Investing Goes Mainstream

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In 2000, the country was engrossed with financial markets and the pursuit of riches. The dot-com boom ushered in a new era of technology and extravagant growth. Soon after, markets stabilized and the craze was over. Then the devastating events of 2008 brought attention back to Wall Street, but this time in the worst way.

Public sentiment grew sour and manifested in movements like Occupy Wall Street. Over the following decade, talent diverted to Silicon Valley for greater purpose and working conditions. Google was the new Goldman, and startups were the new hedge funds.

Enter 2020. A pandemic struck and the government unleashed billions of fiscal stimulus into a struggling economy. This ballooned asset prices, pushed inflation through the roof, and renewed the cultural fascination with finance.

In the last few years, public markets investing has exploded. It is hard to ignore how pervasive these topics have become. I’ve had more conversations about financial markets since the pandemic began than I did in my entire life prior.

With bars, theaters, events, and travel shut down, the stock market became a desirable place to spend stimulus checks. But the forces pushing investing into the mainstream have been building for years. We need to look at accessibility improvements, interest rates, human agency, and FOMO to understand how we got here.

Accessibility

Financial services firms have never been known for innovation, yet they maintained healthy economics due to numerous structural advantages. FinTech established a new framework that balances fiduciary duties and promotes innovation.

For better or worse, the gamification of trading platforms has rapidly become the new normal. Brokers leverage gameplay principles and design elements such as badges, vibrations, and animations in an effort to engage users. These features breathe life into products that would have been plain boring to most.

Until recently, investors had to trade whole shares. Now, brokers allow fractional shares, as little as 1/1,000,000 of a share. An investor would have needed $520 to own a stake in Costco. Now you need less than a penny. This vastly expands the universe of people able to own shares that may have otherwise been outside of their budget.

The advent of fractional shares coincided with trading commissions universally going to zero in late 2019, lowering cost barriers.

As tools for interpreting information are enhanced, more people are able to make investment decisions. Combine this with mobile apps that make trading as easy as buying groceries, and it’s easy to see why Robinhood was doing four million trades a day in June 2020.

Cheap money

High-growth companies derive much of their value from expected future cash flows. Biotechs, for example, often don’t return profits for a long time. Thousands of therapies are in development, spurred by advances in gene editing and cell therapy, and investors are banking on a breakthrough.

Since money now is better than money later, a discount rate is applied to those expected future cash flows. When interest rates drop, the discount rate drops, making future cash flow more valuable.

The further out a company’s cash flows are, the more sensitive it is to interest rate changes. Low interest rates also accelerate earnings growth because companies have access to cheap capital which fuels expansion.

From April 2020 to Feb 2022, rock bottom interest rates caused high-growth stocks to skyrocket, further adding fuel to the retail investing fire.

Reclaiming of Agency

American capitalism was once accompanied by affordable education, homeownership, and compounded savings. With college tuition reaching shocking levels, home prices hovering at all-time highs, and the savings rate near zero, this vision is basically a parody to young people who feel a loss of control.

We’re seeing renewed ripple effects of the financial crisis as they come of age with a different worldview than past generations. A skepticism of elite institutions has created an interest in determining one’s financial future, leading to many thinking like an investor. In other words, a way out.

During the GameStop mania in January 2021, we saw investors unleash pent-up resentment from the Great Recession. Main Street was taking on Wall Street. Hundreds of anecdotes showed people who dumped their life savings into GameStop shares. Not just for a chance to get rich, but also to “stick it to the man” whom they believe caused their parents to lose their jobs and homes in the aftermath of 2008.

Their collective efforts caused Melvin Capital to report a loss of 54.5 percent that month, eventually sinking the hedge fund.

FOMO

Investing has traditionally been a solitary activity. It was examining stocks in the daily newspaper, or sitting in front of a monitor reading charts. Today, investing is deeply social. The pandemic was the perfect catalyst for FOMO as people had nowhere to go but online communities.

According to a 2021 study, social media is the top source for investment ideas among 18 to 35-year-olds. Whether its Discord, Reddit, FinTwit or FinTok, we are more plugged in than ever.

The staggering growth of r/wallstreetbets, which now has 12.5 million self-proclaimed degenerates discussing stock and options trading, is the perfect example.

Capital gain profits are measured in units of chicken tenders, known as “tendies”. In the heat of the bull market, Robinhood account balances and new Lamborghinis were publicized throughout the community. The concept of stock fundamentals doesn’t apply to them. They just want the price to move.

We have all heard of someone who struck gold during the bull run and our immediate reaction is “Why not me?”. The soaring market coupled with viral stories of wealth creation caused a euphoria for investors rushing to get a piece of the pie.

Now what?

The bear market and the investing boom have abruptly collided, and many investors have never seen these market conditions. From 2008 to 2022, we were blessed with a tremendous bull market. A lot of people made a lot of money. But the world is changing. It's quicker. More expensive. More complex.

So far, 2022 has been the worst year for markets in 50 years. The last time the S&P 500 finished a year down more than a few percent, many of today’s investors were going to see The Dark Knight in theaters and singing Taylor Swift’s Love Story on the drive over. What a confusing time.

Cheap capital was rocket fuel for high-growth companies. But since the Fed began raising rates, their share prices have plummeted. This new environment places more importance on businesses that can turn a profit now. Companies like Apple and Microsoft have only seen ~20% drops.

In a market where very little went wrong, few found themselves examining their decisions. Everything was up and to the right, and of course it was all a perfectly executed plan steered by genius. Being a successful investor in this market will take more thoughtfulness and patience.

Investing has never been more accessible, more social, or more important. The bull market bred a class of investors, more engaged than any before, with more opportunities to invest than ever before.

Now that we’re in a bear market, investing requires more discipline. Sure we’ll continue seeing meme stocks go to the moon, and the resulting FOMO. But it doesn’t shift the long-term arc from bending towards opportunity.