Now Would Be the Time to Stop Taking Financial Advice From TikTok

Risky stock-picking has become fashionable in the bull market. But betting on winners quickly becomes more dangerous when markets start to struggle.

Jan 24 2022, 2:00pm

For the last few years, it’s been easy enough to look smart when picking stocks. That’s how things are when "stocks only go up." The combination of that confidence-inspiring ease and a surplus of cash related to various pandemic forces has led to a huge number of everyday people, known as retail traders, piling into various fashionable stocks, most famously GameStop and AMC, and feeling like geniuses. Robinhood, for one, saw more than 10 million people open accounts over a single recent yearlong period. 

Over that time, stock-picking has become fashionable as people were drawn in by screenshots of unbelievably large increases in the value of other investors' portfolios. On TikTok, enthusiastic influencers gave exceedingly questionable investing advice, like “I see a stock going up and I buy it and I just watch it until it stops going up, and then I sell it, and I do that over and over.” According to one recent poll, as much as half of Gen Z is getting financial advice from the algorithmic platform, and they are getting a similar amount from Instagram.

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By and large, investing is a good way to make sure that your savings keep up with or even exceed the rate of rising prices, particularly when compared to stuffing your money under a rug. And luckily, stocks have generally gone up in price in the years since the world’s last major financial crisis. The problem is, picking single stocks—as opposed to depositing your money into a diversified index fund that includes hundreds of them—quickly becomes much harder and more dangerous for everyday people when stocks broadly stagnate or, worse, fall off a cliff. In such moments, hedge funds, rich people, and professionals with Bloomberg Terminals, etc., are often able to quickly dump falling stocks unsophisticated investors (i.e. you and me), who are often left holding a lot of the increasingly less valuable bag. Suddenly, those people switch from feeling like geniuses to feeling like they’ve made a huge mistake. 

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The question right now lots of people will ask is if the party will soon stop, and whether it’s already started to happen. The reason is that stocks are looking a little shaky, to say the least. Particularly technology stocks, perhaps best represented by the recent declines in value of the many various “pandemic” companies, like Zoom and Peloton, which all enjoyed an unpredictable boost in value when COVID-19 enveloped the globe and locked people inside.

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 But the nervousness isn’t simply limited to a bike company here and a video app there. In recent weeks, the stocks that comprise the Nasdaq Composite have struggled to keep pace with recent years of gains. The index is made up of a lot of technology stocks, and people have started to question if some of those stocks are appropriately valued, which has led the portfolio to drop 10 percent from an all-time high it hit in November, enough to be labeled a correction. “The public software sector is weathering the second deepest multiple contraction in the last decade,” Redpoint VC Tomasz Tunguz noted in a recent blog post, pointing as a reason why to indications that the Federal Reserve might end the decade of quantitative easing, low rates, and easy money as inflationary fears heat up.  It’s enough to spook the professionals. 

“It used to be fear of missing out, now it’s fear of bag holding,” Danny Kirsch, the head of options at Cornerstone Macro, told Bloomberg. “Investors are using any sort of rally to exit stocks, as opposed to chasing higher.”

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 Corrections happen. The Nasdaq dealt with a similarly rough patch a year and a half ago, and people who are still bullish can try to make the argument that this is a blip caused by Omicron variant fears or the failure of the Build Back Better plan or short-term inflation or temporary supply chain problems. But the drop follows a growing chorus of prominent people expressing concern about the level of exuberance in the markets broadly. Here are some quotes from the last months: 

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Last week, Jeremy Grantham, the 83-year-old investor and co-founder of Boston asset manager GMO, also said he had determined that the U.S. economy had entered “the fourth superbubble of the last hundred years.” Housing, commodity, and bond prices are all too high, he said. But Grantham placed special emphasis on what he described as “the most exuberant, ecstatic, even crazy investor behavior in the history of the U.S. stock market.”

“The checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time,” he warned. 

Grantham is notable, if only for the fact that he was one of the first people to develop a strategy known as index investing, a diversified strategy that is essentially the opposite of the WallStreetBets YOLO-heavy strategy that is so fashionable today.

A lot of people will look at Grantham and the rest of the names and rightfully scoff. These are wealthy people, and wealthy people have by and large figured out ways to exit every major financial crisis relatively unscathed. Others might see them as washed up rich people or exemplative of the Fear, Uncertainty, and Doubt class or even trying to scare people out of reaping the same financial gains they have enjoyed for years. 

Those are all valid enough points. But while some in the retail class have had some success using apps like Robinhood to make big bets on individual companies during the boom, the level of confidence among traders who haven’t faced a long-term crisis is a cause for concern. “The U.S. market today has, in my opinion, the greatest buy-in ever to the idea that stocks only go up, which is surely the real essence of a bubble,” Grantham wrote in his note. 

At the individual level, the success rate of guessing that, say, Peloton’s stock will go up a few cents could potentially turn on its head, and quickly, should the FUD mentality be proven right sometime soon. Timing the top and bottom of an entire market is even harder, so much so that financial experts advise against trying to do it. 

So instead, please just stop taking investment advice from random people on TikTok.

Tagged:

stock market, Robinhood, wallstreetbets, goldman

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