In Fashion
Matt Damon and Gisele Bündchen have been much mocked for fighting for cryptocurrency exchange. (Stephen Curry seems to have escaped the same fate, perhaps because his video is comical. This may interest you : Why some high-tech lenders are not worried about rising interest rates.) Consumers acknowledge that celebrities are no more knowledgeable than Uncle Jack, who should not use a stapler without supervision, but they renounce their cynicism when fixtures support soft drinks or eyeliners. Celebrities are not experts – but who are they?
However, investment platforms are another matter. We may want to be as popular as Matt or glamorous as Gisele, but that does not mean we want to invest like them, any more than we want help when we take a statistics test.
Such was my first sight. Then I realized that crypto advertisers do not care about the skeptics. They sell instead to those who dream big, and who want change. Matt Damon celebrates bravery. For him, investing in crypto is like discovering the new world, climbing Everest, flying on Kitty Hawk and landing on the moon. Meanwhile, Gisele Bündchen hopes to improve the planet. “There is a real potential for good,” she says, “a chance to promote positive change and create a level playing field. Our current system has not worked well for everyone.”
This represents a new view of investment. For their customers, cryptocurrency exchanges offer more than the opportunity to make money. They are lifestyle decisions. As with shoes, or liquor, or cars, the purchase of crypto shows the consumer’s personality. He or (less likely) she has become part of the revolution.
This Time Is Different
There have, of course, been previous investment revolts. Back in the day, Charlie Merrill took the stock market to Main Street. To see also : Small Business Stocks Qualifying: Some Interesting Questions. Two generations later, another Charles, nicknamed Schwab, undermined Merrill Lynch’s once subversive business model by making trades much cheaper. At the same time, Vanguard not only introduced index investments, but also transformed mutual fund pricing.
Today’s uprising, however, is different. Admittedly, I can not talk about how Charlie Merrill’s coup was received, since it even precedes the memory of my email friend Taylor Larimore, who turned 98 in January. But I’m old enough to remember how Schwab and Vanguard sold themselves. Their seats were impersonal. They sold primarily on price, accompanied by the promise of competitive services.
Not so for cryptocurrency exchanges. Nor for Robinhood’s brokerage platform. To be sure, Robinhood’s external marketing is similar to Schwab and Vanguard, by highlighting costs. However, none of Robinhood’s rivals have such an overtly rebellious name, nor have they tried to make investments playful. Schwab and Vanguard have sought pain relief, not diversion. On the other hand, Robinhood’s website, with its apps and competitions, has imitated them to sports gamblers.
A third revolution has been encouraged by those who buy “meme shares”. While that habit sometimes coincides with having a Robinhood account, the two elements are separate and distinct. The former means choosing a brokerage platform that claims to be different from Wall Street, while the latter strategy not only involves bypassing Street, but often strives to damage its constituents, by squeezing the portfolios of hedge funds that have shorted the meme shares.
Something for Nothing?
The advertising of cryptocurrency exchanges, the branding campaign for Robinhood and the social networking communities that create meme shares each share two attributes: 1) the implication that they have investment virtue (bravery, charity, fair play, punishment of the guilty) and 2) the attempt to entertain. This means that the participants hope to get their cake and eat it as well. In their view, investing must no longer be a tedious activity, facilitated by morally questionable. Investing can actually be fun, while also making the world a better place.
Well, maybe. Whether the exchange of cryptocurrency, the launch of Robinhood or the establishment of meme shares will end up benefiting humanity is up to others to decide. (Each has its share of critics. On the same subject : Investing is a Life Choice.) I can not comment on their pleasures either, since a casino floor in Las Vegas for me occupies one of the nine circles of hell. So I will not comment on whether lifestyle investing is either beneficial or entertaining.
A Risky Path
What I can say, however, is that it is absolutely fleeting. I do not need to repeat the fluctuations of cryptocurrencies. Nor do I have to explain the dangers of investing in just a handful of stocks, as Robinhood’s clients often do. And after having a spectacular start to 2021, most meme stocks have since lost at least half their value, and sometimes much more.
That amount of volatility does not see me as a formula for long-term success. Along with the importance of costs, the mutual fund industry’s biggest lesson has been the damage caused by volatility. Too often, investors say they are prepared to take risks – but then fail when their determination is tested. As a result, the funds that have made the most money for shareholders have not been the ones with the highest returns, but rather the funds that have averted unpleasant surprises, while delivering competitive (if not necessarily outstanding) gains.
We will see if the lifestyle investment choices behave in the same way, with investors arriving late to one bull market, absorbing losses during the inevitable downturn, and then saving themselves before the next bull market starts. This evidence has not yet been gathered, although it should be noted that between the first quarter of 2021 and the first quarter of 2022, Robinhood’s revenues fell by 43%.
I understand the power of appealing to customers’ hearts instead of their heads. It is clear that such an approach has attracted millions of new investors to the financial markets. That’s a good thing. For the result to remain positive, however, these investors must stay the course. Whether they will do so remains to be seen.
Final Note: ESG
It can be objected that I have left out the mother of all lifestyle trends, invested based on environmental, social and management criteria. It is true that ESG supporters want an investment revolution. However, there are two important differences between ESG practices and those mentioned in this column. First, at least as far as I know, ESG investing does not claim to be fun. Second, ESG portfolios tend to be widely diversified. Their performances are therefore relatively subdued.
John Rekenthaler (john.rekenthaler@morningstar.com) has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar’s investment analysis department. John is quick to point out that although Morningstar generally agrees with the views of the Rekenthaler report, his views are his own.
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstars
