Embracing the Stock Market Game
As I’ve been furnishing my home office, I’ve been picking out cool stuff to hang on the walls. One item I came across is this patent from 1950 for a Stock Market Game, filed by Parker Brothers. I had never heard of it but it looks like this game did indeed come to market in a few different iterations over the years, but was never a mainstream success like its predecessor, Monopoly.
The second I saw it bought it because I love thinking about the game of active investing, or more accurately — active investing as a game. I actually believe investing would be a hell of a lot better, more popular, and more successful for most people if we just dropped our preconceived notions we have about it and stopped being so precious about it. Investing is a game and everyone is playing it — the Hedge Fund manager, the VC dropping SPAC’s on the market right now, and the Robinhood investors are all playing it. It’s the biggest game in the world in dollar terms, and it’s not even close.
Felix Salmon wrote a great piece many years ago asking if investing was just a hobby, like golf. This post stuck with me for many years. On the surface it’s an obvious observation, but when taken a step further it’s clear that we don’t treat it like one. This leads to perhaps the most interesting question of all — what if we did?
Hobbies, Chores, and Chobbies
Most activities are either hobbies or chores. Hobbies are what we choose to do with our time, what we enjoy — movies, golf, comic books, whiskey video games. Chores are what we have to do and often times not particularly enjoyable. Chores include work, making the bed, walking the dog, washing the dishes, and hiding recycling in the trash so you don’t have to rinse it out. Some activities are unique in that they have properties of both. Since this is a family blog, I’m going to forgo the alternative and call them Chobbies. Chobbies are not as routinely essential to survival as chores (you don’t have to exercise daily) but you know you should be doing it more frequently. They are not as purely recreational as hobbies, but many people consider them to be hobbies. Exercise is the best example of a Chobby, but they also include activities such as reading or cooking.
Investing is also a Chobby. You need to grow your wealth so you can eventually take on more hobbies and do less chores. Most people don’t invest nearly enough, often enough, and early enough. Yet unlike reading, cycling, running, or MMA for some reason it’s a faux pas to embrace the fun, hobby side of investing. This is a huge mistake.
Take Roboadvisors for example. While I am a big proponent on indexing as a strategy, the concept of “passive” investing focuses on the chore qualities of investing way too much. It’s literally the investing version of “An apple a day keeps the doctor away”. This isn’t a knock on it, at all. It’s been incredibly beneficial for investors in general. There is, however, a moral high ground that it is not justified to hold, as it feeds on our cognitive biases.
To understand this — look at exercising. The exercise industry does a ton to focus on the hobby aspect of exercise — which has been successful in getting more people to exercise. From your local 5K to Tough Mudder’s to Peleton, we have increasingly added game mechanics to unlock the Hobby aspect of the Chobby. This, many would agree to be universally good — because exercise in general is important and we don’t do it nearly as regularly as we should. In exercise terms, passive investing is 7 minute abs. There’s nothing wrong with 7 minute abs, per se. It’s cheaper than a gym membership and surely better than nothing, but it’s directly marketed at people who know they need to do something, but are unwilling to commit to a higher level or engagement and more complete exercise regimen. It’s a very cynical product — or at the very least lacks a strong mission. Passive investing, by not converting passive participants to active investors, is not getting people to invest nearly as much as they would, could, or should. We laud it for being cheaper, and for saving investors from themselves — but it isn’t doing either if the goal is to maximize the growth of wealth. At the very least it’s optimizing a local maxima without any pursuit of a higher global one — which is fine but not nearly as noble as the Bogleheads would have you believe.
Active investing isn’t any better, as both suffer from the same problem — not embracing investing as a hobby. On the active side, the cynicism comes in on the retention curve. Most brokerages don’t believe they have any influence over their long term retention. If you’re a product person, this is actually insane. Imagine every day building a product where you basically assume that no matter what you’re going to lose 70%-80% of your customers. While 30% long term retention is not bad for many types of products, it’s fucking terrible for money. The retention rate and churn rate should be reversed. No wonder the industry has such a low level of trust — the model is to wait til bubbles and euphoria boost activation (ironically the worst cohort you will likely have) and in the mean time find ways to optimize revenue and reduce costs, and justify costs with feature creep and complexity.
If applying the exercise comparison, the brokerages are steroids. They are marketed towards people who want to get big fast, and don’t necessarily care if they are killing their customer. Some people will stick and use them with an exercise regimen and convert to the active customer, but many will use it one summer before their sophomore year at college.
