Three sacred rules

Happy Friday!

I used to work with the top ranked capital markets research analyst, and he told one of my institutional clients that this is how retail investors pick stocks (this isn’t verbatim but close)…

“There’s a guy who needs to get his hair cut. He goes down to the barbershop, but all the chairs are occupied so he has to wait. He sits down in the waiting area, sees a Sports Illustrated on the counter. He reads cover to cover, but before putting it back down, there’s a nine-month old Fortune magazine at the bottom of the pile that catches his eye. He thumbs through it, reads maybe 10% of a favorable article about a company, and then skips on the haircut to run home and trade the stock.”

That’s kind of funny, but after my almost decade on this side of the business, it’s also kind of true. It’s why I don’t talk stocks anymore. Back on the sell side, I would talk stocks and investment ideas all day with sophisticated clients because they would listen, say thanks (sometimes), and then do their own work. 

In retail land, people watch Cramer hit a horn, and they trade after hours to presumably beat the impending rush on next day’s open. I don’t want any part of this, and since the table below clearly indicates that long-term returns are fueled more by asset allocation than stock picking (security selection), I feel like I’m doing right by investors by avoiding those types of conversations.

It’s really no different than the three sacred rules in real estate. Locations (asset classes) explain the majority of your return over time. But that’s boring and the stock market is exciting, so I don’t expect human behavior to change anytime soon. 

Here’s a graphic/article that was published this week that attempts to depict how investors make decisions today versus 20 years ago. This explanation is slightly more pc than my former colleague’s. It’s no surprise that the internet has grown in popularity. However, most info on the internet is pure garbage, so it’s one of these “garbage in, garbage out” situations.

Also notice the time period of the survey. It was conducted through the end of 2019. I’m curious how these trends shifted last year. For example, Elon Musk was probably not a major source of investment advice back when he was building PayPal with Peter Thiel in the early 2000s. Today, I’d argue he is more influential as “friends, relatives, and associates.”

Have a great weekend…