Sep 30, 2021 - Economy

The problem with individual stock buying

A red and green bull charging at each other

Illustration: Megan Robinson/Axios

Buying and selling individual stocks is a hobby for rich people that, over the course of the pandemic, also became a hobby for millions of new investors using free trading apps. But given the number of conflicts involved, it's a hobby that many people should probably give up.

Why it matters: In recent days we've seen shock headlines about the stock-trading activities of judges and corporate insiders. Two Federal Reserve presidents resigned after they were revealed to be actively trading the markets they were also influencing via monetary policy.

  • Thanks to the passive-investing revolution, no individual investor needs to pick and choose which stocks they invest in. (Even many institutions don't.) Trillions of dollars are invested happily in low-cost index funds that tend to outperform active investment strategies over the long term.

Context: While recent decades have seen a long-term trend away from active and toward passive investing, the past year has seen a countertrend toward rampant stock-market speculation.

  • The notional value of options traded this year, for instance, has surpassed total stock market volumes for the first time ever. Billions of dollars' worth of those options are short-dated zero-sum bets that expire worthless within days or weeks unless the stock moves dramatically.

The big picture: Back when individuals had no choice but to invest in individual stocks, there was much more tolerance for the conflicts such activities raised. Today, it's more common for those trades to be considered scandalous, evidence that the market is rigged.

The bottom line: The recent headlines mostly concern boomers whose formative investment years predate the height of the passive revolution. As apps try to make stock-picking "easier and more delightful," in the words of Robinhood CEO Vlad Tenev, it's becoming increasingly likely that we'll see similar headlines about the boomers' kids.

Go deeper: Bloomberg's Matt Levine notes that when it comes to corporate insiders, it's not so easy: Companies can't issue index funds in lieu of stock options. He asks for rules that might solve that problem; if you have any ideas, do copy me as well as him.

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