Access to far more information, the ability to make quicker decisions, lower costs – there are lots of reasons for thinking that smartphones will make us better investors. As we tap away on the screen in our pocket, tracking news and prices in real time, anyone should be able to match the resources and knowledge base of the biggest institutions in the world, and their returns as well. That might sound plausible in theory; it turns out to be completely wrong.
Debasing the golden rules
The US National Bureau of Economic Research has just published a fascinating study from the Kelley School of Business. It took 15,000 retail trading accounts from a couple of the major German banks and then looked at how customers changed their behaviour once they switched to app-based trading. They were all existing customers, mostly in their 40s. The study found three things. First, investors stopped bothering with in-depth research, charts and trends, and just went with their gut a lot more. Second, they gambled a lot more. Measured by the volatility of the assets purchased, the share of trades committed to chancy bets rose by almost ten percentage points. Finally, they jumped on bandwagons, investing in assets that had just soared in price. Overall, app investors were 12 percentage points more likely to buy assets in the top 10% of past performance than they had been before. Whatever the hot fad was in that year, they piled right in.
In other words, once they start trading on an app, investors start doing all the things we know they shouldn’t. There are not many golden rules in investment, but a few have been well established over many decades. It is always a mistake to overtrade (the costs of buying and selling all the time far outweigh any potential gains and no one can ever time the market perfectly). It pays to do your homework (the few really exceptional investors who beat the market over many years always have a system, and a way of researching themes and companies to work out which ones will do best). Without rules such as these, you are just gambling – and if you want to do that you might as well go to a casino or a racecourse. The charges are lower, you pay less tax,and you have just as much chance of coming out ahead.
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Another rule is that it is always a mistake simply to jump on bandwagons and app-based investors are more prone to doing just that. Sure, momentum can carry you on for a while, but if you are always buying the most expensive assets in the world you will usually end up making big losses.
The trend is not your friend
The way that app-based investors trade is not likely to change any time soon. The study looked at whether the changes were simply short-term, as people played around with a new toy. In fact, they persisted over several years. In truth, smartphones are changing the way people invest permanently and for the worse.
There are two important points to come out of that. The first is that, as the use of smartphones continues to increase, as it inevitably will, the markets will get more and more volatile, with crazy booms and busts dominating the headlines. We may already have seen a taster of that with the r/wallstreetbets Reddit crowd piling into stocks. But we will see it far more as, without any form of conscious organisation, investors will simply crowd into whatever is the hot trend of the moment.
Second, anyone who wants to beat the market over the next decade just has to follow one simple rule: put away your smartphone and set up a brokerage account where you have to phone in deals, preferably over a landline, and make sure you speak to an actual broker and follow up those instructions with a written form. While everyone else is tapping away furiously on their phone and hopping onto the bandwagon of the day, you will do brilliantly – and end up far richer.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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