabbing our attention and profiting from it, unleashing Silicon Valley’s “move fast and break things” philosophy on trillions of dollars of personal savings was bound to create some problems.

Public markets misconceptions and Trading Mindset

It took many years to find the style of investing that aligns with my personality. Here are a couple of points that I can relate to. It’s not glamorous or sexy, but it’s boring and mundane work.

• The biggest misconception about bear markets is that they put a dent in our long-term investing goals. They are the price of admission to those gaudy long-run returns, though, and wholly unavoidable.

• In the words of perhaps the greatest speculator of all time, George Soros: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

• Not one of the five Morningstar “fund managers of the decade” through 2010 even managed to beat the market in the next ten years.

I hope you enjoyed this and got something out of it. If you read the book feel free to comment below on what you liked or didn’t like.

Now let’s get back to trying to pick the exact hour the market bottoms and telling everyone that we know better than the Fed (all anonymously online).

Have a good one.

Dean