Shortsighted Investing
December 06, 2024
American markets have become a prime venue for speculation. With meme stocks like Gamestop and AMC igniting a fever among a new generation of investors and platforms like Robinhood that some argue make investing more accessible (though others criticize the platform for gamification), many are looking for and expecting quick and large returns. A rise in speculation through increased enthusiasm for cryptocurrencies, with Bitcoin hovering around $100,000 and the meme coin Dogecoin’s recent runup, has also occurred.
However, a short-term investment horizon can have major negative consequences. Take 0-date options. These short-term options contracts can move dramatically in value because they are always so close to expiration. While that can leave room for significant profits, it also brings a substantial risk of major losses. Suppose an investor is buying 0-date call options on SPY. In such a case, they are not really making a decision founded on a fundamental belief in the American economy or its top 500 companies. Instead, the investor is arbitrarily speculating on a closing price that will be higher than the option strike price. If an investor owns shares in a diversified fund and their portfolio takes a hit, at least they can take solace that they still own a diversified set of corporations, which will, hopefully, move forward and recover. On the other hand, owning 0-date options and reaching expiration “out of the money” will leave an investor with nothing.
Options are an extreme example of risk-taking behaviors that some investors engage in, but there are plenty of others. Already highly volatile stocks now have funds available offering leveraged daily returns on the underlying stock. MicroStrategy (MSTR) is one perfect example. The stock itself moves substantially and frequently. In the last 12 months, the stock is up almost 600%. If that was not risky enough, there is a fund (MSTZ) aimed at delivering a 2X inverse daily return of MSTR’s movements. In just a matter of months, the share price has eroded 90%+.
The truth is the investment is filled with risky instruments that can bring about significant losses. Shortsighted investors have no shortage of options to take risks and speculate on short-term price movements, but they might be well served to reconsider that investment mindset. Warren Buffett’s favorite holding period, “forever,” distinguishes a different brand of investor, one who ignores noise and focuses on conviction. Instead of looking to the next hot stock or investment vehicle, consider how a long-term investment strategy fares. Well, Morningstar highlights a Willis Owen analysis that determined (using the UK’s FTSE 100) that 98% of the time, investing for a 10-year period yields a positive return. It is unlikely that risky investments will go away, but ultimately, each investor can decide whether or not to engage with them.