The Confluence
If you have ever spent time on my website, you will notice a list of book recommendations based on three subjects: investments, fishing, and general interest. One of the books is called “The Confluence.” It is a series of short stories compiled by a friend’s husband about fishing at the Dartmouth College Grant. Two small rivers, the Dead Diamond and the Swift Diamond, come together in the middle of the Grant, the confluence. My favorite book about fishing is also listed, “A River Runs through It,” which was made into a great movie filmed in Montana starring Brad Pitt. Three of the best Montana fishing rivers (Madison, Gallatin, and Jefferson - …history buffs like these names) merge at Three Forks to form the mighty Missouri River. Again, this confluence blends three different bodies of water into one very powerful and vital river in America. Lately, I believe we are witnessing a confluence of factors that are having a powerful impact on Wall Street and investing in general, and I am pretty sure it is not beneficial.
First, we see commentary and trading patterns that indicate more investors are approaching investing as a casino. High risk in exchange for high returns is the mentality. The rise in margin balances, a dramatic increase in options trading, and elevated prices of “meme stocks” are examples of this. The old fashioned concept of “compound returns” has been overrun by the “casinoization” of Wall Street.
A second influence stems from the massive Federal support of our economy over the past eighteen months. The Federal Reserve has driven down interest rates while the Federal government has supported household spending. Low rates and lots of money created the “TINA” market, which stands for “There is no Alternative.” TINA compels more and more investors to buy stocks regardless of price. Have we mistakenly forgotten that bonds and other fixed income investments have a very well deserved role in investment portfolios?
The third influence is “free trading.” Over the past few years, numerous firms have offered “free trading” to investors. Stock trades occur without a commission or fee. Several companies have grown from tiny enterprises to large, publically traded behemoths in a very short period of time using this strategy. I won’t get into the gritty details of how these companies make money, but I see advertisements for free trading and know that some of these companies make it fun and easy to “play the market.” Folks, investing is not a game. Companies that are gamifying investments are leading investors into a bad trap.
I am worried about this confluence that’s creating a casino mentality. Too much money chasing too few stocks, and people trading thousands of shares or options contracts via phone apps that rain confetti when a security goes up in price – these are not positive forces and concern me.
We find ourselves in new waters all the time. As Norman McLean writes, “I am haunted by waters.” I don’t know when or how the good times will turn to bad, but I know Wall Street history. And I know learning from history can prevent repeating past mistakes.
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James. Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, sell or hold a specific security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss.
