October is around the corner, so let’s quickly revisit a few memorable stock market events. While September has the worst historical stock performance, investors often remember the 23% drop across two days that culminated on Black Tuesday, October 29, 1929, and the 22.5% one-day drop on Black Monday, October 19, 1987. In the wake of the 1987 crash, regulators introduced automatic trading curbs to minimize panic selling. These circuit breakers are triggered in stages: first at a 7% drop, then at 13%, and finally at 20%.
During the Asian Contagion of October 1997, trading curbs activated after the Dow dropped 550 points, resulting in the market closing for the rest of the day. In March 2020, COVID-19 fears triggered revamped circuit breakers on the S&P 500, leading to a 15-minute shutdown. With the rise of computer-driven program trading, regulators added further restrictions to limit hedge fund short sellers from increasing volatility.
How times have changed.
Risk-takers will always take risks, and some will go broke doing so—it’s part of our DNA. From the telegraph era of the late 1800s through the 1929 crash, bucket shops emerged, offering the average person “stock options” as a tool for speculation. During market crashes, folks go broke fast. Regulators don’t care whether an investor makes or loses money – they just want “orderly markets.” Trading curbs and other regulatory tools aim to slow down the process of going broke, not eliminate it.
We’ve drifted far from the shores of volatility controls and concern for Main Street shareholders. Today’s markets equip even the most inexperienced investors with a flimsy raft to navigate the turbulent seas of leveraged stock speculation.
Exchange Traded Funds (ETFs) are now at the center of speculation. Originally launched in the early ’90s as a simple, low-cost way to track major stock indexes like the Dow or the S&P 500, ETFs have since morphed into a speculator’s paradise. Sector ETFs that track specific industries (like airlines or utilities) paved the way, but after the 2007-2009 Great Financial Crisis, leveraged ETFs emerged. These funds used short-term options to “enhance” returns by 100% to 300% over the index they tracked.
In the post-COVID era, U.S. speculators gained access to single-stock leveraged ETFs. These funds should be avoided entirely because they use short-term (daily) options contracts on highly volatile companies like Tesla, Nvidia, or MicroStrategy. Speculators looking for an extra thrill can use these ETFs to amplify daily price movements. I emphasize “movements” because this is pure gambling, not investing—not at any level. This volatility layering (my term) is dangerous because it forces a one-day time frame. Even if you guess a stock’s daily move correctly, the internal expenses of these products erode potential profits. Holding one of these ETFs for more than a day results in significant losses due to the constant buying and selling by other speculators.
Knowing this, you’d expect investors to proceed with caution. Yet, NVDL, the GraniteShares 2x Long Nvidia Daily ETF, saw its assets surge from $200 million in January to $5 billion in just eight months.
Take MicroStrategy, Inc. as an example. On the surface, it’s an enterprise software company, but it became notorious when CEO Michael Saylor began heavily investing in cryptocurrency, using millions from the company’s treasury in 2021. In October 2022, Graniteshares created a 3x long daily ETF based on MicroStrategy’s stock. This “investment” layers the volatility of cryptocurrencies, a speculative stock, and short-term option leverage. It’s a perfect storm to attract speculators with an appetite for extreme risk. As you might expect, MicroStrategy’s common stock surged over 100% during the summer, but the 3x Long ETF dropped more than 80% during the same period.
In the future, broad markets will still experience small corrections, larger bear markets, and even the occasional crash that affects most investors. However, speculators will be wiped out much faster by these new single-stock leveraged time bombs.
What are the lessons?
First, Wall Street today mirrors the Roaring Twenties. It continues to concoct a witch’s brew of enticing products that can poison even the most sophisticated speculator. The only ones who consistently make money are the product creators and the exchanges that clear the trades.
Second, buyer beware. While government regulators voice concerns about the risks of these products, they don’t stop their distribution. Investors are prohibited from buying stock options in their retirement accounts, yet they can introduce the same toxic options into their IRA via these new leveraged long/short ETFs.
Third and most importantly, don’t get financially distracted. We call our advisory approach Purpose Built Planning, which centers on Attention Management. Personal productivity gains come from managing attention well. We encourage our clients to stay focused on their individual and family purposes. We align financial strategies to help them achieve that purpose and equip them with behavioral tools to stay focused on what they can control. Just like the Roaring Twenties, we live in an Attention Economy. Social media tools may be unique to our time, but the principles remain the same: what gets your attention gets your time, what gets your time gets your money. Focus determines your experiences, and your experiences become your life.
