In August of last year I wrote about Robinhood going public. In particular I questioned whether Robinhood would become a meme stock itself. In the article, I mentioned some of the significant risks that were outlined in the S-1.
Well, six months later and we can see that it did not become a meme stock with significant moves up and down. Instead, it has basically just lost money, which makes it worse than a meme stock. The only upside happened in the initial trading week.
Imagine getting caught up in the hype, emotion, and parabolic move it experienced the first week of trading. August 4, 2021 was the melt-up (complete opposite of capitulation). The stock opened at 54 (up over 50% in one week) and shot up to 85 intraday (up 240% in one week), and closed at 70 that day.
Beware of Hype
I wonder how many investors in the first week of trading read the S-1. If I had to guess, I would say less than 5%. After all, why would anyone want to waste time reading “required disclosures” when this thing is going to make investors a lot of money??? That is the mentality whenever anything is hyped. Critical thinking and deliberate analysis are perceived as useless or old school in this new technology.
While Robinhood is a recent example of the danger of following hype, it is not alone. A few years ago we learned a valuable lesson from WeWork. I wrote about that as well. While WeWork didn’t quite make it public, it demonstrated that following the hype is not just something novice investors do. Respectable institutions, such as Goldman Sachs and Morgan Stanley, are capable of being just as thoughtless and subject to hype. In the case of WeWork, you had one of the most prestigious (at the time) sovereign wealth funds lose a ton of money on WeWork.
Engaging Our Critical Skills
It’s not easy overcoming hype. We often don’t seek it, but it has a way of sucking us in – unconsciously. It activates our dopamine receptors and when accompanied by groupthink and positive forecasts, can completely cloud our judgement.
There are a few questions we can ask ourselves anytime we have strong feelings toward a security or a particular outcome. These questions should not be confirming in nature, rather they should play devil’s advocate:
- What evidence do I have of this expected outcome? Any contradictory evidence?
- What assumptions are being made that support the expected outcome? Are they realistic or hopeful?
- If I am wrong, how much money am I prepared to lose?
The Power of Good Questions
Reflective questions help engage the prefrontal cortex, which is where executive functions such as thinking, logic, and planning occur. This is the exact part of the brain we want to engage when making financial decisions. We may not be able to control how biases unconsciously influence us, but we can control our response.
Do we just go with the hype and feel-good emotions, or do pause and ask a few reflective questions? Is it about plowing in with the crowd or ensuring you make the right decision? That is up to you.