This leaves the entire industry in an underinvested state and massively underserved state. We are letting the worst aspects of active come out and letting a suboptimal passive investment solution be the only one a responsible person would choose. This is, counterintuitively, because we are doing the one thing most people would say is the most irresponsible — treat investing more like a game.
Product innovation + messaging is the way forward
Focusing on the hobby and gaming aspect of investing is beneficial for a few reasons. The first is framing the cost and value properly in people’s heads because it is not intuitive to most.
Investing has a few components that make up the cost — risk/principal/bankroll, transaction costs, accessories, and opportunity cost. The value you get is the growth of your wealth over time as well as the enjoyment you get by participating.
By taking a gaming and hobby approach on the product side we can help investors understand the true cost of risk and also better asses opportunity cost — backdooring them into investing more on top of passive. On the product side we need to assume the obvious — like any hobby or game, the first time player is likely to suck at it. They will see a game over screen or wrap their mountain bike around a tree. It’s cool. It’s normal, it’s what a hobbyist would call the learning curve or cost, or the price of entry. Until now we have made that assumption and met it head on with a ¯\_(ツ)_/¯. Why don’t we minimize that cost for the customer instead? And perhaps at the same time maximize the value. That first game over screen should cost as little as possible in total bankroll for a new customer. Some ways to approach this could be unlocking the ability to deposit more money into your account, take on leverage or trade options, as the customer gains skill and makes trades that show they understand risk. That initial $500 someone would have invested and subsequently lost in a week perhaps doesn’t turn a profit but instead goes down to $350 over a much longer time frame, before starting to move up. Plus the customer is much better for it, they had a great experience, they feel like they are improving and learning, and they are now able to unlock $500 more dollars in deposits and a portion of the option chain. Instead of being punished, they are being rewarded with what they are seeking, risk. The cost moved from $500 to $150, and the value increased tremendously as the customer spent more time trading, didn’t lose her bankroll, and gained skills.
Even in a world that doesn’t fully yet embrace product innovation to drive game mechanics, a shift in merely attitude, messaging, and marketing can drive a tremendous amount of value. We currently say “investing is risky and you will likely die” in the fine print, but it should be bold in comic sans on our landing pages with a picture of a shark eating a seal. FINRA should love that as they hate when brokerages infer any sort of performance or gains.
We should also give people fat deposit bonuses with one catch — they can only trade with the bonus at first and can’t put their deposit to work in the market for a period of time and activity, or until they lose it all. If they lose it all, let them tell the war story about the gnarly wave that wiped them out and put it on our landing page, next to the shark. Normalize losing money, embrace the fun, be up front about the cost and the risk, but show how over time the hobby can pay for itself. It’s counterintuitive and obviously would have to be done right, but will work.
We can’t promise gains (nor should we) but we sure as hell can promise the risk and fun. Mountain Biking, Surfing, Cross fit, Long distance running, and MMA all do this. Pictures are bloodied up hobbyists are celebrated. It’s the reason you do this. We can do that too. Being unable to promise gains, but kinda, sorta implying it, leaves us really saying nothing compelling about investing. It also allows the worst of the worst to hijack our business as they do the marketing for us. Penny pumpers and swindlers tell the story and market the snake oil, and all brokerages become are vendors, order takers. Change the story and say something.
The upside of this shift is tremendous. If we treat investing like a hobby — pure enjoyment, then it can enter into our customer’s hobby budget. Most people spend whatever surplus they have after essentials and saving/investing on their hobbies. Just getting active investing in that decision would get people investing more than they are already doing today — which is 90% of the game anyways.
The Chad: A completely made up case study using the worst of our stereotypes
Let’s take the case of Chad. Chad is already investing $500 a month with a Robo and has $500 left each month in discretionary income that he will likely spend on his hobbies. Chad could forgo his Chad lifestyle and put another $500 in robo, which is not a bad financial decision by any means, but it’s also a decision Chad has already chosen not to make. Passive is not fun and Chad is fun.
In a world where investing is serious business, Chad would be done investing this month and move on to weighing a $250 dinner at the steakhouse against a new road bike, fancy craft beers, some video games, and crossfit classes. If you weren’t already aware, Chad does crossfit. He’d probably choose some beers (michalob ultras cuz he’s paleo this month) steak, and maybe a video game, but not some loser shit like Diablo.
In a world where investing is perfectly acceptable fun, Chad now has a $250 deposit in his Robinhood account as a new option to weigh against to others. Chad decides that he’d like to keep the gainz from cross fit but trade the gainz from the protein packed steak dinner for the gainz in some Tesla calls. So logs into his Robinhood account, puts $250 in and buys the calls. What happens next is largely unimportant. Even if Chad loses all his money, which is impossible because he’s Chad, it’s very difficult to argue he made a really poor decision by choosing the investing over the steak.
