As I am writing this article, we are mere hours from the 2024 Presidential Election. As you are reading this, I truly hope a winner has been determined and regardless of the outcome, that both candidates have accepted the voice of the people, and we can move on together as one nation.
Today, I want to comment on a disturbing new trend in investing called event contracts that has begun to gain traction, particularly around this election. These contracts are purchased and traded like other commodities, but instead of holding an actual physical asset such as gold or oil, you hold a specific yes or no outcome to an event. If the event occurs you receive the contract payout. If it does not, you receive nothing.
The online trading platform Robinhood, which came to prominence during the Covid lockdowns, have been advertising extensively on the radio this very financial product. In their ads, they try to convince you to not only vote for who will be president, but to also invest in that outcome. In case you are curious, as I am writing this Donald Trump has the edge on Kamala Harris meaning the payout is higher for the current vice president.
You may be asking yourself what the difference is between investing in this type of asset class and ordinary gambling? My answer is absolutely nothing. In fact, as an investment professional it terrifies me how the lines are being blurred between what is legitimate investing and what is reckless gambling.
According to a recent Bank of America study 75% of Americans between the ages of 21 and 42 say its impossible to achieve above average returns with stocks and bonds. 80% of these same individuals are looking to alternative investments such as private equity, commodities and digital assets such as cryptocurrency for higher returns. This, in my opinion, is evidence of the significant financial illiteracy amongst our younger generations. The correlation between risk and reward seems to not be fully understood.
Investing, in my opinion, is not intended to be something done for large short-term returns. It is supposed to be the process of growing your money over a long period of time in a well-diversified group of assets that have a high likelihood of appreciating over time. In other words, it’s taking a crock pot approach to growing your money, not a microwave oven. This strategy is not always as exciting, but it has been successful for millions of people in the past century, and I believe it will continue to be in the future.
Last week, my associate Aaron Pickert, discussed how the potential increase in demand of uranium as an energy source, could lead to above average portfolio gains for those who invest in the companies that produce it. I generally agree with his thesis and think having a small portion of one’s assets in a position like this is perfectly reasonable. However, there is a very big difference between that sort of speculation and investing a large portion of your net worth in something like GameStop that most people do not believe is a viable long-term company.
One, is an investment in companies that you believe have an opportunity for significant growth in a legitimate industry, the other is a bet that once again large numbers of people will be influenced by social media to artificially increase a stock price to harm hedge funds.
As actual gambling continues to become more convenient and socially accepted, I fear we are going to see more and more trading platforms begin to attempt to capitalize on the public’s desire for large payouts in short amounts of time. My advice to you is to remember, investing is a marathon, not a sprint. Avoid the temptation to go after easy money because often that is money easily lost.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)