Why Investors Keep Losing

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Head shrink in the markets. Yeah, people have been reading our stuff and following this program for some time. Know that I talk a lot about behavioral economics. about Daniel Kahneman here on the program. I’ve talked about the work that Terrence Odean, Professor Terrence Odean has done and Richard Thaler as well. And I wasn’t aware of this. I just found this out. Very important book.

that came out early in the infancy of my career entitled The Winner’s Curse. Richard Thaler, the author of this, he actually won the Nobel Prize. Nobel Prize this in 2017. And again, it’s a look at why people do dumb things with their money.

I didn’t know it was the reissuing the book. He’s reissuing the book with Alex Imus. They’re kind of like doing a redo on it. I highly recommend it to everybody out there. Jason Zweig from the Wall Street Journal. has these intelligent investor column. Recently interviewed them and the re-release of the book. Again, it’s all about trying to figure out why people do stupid things with their

money. Anyway, okay. The questions that Zwei put to them, and I talked to Thaler as well. Why investors like to buy investments, again, more often than not, he talks about this ill-advised, and I’m a big believer in compounding, compounding being the royal road to riches. However, however, when you see

outsized yields in various different products. You need to take a step back and pause and say to yourself, why is this yield so high? Again, you also take a look at the power of compounding, which is great, but also when you’re in an environment when you have

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the currency, want to call it, being debased, the value of the currency coming down, meaning guess what? The returns that you’re seeing are just not going to add up the way you expect to. And Thaler talks about this and he says, yeah, not only do a lot of people do this, but foundations, universities took them a long time to learn this lesson. Sometimes, you know what? It’s not just about, oh, I got a high yield right here. Yeah, but what about the principle? Is your investment

growing. Again, focusing more not just on yield, but on total return as well. The traders out there, we’ve got all the apps that are out there. We’ll get into that a bit. We talked about how short term losses can distract from long term gains.

And again, take a look at the apps out there, the Robin Hoods and the other brokerage apps that are out there that are perpetually pinging people with continuous pricing updates, value updates, streaming alerts, push notifications, all of that crap. They’re designed that way. Imus replied to this. said, these apps seem to exploit a host of behavioral biases.

Myopia, self-control problems, loss chasing, preference for lottery-like stocks to get people to invest in very sophisticated financial products. They did homework on this, studies on this. One of the most popular financial products on Robinhood are weekly options. They have lottery-like characteristics. These options

also happen to have the biggest bid to ask spread. They’re like penny stocks for crying out loud. Retail traders have lost upwards of $2 billion on these options over the past two years. You know where the real winners were? Robinhood. Yeah, Robinhood and Citadel, they made $6.4 billion in trading costs. You’re like, how do they do that?

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or they’re charging anything for trades. How do you think they keep the lights on? It’s the spread between the bid and the ask. The same, how shall I put it? Same bullshit that the boy in the room’s engaged in. Same exact thing.

Anyway, talked about as well, meme stocks, crypto, leverage single stock ETFs. Is this new? Has this been around forever? And Imus talked about speculation. We’ve all heard about Tulip Mania. They also got the 720 South Sea speculation bubble. And the reality is everyone at that point in time knew it was a bubble too.

Everyone knew it was a bubble, you know what they also thought? They thought they were smarter than everybody else and they would win in that demonic game of musical chairs that we talk about all the time. Again, because of the internet, because of the way that we’re able to communicate today, there’s going to be more bubbles. It’s easier to put things together. You get those groups out there like Wall Street Bets, getting everybody to do same thing at the same time and diamond hands and all of this stuff.

another great question by Zwangs, why are investors so reluctant to sell until they get back to break even or what they paid for in the first place? Again, behavioral head shrinking here. People react differently to realized outcomes compared to paper gains and losses, which leads to all sorts of interesting or odd patterns, including the disposition effect.

the greater willingness to sell winners and losers. Again, how often have we talked about that? Terrence Odine, Professor Odine has studied this as well. Another is the motivation to chase losses. I’m in a hole and I want to avoid realizing a loss. I could just take on more risks in the hope of getting it back. Again, when you’re in a hole, you might want to just stop digging.

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How can investors improve their procedures for cutting losses and letting winners ride? Slow down the entire process. Speeding up the process. Again, we were told, it’s just a way to go. And high speed training and algorithms. And we got rid of, we basically got rid of the exchanges. There’s really no real exchange. It’s all computerized. We got rid of the specialists. It’s gotta be fast, fast, fast. We’re told how quickly these trades can be executed. It’s all for our benefit.

I tell this to people sometimes I mentioned this before on the show and people sometimes blown away when I tell

I think the longest I’ve gone without looking at my account, not even looking at it, like maybe a year and a half. If I look at my accounts, personal, if I look at them once a year, it’s a lot. I’m be honest with you. I know what I’m doing. I know where everything is going.

know what my time frame is. I’m good.

I’m good. We speed everything up. Everyone’s got that short term timeframe. Another way that I’ve described this to people. How many times over the years have I been asked by radio, radio station, Chris, you wanna do the market wrap at four o’clock? Could you do that for our station? Give us a rundown. No.

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No, I’m not gonna do that. Why? Because I personally do not look at four o’clock to see where the markets close. Not that it even matters anymore because, I trade 24 hours a day. I’m gonna trade all the time. I’m gonna be able trade 24 hours a day. I gotta do it all the time. I’m trading in this market.

Do you understand who wins and loses there? Do you think you win as an individual investor in that way? You don’t. You don’t. I don’t do that stuff because it’s not necessary. It’s dumb. Short-term fluctuations in the market don’t matter. You can’t time it. Don’t get involved with it. One last thing that

That’s why I asked the, they asked us to, you know, Professor Thaler, is there a better way to get people to commit to long-term buy and hold investing? And he says the data, and you’re not getting an argument from me here, data suggests that very, very few individual investors should be trading individual securities. If most mutual funds cannot do better than their benchmark,

Why do you think you as an amateur, why do you think that you’re able to do it? Hey, yeah, we got the baseball playoffs going on, right? And I’m a Yankee fan, I’m glad they won yesterday. Listen, I’m gonna show my frustration, or two days ago, my frustration with the batting average of some of these guys on the team. And they’re the, you know, some of the…

best players in the world. I wish they could get more hits. However, I’m well aware that, yeah, I played baseball when I was younger. I can’t go up there and do that.

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You just can’t. And their policy, Thaler’s policy, it’s the same thing as I tell people. If you want to have a hobby and speculate a little bit, but treat it as a hobby. The overwhelming majority of what you do, what you’re holding on to, yeah, it better be well diversified and taken care of. You want to play the market. You don’t risk.

any more than you would expect to lose in totality and have it not bother you at all. It’s like going out to dinner or something like that. It’s nothing you’re going to worry about.

Again, great book. Glad to see that they’re re-releasing it. Fantastic. Richard Thaler with Alex Imus, the winner’s curse. I think it came out like 1990, 91, something like that. Re-releasing it. And again, it’s another look at why people do dumb stuff with their money. Watchdogonwallstreet.com.