Bend the Market Like Buffett: Stop checking your stock portfolio — especially on your phone — and you’ll make more money.


By Markus Hulbert

The more you check, the more likely you are to invest in lottery-like stocks

How often have you checked today how your investment portfolio is developing?

This is an important question because the answer has a lot to do with your investment decision and therefore your long-term performance. Checking your portfolio balance is not a harmless activity; The more you check, the more likely you are to invest in lottery-like stocks.

The opportunity to discuss this trend comes with the recent release of Berkshire Hathaway (BRKA)(BRKA)’s annual report, which features CEO Warren Buffett’s much-anticipated thoughts on investing. It is known to occupy one extreme of the holding period spectrum, with a preferred holding period of “forever”.

At the other end of this spectrum are traders whose holding periods are a few days. I don’t need to remind you that Buffett is way ahead of them over the long term.

The facts about cheap stocks

The stocks Buffett tends to favor are “cheap, safe stocks,” according to a 2018 Financial Analysts Journal study. According to the professors who authored this study, Buffett prefers stocks with low price-to-book ratios, those that experience relatively low volatility and are owned by companies whose earnings are growing faster than average and that pay out a significant portion of their earnings as dividends.

The safety and quality of such stocks make it possible for Buffett to hold them indefinitely. A high-flying stock riding a wave of investor exuberance would not qualify as such stocks are destined to lose very badly over the long run sooner or later.

Short-term traders typically find the stocks Buffett favors far too boring. Instead, they look for stocks that can pay off big in a very short period of time. They don’t care that such stocks are bad long-term bets.

Commentators have long suspected that smartphones and social media are sharpening traders’ focus on lottery-like stocks – low-priced stocks with above-average volatility and positive skewness. This latter property relates to the distribution of such stocks’ returns: in contrast to a symmetric bell-shaped distribution, most values ​​in a lottery-like stock are clustered near the left, negative side, but its opposite, positive, side extends far to the right — a long one right tail, in statistical parlance. Such stocks often lose money, but when they win, they can win big.

The typical American checks their cell phone 344 times a day — every three minutes on average during waking hours, according to one survey. That equates to 140 checks during the Wall Street trading session. Betting whether traders will focus on the cheap and safe stocks Buffett favors or lottery-like stocks during trading hours on their smartphones?

Recent research has found the answer. The study, published by the National Bureau of Economic Research, is entitled “Smart(phone) Investing? A Within-Investor-Time Analysis of New Technologies and Trading Behavior”. It was conducted by Ankit Kalda and Alessandro Previtero of the Kelley School of Business at Indiana University; Benjamin Loos from the University of New South Wales; and Andreas Hackethal from the Goethe University in Frankfurt.

For the study, the researchers focused on the trading behavior of customers of two major German banks between 2010 and 2017. During this time, the two banks developed trading apps that customers can use to trade shares with their smartphones. The researchers were able to determine whether the banks’ customers were actually doing business from their smartphones.

Researchers found that customers were 67% more likely to invest in lottery-like stocks after customers started executing trades on their smartphones.

What happens when brokers send SMS to your smartphone?

This evidence is convincing enough. Perhaps an even stronger causal link between smartphones and risk appetite emerges from another study published last year in the Journal of Financial Economics. The study, entitled ‘Attention Triggers and Investor Risk-taking’, was conducted by Marc Arnold of the University of St. Gallen in Switzerland; Matthias Pelster from the Center for Risk Management at the University of Paderborn in Germany; and Marti Subrahmanyam of NYU’s Stern School of Business.

The researchers examined the trading records of clients of a major broker, which regularly sends messages about individual stocks to clients’ smartphones. The researchers limited their investigation to the broker’s messages, which contained no fundamental news about the company in question. They did find, however, that these messages triggered greater risk-taking among the customers who received them — 19% more, the researchers said.

Because these news items contained no fundamental news, the researchers conclude that the greater risk appetite was a direct result of brokers’ mention of the stocks in their news stories. The simple fact of focusing on a particular stock — paying attention — led to greater risk-taking.

The most obvious implication of these studies for investing is that we should focus less often on how our portfolios are performing and turn off text messages and social media feeds about the stock market. But that’s unrealistic. Human nature is what it is, telling someone not to pay attention only increases their desire to pay attention.

The next best alternative is to develop an action plan specific to your portfolio, detailing how you should respond, come what may — and then follow that financial plan. This may involve hiring a financial advisor to manage your portfolio in accordance with this plan. If you do these things, you can pay attention to social media feeds that focus on the stock market.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Buffett loves cash dividends, and so should you — plus 8 higher-yielding stocks to get you started

Also Read: Stock Investors Still Too Bullish For Anyone To Believe This Selloff Will Trigger A Strong Market Rally

-Mark Hulbert

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.


(ENDS) Dow Jones Newswires

3/17/23 1249ET

Copyright (c) 2023 Dow Jones & Company, Inc.

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