Over the past three decades, the economy and financial markets experienced three seminal events which amplified behaviors of individuals reacting to basic emotions of fear in the investment markets.

These events were the dot-com era bust of 2000, the mortgage-backed housing boom that preceded the great financial crisis of 2008 and the rapid bust-and-boom of the 2020 COVID-19 pandemic.

All three events led to huge infusions of liquidity into the markets from the U.S. Federal Reserve (Fed), as well as significant changes in government policy, regulation and the structure of capital markets themselves.

They also helped to usher in new types of investment assets, strategies or vehicles that can be characterized as having significant speculative dimensions.

In the aftermath of all three events, the value of solid fundamental investing practices again became manifest, and long-term, disciplined investors continued to enjoy the magic of compounding returns in building wealth.

Investing in the current environment

The confluence of social media, higher interest rates holding steady, rapidly developing technology like artificial intelligence and extremely low-cost brokerage platforms has helped to create an environment in which some market participants are focusing on the pursuit of speculative, short-term trading profits rather than a methodical long-term approach to building wealth.

New asset types and investment vehicles such as cryptocurrencies, leveraged ETFs and special purpose acquisition vehicles (SPACs), to name a few, were created in response to this speculative dynamic in the markets. The dramatic growth in video gaming and online gambling has also contributed to this increasingly edgy, restless and, at times, volatile environment.

Rapid-fire equity sector rotation, high frequency trading, meme stock trading, cryptocurrency trading and arcane equity derivative strategies are just a few examples of the behaviors that react and respond almost entirely to the price action of an asset rather than to any assessment of its fundamental value. At its worst, this behavior is simply FOMO (fear of missing out). The common theme of this environment is the focus on trading, not investing.

Trading does provide a valuable contribution to healthy financial markets, if pursued by individuals and organizations in a knowledge-based, disciplined and ethical manner. Trading provides benefits to financial markets in the form of aiding in price discovery and providing liquidity for both investors and other traders. However, when trading is being pursued without real knowledge and research, it becomes a basic form of gambling. And as the saying goes, in gambling, “The house always wins!”

Knowledge-based, disciplined and ethical investing has the potential of providing success for most investors. It is the process of carefully assessing a rising tide of information—with the use of data analytics—to determine opportunities and risks for various industries and companies.

Real investing has a much longer-term orientation than trading. It leverages time as an opportunity, not a clock that needs to be beat. Consequently, this longer-term dimension provides the powerful advantage of time for an investment to benefit from either organic growth or from positive changes occurring in specific industries, or from positive management changes that a company makes to improve its performance.

By contrast, many trading approaches are based on short valuation behaviors, price momentum or short-term arbitrage opportunities.