WallStreetBets is a subreddit that provides an open forum for members to carry on discussions of stock and options before trading. Jaime Rogozinski founded the site on January 31, 2012. Since that time it has served as a gathering place for investors to get together and discuss the pros and cons of aggressive trading strategies. the site is known for its profane language and open speech. It’s taken the center stage for the recent Game Stop trading extravaganza that took place to teach a moral lesson to hedge funds that were shorting the stock. Here are five things that WallStreetBets teaches us about investing.
1. Investing and trading are two different things
According to Journalstar, WallStreetBets has taught us all some big lessons recently. One of the more important things that we learned is that investing and trading are not the same. When you buy shares with the hope of selling them for more than you paid for them in the future, you’re not really investing in that company. You’re leveraging an asset to make a quick profit and then get out. It’s more of a means to an end than it is an investment that you plan to hold onto for a while. You’re looking for the best way to make a profit when the stocks go up to cash and try something new with the profits.
Investing is a different strategy that includes investing funds in the hope that a company will use the funds to expand and prosper. It’s a bet on the future success of a company over time. You own a small piece of the company and therefore take an active interest in its overall success. If the company fails, shareholders pay the consequences. If the company prospers, then shareholders reap the benefits in payouts over time. This is considered one of the more stable and best ways to build wealth over time. It’s important to know the difference between the two so you can distinguish between trying to make a quick profit and true investing.
2. Markets can become irrational
We also learned that you cannot always predict what the market is going to do. There are so many factors that go into its behavior that stock prices are subject to change by the second daily. We cannot know what greedy investors are going to do with their stock at any time. Just as the Game Stop peaked at $24 billion-plus, with declining sales that brought the value much lower, investors may not always know what’s going on. You may let your investment ride while others who catch wind of deciding sales may go into a panic mode en masse and start selling their shares. The irrational behaviors of investors can move the stock prices and their value at any given moment in time. Those without a good sense of the total picture can affect stock prices through their actions. The market can serve as an indicator of investor perception with its ups and downs and you never know when large investor groups are going to react to a rumor or a rough spot in the operations of a company they hold stock in.
3. Keep your cool and play to win
Erratic or irrational investing behaviors and a broad impact on the intrinsic value of a company and the prices of the stock. We learned from WallStreetBets that it’s more important to avoid knee-jerk investment transactions that are based on rumors or emotions that we experience both good and bad. It’s not uncommon for investors to gain thousands or even millions as we saw in the GameStop investing frenzy. When confidence began to wane, the gravy train had effectively come to an end, but not before causing severe damage for some of the later investors or those who held the stock. Those who made a quick and substantial profit became blinded by the sense of invincibility with smaller gains from investments not feeling satisfied. It seemed to cause a rash of careless and large investments in stocks rumored to perform as GameStop did. This is a faulty mindset that can leave you broke and upset in a hurry. When you’re making large and risky gambles on stock, you can lose it all even more quickly than you gain a windfall so keep your cool, use common sense, and invest to win in the end.
4. Cashing in stock early can hurt you
The Motley Fool points out that WallStreetBets teaches us that cashing in all your profits on a high performing stock might not be in your best interest. When you sell your stock through a brokerage account, you’re going to trigger a taxable event. You’re going to pay the price in capital gains taxes on your investment. You could end up paying as much as 37 percent in capital gains taxes on a short term investment. If you hold on to the investment for a year or more, you will see the capital gains taxes decrease significantly over time. The longer you hold onto it the better.
5. The rules are not always fair for investors
Although the Reddit crowd meted out their punishment to the hedgers who had been shorting GameStop, we quickly learned that the nasty politics that can invade the market can rear their ugly heads quickly. Even prominent politicians weighed in when Robin Hood restricted investments on the GameStop stock. It seemed to some that they were siding with the hedge funds. We’re neutral on that assumption with no opinion one way or the other. This is a valuable lesson for investors to learn. Even though you plot the best strategies, there are so many different contingencies in the world of market investment that you never know when your plans will be subverted. It’s easy for variables to ruin otherwise perfectly executed plans. It sometimes seems that the big guns out there are packing the most weight and it’s hard to win against such mighty foes.