In a recent commentary about “investment addiction” among the young, Henry Mockridge seems to have fallen victim to the idea that individuals are incapable of making rational decisions on their own, and that government regulators are more competent at making decisions for citizens. Moreover, he fails to prove his case, and what he presents as a solution to the (non-existent) problem would most likely reduce prosperity for all of.
No learning is cost-free. A baby learns to walk by falling down. A baseball player learns to hit by swinging and missing. To deny young people the opportunity to fail in some investment activities is to set them up for larger failures later in life. It is better to learn the risks of investing when young, when the stakes are low and they have decades to recover.
Mockridge bases his analysis on items not in evidence. Early on, he tells the reader that there has been a rise in investment activity by “[t]eenage and young adult first-time investors.” He reaches this conclusion by noting that Robinhood has reported a 103% increase in new users; he then assumes that the most of those users are young; he then describes them as a “teenager and young adult.” In the penultimate paragraph, though, he tells us that “Robinhood and similar retail investment sites have not published any information about the number of new investors who are teenagers or young adults.” He has no evidence that there’s a problem with any age group. Indeed, he doesn’t even provide evidence that Robinhood customers as a whole have underperformed the market.
Mockridge also tells us that the average retail investor has underperformed the market by 11%. Clicking through to his source, one learns that this represents a one-month result, from mid-February to mid-March, 2021. Furthermore, this statistic is without context. How well do professional investors perform? Well, from 2008-2019, the average of all actively-managed funds underperformed the market by 25%. The two statistics are not perfectly comparable. Still, it makes the one-month 11% underperformance by retail investors seem somewhat less frightening. One final note: underperforming the market is not the same as losing money. It could, and often does, mean simply that the investor could have made more money with a different strategy.
Having failed to establish that there’s a problem, Mockridge then proposes a solution which solves nothing. His idea is that online brokerages should publish information about their customers, specifically “the types of trades, the number of trades make per week, and the amount of money lost or gained” by age of investor, which information he suggests would equip the SEC with necessary data to propose new regulations. But what regulation will protect an investor from poor decisions? Or simple bad luck?
Prosperity requires innovation. Innovation requires risk-taking. Risk-taking implies a degree of failure. If we reverse that progression: to remove or reduce failure, we must reduce risk-taking, thus we must accept less prosperity.
That is why there are no participation trophies on Wall Street.
Charles Meyrick is an Assistant Professor at Housatonic Community College in Fairfield.