The opening scene of the movie Wall Street (1987) gives you a flavour of the stock trading life in the 80s. Before the internet, all transactions were conducted over the phone.
If, you wanted to buy, let’s say, a couple of Apple shares (Apple had just been listed on the US stock exchange!), you would call your broker on the phone, who would write down the trade on a coloured ticket. That ticket would be sent to the local trade room, sometimes through a tube system. In the trade room, brokers would call their trade desk at the exchange to place your orders, for which you would receive confirmation a few minutes later.
70-75% of today’s individual traders buying and selling stocks for their personal accounts lose money.
While some of us may be nostalgic about these good old days, trading stock is simply much easier and accessible today: To buy shares in our favourite company, all we have to do is to open an App, state our conditions, and press “Buy”. But along with great benefits, this tech may have brought some new risks that investors need to deal with…
The 80s financial markets were not developed and interconnected as they are today. An investor could buy fewer securities (it used to be a handful, but now, depending on the brokerage house they choose, Swiss investors can access between 40,000 to 3,000,000 securities. Financial news was also less abundant. The primary sources of information were newspapers and company reports. As for training materials, there were significantly fewer books, tutorials, and communities. The limitations of the time created real barriers to entry and required significant resources.
Let’s go back to the ‘80s
Who would spend hours in 2021 peeling back the annual report of a company when you can click a button and learn, what investment analysts and the crowd think about the stock?
Why bother travelling around the world to find the next investing trends, when communities highlight what’s hot in the market, what to buy and how to buy it?
Is it still worth the burden of completing a degree in Business and Finance to start investing when you can listen to excellent podcasts and the process of investing is entirely gamified trading platforms?
That said… the investors from the 80s had one advantage over us: time to exercise their critical thinking.
Inexperienced traders are more likely to base their decisions on what is grabbing their attention rather than on clear investment criteria.
Seamless experience, broke investors
If the democratization of finance is something we should all welcome, easier access to investing has not necessarily translated into better performance. Recent pieces of research suggest that inexperienced investors looking for a seamless experience are learning the hard way that oversimplified investment advice comes with risks. Here are a few startling facts:
- 70-75% of today’s individual traders buying and selling stocks for their personal accounts lose money.
- Inexperienced traders are more likely to base their decisions on what is grabbing their attention rather than on clear investment criteria.
- This leads to greater herding effects and more frequent trades, which mostly benefit brokerage houses.
- Their portfolios are on average 1.5 times more concentrated. If concentration (concentration means putting money in a limited number of stocks, it is the opposite of diversification) can be a fast way to build wealth, the odds are usually not in the favour of investors. For example, a study conducted on the US stock markets since 1926, shows that 4 out of every 7 common stocks have underperformed government bonds over a lifetime.
- Finally, inexperienced retail traders tend to ignore some time-tested best practices in terms of asset allocation and market timing implemented by investment professionals. As a result, their portfolio is often a pile of bets than the results of a clear strategy.
Game over… at least for today
Brokerage houses may be to blame for taking advantage of our weaknesses by nudging us towards particular investments, but it is our responsibility to ensure that we exercise our critical thinking. Not sure where to start?… by taking the time. The time to build a strong case for each investment you are considering, the time to understand how they fit with your current strategy and long-term plan, the time to seek contrarian viewpoints and challenge your assumptions… Maybe that investment opportunity popping on your phone right now can wait until tomorrow. Spending the evening studying its merits may be a good option… as well as rewatching movies from the 80s!