Welcome to the Dumb Money Express

Key Takeaways

GameStop and other meme-trading stocks. Leveraged crypto ETFs and MicroStrategy-style “digital asset treasury” companies. Zero Day to Expiration options. Prediction markets like Kalshi and Polymarket. This pattern reflects a broader and alarming trend: Platforms presenting short-term speculation as investing and marketing engagement as empowerment.

Consider how widely this concern is shared across the financial industry – not by moral scolds, but by long‑term investors and market practitioners focused more on outcomes than clicks:

• “You have too many platforms out there that are focused on engagement and not focused on outcomes,” Vanguard CEO Salim Ramji was quoted by the Financial Times. “Too many people … are representing speculation as a form of empowerment. Really, we see this as a form of financial exploitation.”
• My colleague and Baird Investment Strategist Ross Mayfield, CFA, aptly put it this way: Prediction markets “encourage binary thinking and short‑term outcomes. That’s very different from long‑term investing, which relies on patience, diversification and compounding over time.”
• “Is there any distinction left between investing and gambling?” asked a recent Barron’s article. They later write, “For many individuals, the GameStop saga permanently changed what it means to invest. Trading volumes from retail investors soared during the meme craze and have remained elevated ever since. … Brokerage firms are in an arms race to keep up with this increasingly sophisticated clientele, who have discovered the excitement – and often short-term awards – of speculation across stocks, cryptocurrencies, sports betting and, most recently, prediction markets.”

With all due respect to venerable Barron’s: There is every distinction between gambling and investing. But you wouldn’t know it from the proclivity of what the Economist calls “the indefatigable retail investor” for increasingly short-duration speculative schemes – clothed in the lexicon of financial markets, ported to alternative (ostensibly decentralized) rails and riddled with fraud, manipulation, insider trading and fleecing.

All Aboard the Dumb Money Express 

Under the banner of the “democratization of finance,” an entire generation might be growing up with little understanding of how financial markets actually work. That reflects a lack of appreciation for the science and rigor of long‑term investing – and little comprehension of how financial instruments are meant to achieve real goals or solve real problems in the real world. (I wonder how many of the millions of accounts at self-serve platforms like Robinhood belong to an “increasingly sophisticated clientele.”)

Instead, these investors represent what the Financial Times calls “easy prey for trading firms and professional gamblers,” coaxed into these products by “a concerted marketing push and a raft of paid influencers.” Writes Financial Times columnist Gillian Tett: “Financial gamification has upended traditional patterns of trust and oversight. … People are increasingly acting as if they view their online and real-life peer groups as a source of guidance.”

As the industry often does, finance has chummed the retail investor waters with all manner of speculative products promoted as innovations, with few real-world use cases other than the allure of generating trading profits.  Baird’s macro research team Strategas recently noted an “obscure product deluge in the crypto ETF world” offering (in many cases, leveraged) exposure to, and staking opportunities with, Dogecoin, Chainlink, Stellar, Polkadot, Bitcoin AfterDark, Canary, Cardano, as well as an upcoming Pepe ETF.

Amanda Fischer, policy director at advocacy group Better Markets and former chief of staff to SEC Chair Gary Gensler, told Barron’s, “Everything that happened in GameStop is happening in crypto markets but on steroids. As chaotic as GameStop was, it’s even more chaotic and there’s less oversight in the crypto market.”

And prediction markets, far from a departure from this trend, are its logical extension. Kalshi offers increasingly short-dated crypto contracts, like 15-minute up/down bets on digital coins. Continues Fischer, “[They] have managed to take a speculative asset and inject even more mania into its trading.” True to form, Robinhood has added prediction bets to its platform: Its CEO Vlad Tenev told Barron’s “prediction markets are on fire” and dubiously described them as “a new asset class.”

So What’s the Answer? 

Ultimately, it comes down to financial literacy and investor education – a reminder of the good finance can do for investors as well as our broader society. More comprehensive and coherent regulation can help: Encouragingly, SEC Chairman Paul Atkins and CFTC Chairman Selig have announced collaborative rulemaking efforts around digital assets and prediction markets, and Congress is working on comprehensive legislation called the Digital Asset Market Clarity Act.

One of the greatest practitioners of investment management was the late Yale University Chief Investment Officer David Swensen. His seminal book, Pioneering Portfolio Management, is a repository of insights into how different investment vehicles and asset classes behave and interact with each other – and how they should be curated into portfolios that serve the end needs of investors, be they institutions or individuals. “The investor is bombarded with staggering amounts of information,” he wrote, “designed to get the investor to buy and sell and trade – to do exactly the wrong thing.”

That’s always been the case – but never more so than today.  

The information reflected on this page represents Baird experts’ opinions as of today and is subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action. The views and opinions expressed here are those of the speaker and do not necessarily reflect the views or positions of the firm.