Whose Decline is it Anyway?

I recently read this Wall Street Journal article about three photographers in California who became day traders during the pandemic. Since photography work was so hard to come by, they thought they would have more luck if they teamed up and took on the stock market. Initially, their plan worked. Trading on Robinhood was making them more money than they ever earned as photographers.

However, what started as a way to make ends meet quickly turned into an obsession. Every day the men texted about markets, held video calls, and even updated a shared spreadsheet with their individual account balances. They plowed more and more of their money into the markets and even started using margin to further juice their returns. They were riding high on SPACs and EV companies when things started to turn.

First it was CCIV, a SPAC that declined by 39% overnight, leaving one of the men $50,000 poorer. As the bloodbath continued over the next two weeks, the other two men were hit hard as well. Before they knew it, they were all facing margin calls and were forced to sell stock to cover them. In the end, one of the men ended up basically flat while the other two lost 33% of their initial investments.

I tell this story because it raises a larger question of who is responsible for this unfortunate circumstance. Is it Robinhood, who could have done a better job disclosing the risks surrounding the use of margin? Is it online communities like wallstreetbets, who can influence individual investors to take unnecessary risks? Or is it the men themselves, who should have known better?

Whose decline is it anyway?

Technically you can make arguments for each of these points. For example, if Robinhood had done a better job explaining how margin actually works, maybe these men wouldn’t have used it. Or maybe they still would have. Who knows? Either way, some people would have been swayed by better disclosures. How many? I don’t know, but some.

The same logic can also be applied to the influence of wallstreetbets on individual investors. Without wallstreetbets, fewer people would have YOLO’ed their life savings into meme stocks and lost money. I hear these kinds of arguments online as examples of how these communities are harmful to individual investors. But, I rarely hear the reverse of these arguments.

After all, didn’t Robinhood and wallstreetbets also make some individual investors richer in the process? There have to be some people who benefitted from access to margin and chasing meme stocks, right? Where are the stories praising Robinhood and wallstreetbets for enriching this particular group of investors? Because I can’t seem to find them anywhere.

I don’t say this because I believe that Robinhood and wallstreetbets are inherently good for investors. But, I don’t believe they are inherently bad for investors either. Of course, I don’t want people YOLO’ing their life savings into individual stocks and cryptocurrencies. However, I don’t think Robinhood and wallstreetbets should take the blame when they do. Yes, there are things that both of these communities can do to improve investor education and increase understanding around the use of options and margin. However, we can’t ignore the role of personal responsibility either.

Because the issue isn’t necessarily with the tool, but how it is used. You can use Robinhood to own index funds or to buy the most volatile companies on margin. The choice is yours. This is why it’s hard for me to believe that all these day traders had absolutely no idea what they were doing.

Do you really think a better margin disclaimer/explanation in Robinhood would have prevented all of them from blowing their accounts up? I think not. It’s funny because no one complains about the margin disclaimer when their account is going up, do they? It’s only when their account declines that it becomes a problem.

This illustrates an uncomfortable truth—you can give people all the knowledge in the world and they will still make bad decisions. After all, if knowledge were the only thing that people needed to change their behavior, fewer people would eat donuts, candy, and other processed foods. Everyone already knows that this stuff isn’t good for them, yet many of them consume it anyways (myself included).

Unfortunately, knowledge isn’t enough, yet there are people out there who claim that it is. They believe that if Robinhood had just disclosed the risks better, then these day traders would see the light. But we both know this isn’t accurate. Some people can’t learn this way. They need to live it. As Fred Schwed once wrote:

Like all of life’s rich emotional experiences, the full flavor of losing money cannot be conveyed by literature.

So we have to let them live it. We have to let them do what they want. Of course I don’t want people to lose money, but I also don’t think that I have the right to prevent them from doing so. No one has that right. This is why I fundamentally disagree with this paternalistic belief that some people need to be protected from using their money in certain ways. No, it’s their money. They can use it how they want.

I happen to believe that people are capable enough to make their own decisions. Blaming the system suggests the opposite. It suggests that people are too ignorant to make their own choices, so we need to help them. I hate this logic because it turns people into victims and takes away all of their agency. It implies that they have no control over their finances. I can’t imagine a more harmful worldview for an individual investor.

I’m not saying that we shouldn’t try to improve investor education. Of course we should. Why do you think I’ve been writing online for over four years now? However, we should also take responsibility for our investment decisions. We should accept our mistakes and learn from them instead of placing blame elsewhere. It’s the only way to become a better investor.

Happy investing and thank you for reading!

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This is post 239. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

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