Gambling with Stocks Will Ultimately Lead to Painful Losses

Gambling in stock trading is dangerous, an article in Bloomberg implies, analyzing the latest events around market price movements of GameStop shares.

The Rebel of the Ants

Provided with easy access to stock day trading from the Robin Hood platform, as well as its “addictive gamification”, young people gathered around the WallStreetBets forum for stock trading tips went against the long-term passive investment approach instilled in the crowd, and instead banded together to pump stock prices.

Chasing the rush of going all in and getting rich quick, these people who have nothing else to do due to the pandemic, ignored the fundamentals behind trading with financial instruments, and managed to incur heavy losses to some industry professionals in the process, “giving the collective middle finger” to Wall Street pros and their stock valuations.

According to Kelly Mothner, a licensed clinical psychologist in Hermosa Beach, California, cited by the article, such a behavior resembles reactions to drugs, creating a dopamine rush and making people even more impulsive. Mothner also took a dig at Robin Hood, comparing the platform’s response to each trade by sending traders confetti, colorful and noisy like on slot machines.

Casino-style approach, albeit always possible when trading stocks, can only lead to a reckless behavior of taking bigger and bigger risk which will ultimately end bad for the traders, but what happened last week when people with relatively low experience in trading plowed en masse for maximum rush and volatility, cannot be ignored.

Gambling or Not, Nobody is Immune from Losses

Driven by clear “gambling energy” which got re-funneled after the March suspension in sports, and culminated last week when GameStop, a retail chain selling video games which stock price at one moment in April was at $2.80, climbing slow and steady seeing purchasing interest from users of the Reddit forum, was suddenly considered as a golden goose after claims of being undervalued.

GameStop went to stratospheric levels, soaring 1,625% to reach $325 a share having caught the bears in a relentless squeeze and inflicting to them painful losses to the amount of $20 billion. Among those short selling were several hedge funds, including Melvin Capital, but also prominent online stock commentary website Citron Research.

The rush for more adrenaline spilled over to other stocks like BlackBerry and AMC Entertainment, which jumped to long unseen heights and prompted the restriction on buying imposed by Robin Hood and several other platforms, stirring rumors of conspiracy among forum users.

Higher Purpose?

When the dust finally settled, commentaries about what had happened ranged from shades of the Occupy Wall Street movement, to an eruption of the frustration endured by millions of have-nots created by the economic system in the US. Some forum users compared themselves as “righteous populists who saw GameStop as their Rubicon”, ignoring losses with the idea to expose the hypocrisy of the ultra-rich 1%.

Both sides of the isle ignore the simple fact that gambling is fun and addictive, especially if it brings financial rewards, and such forums provide an outlet for community for these people.

“This is a really interesting participation sport. You can cause the price to move, you can help your team win. The ability to do that is very, very attractive.”

Dan Egan, Managing Director, Behavioral Finance & Investing, Betterment

Such a behavior can only lead to painful endings, an academic paper on Robin Hood culture of intense buying published last year concluded, linking such an approach to future negative returns.