How Exciting Should Investing Really Be?
Retail investment trends rarely make the front pages, but in yet another indicator of us living in very strange times, the headlines have been awash with such news in recent weeks.
I refer, of course, to the explosion in the use of online trading platforms – and in particular the strange doings that have been fuelled by social media forums.
Coming out of the US has been a movement to punish hedge funds by artificially raising the price of the stocks they are shorting (and which really should be dead in the water). Meanwhile, platforms as unlikely as the UK’s Mumsnet have become hotbeds of investment tipping.
Although easy-access investment platforms designed for smartphone use have been around for years, recent market highs, the boredom of lockdown and many people having extra cash currently have combined to create a snowball effect. It has been estimated that 400,000 online investment accounts have been opened in the UK during the pandemic, amounting to £20 billion of new inflows. What’s more, these investors are far younger than ever before.
Far be it from me to denigrate this uptick. A lack of engagement in the markets at the retail level has rightly been bemoaned by both the industry and government. If the urge to seek a bit of excitement or social posts boasting of gains have inspired novices to get involved, then overall you could argue that’s a good thing.
Without wishing to rain on anyone’s parade, however, I hope this is just a starting point for very much healthier and rational relationships with the markets, and a real desire to understand how one really should invest.
There has been a huge rise in online gambling during the pandemic and it’s difficult not to see shades of that in the current retail investing boom. Looking at investment forums, it seems like people are being encouraged to seek very great returns in very short periods of time. The truth is, proper investing hardly ever works like that.
The reason is that markets are generally efficient, and become ever more so as information and transparency continue to improve. In fact, the much-maligned hedge funds the Reddit investors were acting against are typically shorting stocks because they have better information than the rest of the market has, that they have invested a lot in to attain (some use satellite imagery of car parks to predict retail trends, for instance).
There’s an important point about market intelligence there. Professional investment houses dedicate huge amounts of resources to knowing exactly what is going on in a particular market, sector or even individual firm – whole teams in fact, pretty much working night and day. Without nefarious means like insider trading being deployed, the likelihood of uncovering something the big boys don’t know is vanishingly small. The intelligent layperson may be able to spot and move on trends in forward-thinking ways, but as for regularly making a mint overnight? I doubt it.
To say that stock market tips should be taken with a pinch of salt is an understatement. That is true even of a friend (however well-intentioned they may be) and still more when they are offered by a random person on the web. As with the activist investors, the whole point is to puff prices up and there may often be little merit to support this more than a few days. There is a reason the wealthy invariably have professional advisors.
A little boring is a lot better
None of this is to say that people don’t make money as day-traders. Yet it should always be borne in mind that people are generally a lot happier to talk about their big wins than their losses. Making significant short-term calls on the market will invariably involve a lot of those. The danger is that many people simply don’t have the stomach or the financial firing power to take that kind of punishment. Nor should they aim to.
The truth is that investing should be a little boring. In fact, some of the most successful investment houses boast about how boring they are!
It may not make for a great status update, but slow and steady is the only way to really make the money you need to achieve your goals. On the one hand is a rollercoaster of gains and losses, which likely cancel each other out, and where churning your portfolio eats into returns too. On the other is investing for the long-term, changing your holdings as little as possible, and letting the onward march of the markets and the passage of time do the rest.
If taking the occasional punt helps pass the time, then by all means do that with a small part of your portfolio. Don’t confuse gambling with investing though, and particularly not with any important pots of money.
There may be little that’s particularly thrilling about harnessing compound gains for as long as possible and seeking strong but reasonable returns. However, on a longer-term view, the satisfaction of getting to where you planned to be will more than make up for that.