The deeper implications of this shift are important. Once it’s ok to blow all his money at Robinhood like he does at the steakhouse, Chad will understand risk, cost, and value much better. He will realize that unlike at the steakhouse — the free meal is on the menu at Robinhood he just needs to know where to find it. Over time, Chad may even start to see the trades he makes and his bankroll as a risk/cost and return as value. He will learn that if he doesn’t blow all his money in OTM call options and actually makes the gainz he totally would have made in the first place if it wasn’t for the MM’s, the $250 he “spent” last month is still around and may begin to look at that the steak dinner as more expensive by comparison and invest more. Plus he’s also now got some Stocktwits followers (“@DayCHADer69. smash that follow button”), just posted a hilarious meme thats going viral, and is tuned into the markets all day, so he doesn’t need video games nearly as much. Chad has now sneakily doubled the amount of investing he does each month without sacrificing any of his Chadness. Even if he’s losing half of it each month, he’s still better off from a money invested standpoint than if he blew it all on video games, or sneakers. Chad didn’t need any of our help in the first place but he’s investing more, having fun, and being Chad.
As long as you contend that Chad wasn’t going to spend the money in his discretionary budget on anything other than what he enjoys, than it’s hard to argue that by making active money something that is more like discretionary spending, Chad is investing more. And if you disagree take it up with Chad. I dare you.
Obviously this is a simplistic example and doesn’t’ take into account the odds that Chad keeps losing money and then starts eating into his passive investing budget and then principal, and so on — a real concern to be sure, but he could also become an alcoholic get addicted to video games, or fuck up his body in cross fit as well. Every activity has a dark side. However, as long you contend that Chad wasn’t going to spend the money in his discretionary budget on anything other than what he enjoys, than it’s hard to argue that by making active money something that is more like discretionary spending, Chad is investing more. And if you disagree take it up with Chad. I dare you.
Embracing the Random Walk
The fun is the secret ingredient — the thing we intuitively know but for some reason feel is too taboo to embrace. Games are transforming the fitness and exercise business (and have been for years). They’re transforming learning and languages. To say that it couldn’t transform investing is foolish. It isn’t going to be smooth transformation and there will be some clunkers, but we are so quick to attack those who are trying to move us in that direction — most notably Robinhood.
To be clear, Robinhood is not perfect, and the consequences of some of their worst decisions are tragic and real. Since launch, I was disappointed on how they designed option trading and it could have really been transformational if they approached it with the same time and care that they did with equity trading. They did, however, make investing more fun, and more accessible for more people and, aside from options, they made it more successful for first time players. A lesser discussed but incredibly impactful design decision they made was centering around a simple stripped down interface with a huge real time chart. They intentionally focus the investor on where the line is going to go next and away from news, indicators, and metrics that novice investors don’t have any edge in analyzing. This is the type of stuff that at best will confuse first time investors and at worst give them something irrational on which to anchor. They were very effective in giving every first time investor an experience a bit closer to the theoretical random walk that we continue to demonize and position away from for some reason. By doing so they derisked investing for first timers and saved them from some, but not all, of the rookie mistakes. This is very counterintuitive to the prevailing narrative and largely underappreciated.
The random walk should be our fucking North Star. A world where trades are free, every investor is that drunk guy on a random walk with one, maybe two dart throwing monkeys on his back happily earning beta sounds pretty fun to me. Like all north starts it will be impossible to reach. It is, however, a much better guidepost than the current iteration — a cynical mission to turn every investor with enough computer monitors into a self-sufficient daytrader or hedge fund manager with a beautiful wife, who for some reason hasn’t left him and still takes him seriously. Perhaps it is because he has the hair of a silver fox and somehow managed to give her a baby that can talk. Digression aside, the latter is much more of a fantasy than the former and not nearly as fun.
Embracing games and hobbies when it comes to investing is the process of embracing the random walk — not fighting it. We need to act more like Parker Brothers and less like the Duke Brothers. This should be something even the tightest whitey underwear-wearing, Boglehead-worshipping, investing moralist could get behind, though I’m sure someone, somewhere will find a reason.
But then again maybe I’ll miss the criticism because it’s behind a substack newsletter or paywalled media outlet where they charge $10 a month to have them opine and make predictions about the future of politics, tech, business, culture or anything else that we like to read for fun. But not Chad. That dude is a walking crystal ball.
This post originally appeared at: https://www.justinpaterno.com/the-stock-market-game/