Link: https://tinyletter.com/acs171/letters/known-unknowns-41
Excerpt:
But the whole thing is being framed in an odd way—i.e., that the individual retail investor is rising up against the big, bad hedge funds. This is a compelling narrative, and that’s why it’s all anyone is talking about. And I suppose that could be the takeaway after a single day of trading. But making money in markets requires knowing when to get out (or having power friends who will lend you money when you need it), and I worry about some people betting money they don’t have without realizing the risks that they’re taking on. Taking down a hedge fund is only fun when you make money at it, and we don’t know whether these day traders care so much about taking down big whales until they actually lose money while doing so. And these funds have much deeper pockets and access to a lot more capital. It’s sad to say, but the game is rigged in their favor. So, as satisfying as it may be in the short run, I don’t see it ending well.
It feels like all of these discussions about risk, class, and fairness are dancing around the real question here, a question few will dare to ask: Should retail investors be able to buy individual stocks? Or should we only be able to buy mutual funds?
Investing in individual stocks is risky, and most people would be better off owning an index fund. If they did, they’d make more money on average and face less risk at the same time. Day-trading options are even riskier. So is shorting. My mentor, Robert Merton, has likened owning an individual stock to buying a single piece of car—it’s pretty useless, especially if you don’t know what you are doing. After all, a security’s value is largely about how it contributes to your entire portfolio as a whole.
Author(s): Allison Schrager
Publication Date: 1 February 2021
Publication Site: Known Unknowns