How cheap money, low interest rates and FOMO are driving mania trading

The fact that Dogecoin is this year’s best investment speaks volumes about current investor mentality

This year’s cryptocurrency stand out is Dogecoin, up a ridiculous 6,645 per cent year to date. Photo: Reuters

A year of lockdowns has done strange things to investors around the world, who are now showing signs of going stir crazy.

Too many are being sucked into the sudden fads and frenzies gripping today’s manic market, buying all sorts of weird investments in an attempt to make a fast buck, or to amuse themselves behind locked doors with nothing much else to do.

All too often, they are buying into complex financial instruments they don’t understand, or are rotten investments by any sensible measure. Some are having fun, others can’t stop themselves.

Investors have always been at the mercy of their emotions. Greed and fear are the two biggest, but hope, frustration and boredom have also come to the fore over the past year. If you don’t keep yours under control, you could pay a high price.

The Covid-19 pandemic is partly to blame. With sporting events written off, spread betters and online gamers had to find other amusements, and taking a chance on the performance of financial assets was one of them.

Many had extra money to play with after saving cash during pandemic-induced movement restrictions, while fiscal and monetary stimulus has flooded markets with hot money, driving up asset prices everywhere.

The incredible returns from US tech titans and Bitcoin are also at fault. Stories about investors buying Amazon shares at launch or Bitcoin back in 2009 have filled investors with FOMO, or the fear of missing out.

Others are getting rich, why can’t I? That kind of philosophy can’t end well.

US “meme” stocks, cinema chain AMC Entertainment and bricks-and-mortar video games retailer GameStop, are possibly the craziest of all.

AMC has been hit hard by cinema closures and the streaming boom, while most gamers now download games online, rather than buy them in GameStop’s stores.

They should be crashing, but instead they’re flying to the moon.

Short sellers who sniffed an opportunity have been thwarted by hyped-up retail traders on Reddit bulletin boards, who join forces to beg, bully and cajole each other to buy these two stocks on free investment apps such as Robinhood.

Some investors have made big money, with AMC’s share up an incredible 2,850 per cent year to date. If you had invested $10,000 in AMC on January 5, you would have a thumping $298,500 today. GameStop is up 1,186 per cent.

Calculations like that are prone to drive investors crazy, but most will not have made anything like this return, having bought too late. If you bought GameStop on June 8 when the price spiked beyond $300, you would be sitting on a 25 per cent loss.

By contrast, Bitcoin’s recent growth looks pathetic. It is up just 33 per cent year to date, from $29,374 to $39,180 at the time of writing. Ethereum has done better, rising 236 per cent, but this year’s cryptocurrency stand out is Dogecoin, up a ridiculous 6,645 per cent. Although if you bought on May 7, you would have lost more than half your money.

The fact that a dog-meme alt-coin with no practical uses is this year’s best investment tells you everything you need to know about the current investor mentality.

Many are now gripped by “impulse investing”, says Chaddy Kirbaj, vice director at Swissquote Bank. “Cryptocurrencies and penny stocks offer the same psychological thrill as gambling and can be just as addictive.”

Cheap money and low interest rates are driving today’s aggressive fluctuation and younger investors are getting caught up in the excitement. This looks like a fad but it could be the future, Mr Kirbaj says.

“Generation Z investors have a totally different mentality and will play a bigger role as time goes on due to sophisticated new technology, AI trading tools and the disruptive tech boom,” he adds.

But some things do not change, he adds. “There are exciting opportunities out there, but it is still prudent to follow the old tactics of risk management, diversification and self-control.”

The AMC frenzy has partly been triggered by the hunt for “re-opening stocks”, which could benefit from the easing of social restrictions, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says. “Strong cinema takings and a loss of appetite for cryptocurrency following recent falls adds to the swirl of interest.”

Investors must avoid following the herd into speculative stocks like these two, Ms Streeter says. “Only dabble at the edges of your portfolio with money you can afford to lose.”

The madness could go on a lot longer than many people realise, Matt Weller, Gain Capital’s global head of market research, says. “As we’ve seen with Tesla Motors and certain cryptocurrency assets over the past year, the question isn’t whether these movements are reasonable, but where they will stop?”

Short-term day traders can find amazing opportunities but when the bullish sentiment turns, it can be traumatic.

So, what could kill the frenzy? The greatest threat is inflation, which would force central banks to cut stimulus and increase interest rates, which would kill off today’s easy money culture.

To avoid succumbing to today’s mania, pause before you hit the buy button, David Kimberley, an analyst at trading app Freetrade, says. “Never buy due to short-term share price movements, whether up or down. Follow in-depth analysis of how a company might actually perform over the long term.”

Don’t believe in the myth of the winning streak. “Like any other thing that involves taking risk and getting a reward, a successful investment can make you feel pretty pleased with yourself. You might end up thinking all trades you make are destined for glory, but they’re not.”

Too many treat the market like a horse race, he says. “You might make a quick buck here and there but, overall, you are likely to have many more ‘losing’ stocks than ‘winning’ ones.”

Do not trade too frequently, Mr Kimberley says. “Say you bought shares in a company and they climb 25 per cent in a week. Don’t be too quick to cash in and move onto the next big thing. Who knows, if you had left them alone for six months, you might have made a 250 per cent return.”

If you can keep your head while all others around you are losing theirs, then you might just survive the coming crash. Otherwise, watch out.