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Many hedge funds and brilliant minds in the financial space have discredited the recent rise in what they are calling “Reddit stocks.” If you haven’t heard by now, there has been a rise in the subreddit known as Wall Street Bets, where redditors banned together and conducted a short squeeze on stocks such as Gamestop (Ticker: GME) and AMC (Ticker: AMC). Briefly, a short squeeze occurs when a stock price rises due to rapid short selling rather than changes in the underlying fundamentals of the stock itself or the economic environment at large.
As Reddit stocks rose in value and the retail traders who jumped on board saw gains, many of the suits on Wall Street (and their friends in the legacy media) began to push a narrative that retail trading is dangerous. They compared the Wall Street Bets subredditors to investors engaged in insider trading. In short, it was madness! Companies that were seemingly on their way into oblivion began skyrocketing in price due to high retail investor trading volume. Unfortunately, many young, inexperienced investors ended up losing money as they bought in late and panic sold at the first sign of a price dip (but some made money too!). However, on the whole, we believe the GME/AMC fiasco is a net positive for young investors. Here’s why...
According to Bank of America and an article by CNBC, more money in the past 5 months has been invested than in the past 12 years COMBINED. Yes, you read that right. In addition, trade volume went up 40%.
There could be a few reasons for this. During the pandemic, individuals had more time to spend at a computer, either unemployed or working from home. Additionally, stimulus checks and less household spending left more cash available for investing. Although many of these investors may have bought into the internet frenzy and began trading meme stocks - which, without a doubt is extremely risky - it served the useful purpose of getting individuals interested in investing in general. Indeed, in 2020 10 million new brokerage accounts were opened, which was more than any other year ever!
Although the Reddit meme stocks are unpredictable and some may have been hit hard while trading, they incentivized many investors to learn more about the fundamental aspects of investing in the stock market. This introduction to investing can entice individuals to educate themselves on how to grow their wealth and take ownership of their finances. Some may get discouraged because of the loss of money, but the few that do not take the loss as a negative but as a lesson will have more control over their own future. I am hopeful that this trend will bring a bright future for the Reddit traders and that they will figure out which investment strategy works best for them throughout this process.
Inflation
We recently put out two threads on our Twitter account describing some of the effects of inflation (data driven & cost driven). People of all ages are becoming more aware of the personal effects of the economic decisions being made by the government. The government uses the consumer price index (CPI) to depict inflation. CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Although this is the metric reported, it is NOT accurate for several reasons. For example, the government leaves out certain metrics depending on the month and they’re admittedly aware that this number is usually an underestimate of the actual level of inflation. The Federal Reserve Chairman Jerome Powell recently admitted that reports on unemployment rate are not correct and unfortunately this is similar with other reported metrics. The CPI has continued to increase and has had its highest month-over-month increase since June of 2008!
Compared to June of last year, CPI has jumped by 13.7 points representing a 5.3% year-over-year increase, which is well over the Fed’s target inflation rate of 2%.
Not only is the CPI data showing drastic increase in inflation, prices of used vehicles are at record highs (up by 10.5% MoM and 45.2% YoY), energy costs are up (1.5% MoM and 24.2% YoY), transportation costs in the US are up (3.6% MoM and 21.2% YoY), and food and beverage costs are up 2.36% YoY! Large brands such as Coca-Cola, PepsiCo, Chipotle, Tyson Foods and Kimberly Clark (as well as others), have all reported raising prices by 4% - 7.5%. Other companies have announced that they will need to raise prices but have not disclosed the extent to which they will do so.
Now this data is not meant to be shared for you to hide in your room and never spend a dime again, it is meant to keep you all informed on what is currently going on. Investors win and unfortunately with yearly inflation, savers lose. An average savings account has less than 0.05% return on your money and now some of the “high yield” savings accounts offer only 0.6%. Unfortunately, inflation sits at 5%, meaning your money is becoming less valuable if it sits in an account that is not growing by at least 5% per year. A Standard and Poor 500 (S&P 500) index fund gives an average return of 10% per year, which means your wealth actually GROWS while being invested. This might sound like gibberish and might be daunting but in the next few weeks, we are going to break down the different kinds of investing, how to do it, and some of the strategies involved!
Our ultimate goal is to educate as many people as possible and to help everyone achieve financial ownership. You work hard for your money. Don’t let poor policy decisions undercut the time and energy you’ve spent earning money.
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Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.