This Is Not Investing
“Average returns for an above-average period of time will result in extreme outperformance. It is the most obvious secret in investing.”
- Morgan Housel
Last month, Robinhood, an investing platform that helps humans make terrible decisions with their money, announced they would allow users to bet on the outcome of the Presidential election. The company described this as “unlocking a new asset class that democratizes access to events as they unfold.” And in an S-1 filed with the SEC they wrote, “We take pride in the fact that we are expanding the market by welcoming new investors into the financial system.”
On its face, this seems crazy. “Event contracts” are no more of an asset class than NFL parlays or roulette spins. But humans love gambling and Wall Street is set on giving the people what they want.
For example:
There are now 245 different ETFs in the leveraged / inverse category and collectively they hold more than $110 billion in assets. And a lot of these ETFs are just levered plays on individual stocks which are themselves leveraged.
Ticker MSTU - the T-Rex 2x Long MicroStrategy Daily Target ETF - is one such product. The fund’s goal is to give traders twice the daily exposure of Microstrategy (ticker MSTR), which itself is a levered bet on Bitcoin.
If a levered bet, on top of an already levered bet, on top of an already volatile cryptocurrency isn’t enough action, you can always add further leverage to the trade by using options rather than buying the ETF itself.
Who uses this stuff?
A lot of people. The MSTU ETF, which launched in September is already in the top 1% of volume, right there with GLD (a large gold ETF) and IBM.
As a fellow human, I understand the appeal.
If you put $1,000 into a trading account, you want to see it do something. If you allocate to an S&P 500 ETF, you may be up or down $10 on any given day. That isn’t going to change anything. It doesn’t feel exciting, and it certainly doesn’t feel like you are getting rich.
But Bitcoin may be up 60% in a year. And MicroStrategy may be up 300%. And this leveraged ETF may be up 600%. And maybe with options you can be up 2,000%. And maybe instead of waiting a full year, you can actively trade to make it all happen in a couple weeks or days!
It all works perfectly . . . until it doesn’t.
And when it doesn’t - when the leveraged bets fail to hit and the invested capital disappears - investors will be shocked to learn that the only ones to benefit from these products were the companies that created them.
Last weekend I got the chance to watch my guys play lacrosse together on the same team.
Watching the older one hype up his little brother in front of his coaches and teammates was the stuff parenting dreams are made of.
