Speculation addiction

Who ever dreamed that Roblox and Fortnite would be the “gateway drugs” to stock speculation? But it’s hardly a surprise that a generation that grew up on video games — honing their quick decision-making skills and even paying real money to purchase “extras” — would suddenly turn to “playing” in the stock market.

No amount of rational thought or pleas for sensible perspective will deter this new fascination. Or shall we call it an addiction? And just as for those addicted to drugs, alcohol and gambling, there should be a “speculation anon” group giving support to those who have to deal with the very real financial consequences of this new mania.

It’s not the idea of speculation that’s alarming. In fact, speculation plays an integral part in the financial marketplace. Speculators assume risk, provide liquidity and frequently oppose the “common wisdom” successfully.

But there’s a big difference between intelligent speculation and outright gambling. That difference is the probability of loss.

This column was triggered by an email I received this week. “My grandson wants to take out all his Apple stock and put it into Robinhood. We do not agree. What do you think?” That’s all the information they gave.

I never give specific stock advice, so I responded with a measured suggestion that they might want to give him a bit more money and designate it for speculation in other stocks, while he maintains his Apple position. I assumed the grandson was young and caught up in the headlines of the Robinhood mania.

A few hours later, I received another email headlined, “I am the grandson!” Obviously my advice had been speedily passed on. The grandson gave me more background.

“Currently I have 280 shares of Apple that I’ve done well on. I understand that the market is getting a bit more volatile [sic] and I’m comfortable with my returns so far. I’m thinking about selling off my shares (which are currently in Robinhood) until the market drops. Then I’ll rebuy at a lower price. Apple has already released their flagship products, and I believe Apple only has so much upside in the current market. I’ve been holding this Apple stock for 10+ years.”

The first thing I know about giving advice is that people who have made up their mind are not often willing to change. So I responded carefully.

My first point was to remind him that his trading strategy requires being right three times: when to get out, when to get back in again, and then when to sell once more. The probabilities of him making all three correct timing choices pale in comparison to simply enjoying this long-term winning position.

Second, I reminded him that he would owe capital gains taxes when he sells. So at least 20% of his gain (and perhaps more if the tax law changes) would go to the government.

Thus, he would have less money to trade with, and each trade would face its own set of tax consequences.

And third, I knew he would be tempted to get into whatever is making headlines. Whether it would be a crowd-generated short squeeze like GameStop or a new “fad” like cannabis stocks, all of those plays are generated by a kernel of attractive truth. And they end with the expensive bursting of a bubble fueled by greed.

Would he be one of the smart or lucky winners in this game? The odds are not favorable.

Instead, I suggested we have a contest. He would sell half of his Apple stock, paying the taxes out of his proceeds. Then go ahead and trade for a year. I would take the side of his remaining Apple position. Let’s see what happens a year from now.

But I’m sorry, Grandma, everyone must learn the big lessons the hard way. It’s an old Savage Truth: The lessons that cost the most teach the most. I doubt he will take your advice or mine. But we will both be able to say “I told you so.” And that’s The Savage Truth.