The desire to get rich quick
If you’ve spent any time in the finance space, then chances are you’ve heard of a story where someone was able to make a boat load with “meme stocks.”
That person might have even loaded up a credit card or two to leverage those returns.
In every market, there are at least a few success stories of people turning a tiny portfolio into hundreds or even thousands of times greater than the initial investment. With these seducing successes, it can be very tempting to put a lot of money towards these speculative plays. After all, if he can get rich in 6 months, why can’t I?
Who wouldn’t want to “cut the line” of wealth building?
Being able to skip years of progress by rapidly growing money sounds great in theory. But it’s a very dangerous game. Let’s dive into the speculative (and often meme-based) investing world and learn about what one can expect.
It’s Easy to Get Arrogant While Investing
Reading the few success stories on the web or seeing videos on YouTube of people winning big can make their successes seem repeatable and reliable.
Similarly, it’s easy to believe that we have some type of advantage that we can use to exploit the market.
We might read a strongly worded post online justifying why a stock will 10x in the next two months! Time to pour everything into it! After all, YOLO.
The reality is that being able to grow your money continuously at such a breakneck speed, especially on a meme stock is nearly impossible.
Most Investors Fail
Most individual investors end up lagging the broader market.
This study suggests that individual investors average a 3.8 percentage point lag in performance compared to the rest of the market.
And that 3.8 percentage point difference will quickly compound over many years without some edge to reverse course.
What are the chances that you have a serious edge over the broader market?
What are the chances you have an edge so powerful that you’ll reliably make 20x gains in the next month and a half?
You might have one after all, but the chances of your edge being so big that you can 100x your money every year are slim.
If you really could 100x your money every year, assuming you started with only $1,000, you’d end up with over $10 trillion by the end of just 5 years.
The chances of you having such an amazing and reliable edge to where you could own 10% of the entire global stock market are slim, to say the least.
extreme luck vs. skill
When trying to get rich quick with meme stocks, we need to ask ourselves, how likely is this to happen?
Most millionaires did not become wealthy on meme stocks. And, no, most millionaires did not inherit their wealth.
According to a study, most millionaires accumulated their wealth over a significant period of time.
Most often, these people worked hard and made smart decisions with their money. But they had time to make mistakes.
Most millionaires also believed that they were in control of their own money. This is opposed to something like pure gambling at a casino.
When looking at meme stocks, we cannot confidently say that we can control the outcome. There’s often a huge risk of failure based on a variety of factors.
Instead, that same money can be used to control a “steadier” asset, like a cash flowing rental property.
What are the chances that the meme stock returns a positive return over the income that the rental property would bring in? Sure, you might not 10x your money anytime soon with the rental property, but the chance of profitability is likely much higher.
In reality, we can exercise more control when picking a good rental unit versus converting on a meme stock bet. The market is often very unpredictable in the short term. And most short term strategies heavily rely on predicting short term moves in the market.
So, when a short term speculative move pays off, was it really skill? And how repeatable is that pay off when you subsequently double down?
Overleveraging When attempting to get rich quick with meme stocks
Like the greed from a speculative play potentially paying off, incorporating copious amounts of leverage to pump up potential returns can be tempting.
Let’s say you are just starting out and you only have a couple thousand dollars to invest. It can be very tempting to take out a cash advance on your credit card to double down on the investment so that a financial play “moves the needle” more than otherwise. After all, the payoff is “nearly guaranteed,” right?
However, the needle can move both ways. When you use debt, you could find yourself further down from where you started.
If you took on debt before the trade, then the debt is still there. Especially if you do not have a high income, you may find yourself in a substantially bigger bind compared to when you started.
An unexpected event may happen. When your car breaks down, you may be forced to pay a couple thousand on repairs. If your cash reserves were wiped by the failed trade, now you’re in serious trouble.
And if the debt amount is big enough, it might take years just to make up the losses.
In most cases, attempting to get rich quick on meme stocks will only set you off worse than when you started. Leveraging those moves will only magnify the results in either direction.
The Mental Energy of Volatility
With the extreme volatility of many short term trades, the amount of stress and mental energy spent while waiting on the results will likely be immense.
In poker, going “all in” is the most stressful move a player can make, as the future of your life in the game rests on just one play.
And is your future really resting on pocket aces? Or are you putting all of your money on landing a straight flush with an off suit 7 and a 2?
The stress of not knowing whether you’ll convert will take a toll on you, in all likelihood. Seeing your chance of success decrease as new cards turn up (or as the price of the stock continues to fall while your debt costs rise) will not feel pleasant.
With all of this mental energy spent on waiting for positive results, you likely won’t be as productive in other areas of life. If you are trying to grow in your career or learn a new skill, that will be harder to do as you constantly check your phone for the current stock price to see if you’ve converted yet.
In the end, all the stress will not play a factor in the success, or failure, of the trade itself. But it would negatively affect other areas where you could be more productive.
Conclusion – Don’t Try to Get Rich quick with meme stocks
When investing, if it sounds too good to be true, it probably is.
In investing, the odds for success will increase the longer your investment time horizon. Simply put, there’s more time to make up for mistakes or wait out market fluctuations. Not to mention, you have more time to earn more money to invest.
It follows that you’re more likely to be financially independent with a 10 year plan than with a 6 month plan.
Thankfully, history has shown us that investors can reliably pave their way towards financial independence without meme investing. Many people have achieved it without a single share of $GME.
This isn’t to say that you can’t make speculative bets on your journey towards financial independence, but realize the likelihood of those “investments” paying off is usually quite low. And if you lose enough on those bets, you’ll be slowing yourself down immensely.
To obtain financial independence, we need to invest consistently over time. Discipline, not a dog coin, is key.
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