If you’re investing in a low-cost, diversified, target-date fund in your pension plan through regular contributions, you might feel like a loser right now. Story stocks are the talk of the financial world, and those stories seem to have entered the zeitgeist.
Even the sports podcasts I have on my regular listening rotation are talking about GameStop, Robinhood, and trading limits. So it’s hard not to feel a little forlorn if you’re investing regularly in a widely diversified portfolio of stocks and bonds, of which these story stocks are a minuscule part.
Investing can be Boring
It’s one of the paradoxes of successful investing: When it’s clicking, you tend to feel nothing, or worse. Boredom is a common state. You put the money in, wonder where it goes, leave it alone, watch it fitfully grow, and repeat the process. It's not exciting, and it's hardly good conversation fodder. You’re not going to boast to friends and neighbors that today you bought more than 3,600 stocks, which is often what you do when you invest in an index fund.
It can also feel lonely and unsettling. Think back to last spring, or the euro crisis before that, or even further back to the housing bust and the tech bubble, and you know what I mean. At such times, even the most boring and regimented steps we take as investors might seem like an act of valour. You’re charging up that hill while droves of others are clambering down. That’s not going to leave you feeling affirmed or charged up. You’re going to feel dumb and drained, questioning yourself.
Confusion and doubt often plague this process. That one went up, why? Hang on, that one lost money? I should sell my winners and buy my losers? Investing inverts intuition and scrambles patterns, whereas we’re wired to trust our instincts and popular culture lionizes those who follow breadcrumbs or crack codes. Stories are expected to have clear protagonists and anti-heroes, follow arcs, impart lessons, or at least reach a satisfying conclusion. Investing is caked in inscrutabilities like cash flows that stretch into perpetuity. You don’t get the guy or gal at the end and there’s no sunset to walk off into. Again, this is when investing is working.
GameStop Breaks the Investing Rules
Now let’s consider GameStop (GME), which upends just about all of this. Sure, it’s baffling that a failing video-game retailer would become the stuff of a Victor Hugo tale, with individual investors manning the battlements and the Wall Street establishment laying siege to it. But it is very much a story, brimming with excitement and thronged by tribes cheering their side on. And it seems to have achieved a kind of finality, where the skinny nerd took down the muscular jock, brains over brawn, thrilling the rag-tag group that made him their cause.
It’s also striking in another way: the ease with which it took place. In the past investors have had to deal with nettlesome issues like brokerage charges, trading in whole shares, and margin requirements. But with the rise of commission-free platforms like Robinhood, those barriers have fallen away. The brokerages aren’t just putting a big "easy" button in front of investors, they’re shooting digital confetti cannons with each press of it. It is fun, punctuating the dullness of our locked-down lives, and in a weird way kind of unifying, too. We might hate each other’s politics, but damn if we don’t love sticking it to the man, finding solidarity through social media.
But this is going to end, and then we’re going to ask ourselves what we've learned. Is the age of grass-roots activism upon us? Has the pendulum swung from the institution to the individual? Is co-ordinated action the new "fundamentals"? Can we use our investments to settle scores? But I wonder if those questions miss a more basic point: This isn’t supposed to be easy or satisfying, let alone fun. In fact, frictions, boredom, and paralysing confusion can be underrated in investing.
What Lessons Have we Learned?
Yes, it’s trite to say GameStop wouldn’t have happened if investors had to pay to trade, or to insist that investing should be a miserable slog all the time. But when we reflect on some of the biggest breakthroughs investors have had in achieving better outcomes, we find they stem from removing discretion and enforcing routine. Automating pension contributions is mundane, for example, but it has been valuable in ensuring that investors save and invest on a regular basis. Opting people in to target-date funds is another unsexy yet very effective step to take decisions like asset allocation, fund selection, and rebalancing off their plate, simplifying matters.
A little bit of friction--brokerage commissions, trading curbs, limits on margin debt--also can go a long way. I’m not arguing for a return to the bad old days of hefty transaction costs and onerous trading limits.
But our research and others’ has found that less tends to be more when it comes to making investment decisions and trading. The more you do, the more it tends to cost you in the form of inopportune purchases and sales. In that sense, trading curbs and switching costs can save us from ourselves: We make fewer decisions and thus are less prone to buying high and selling low on emotion.
Finally, there’s something to be said for confusion. Investing is one of those endeavours where it can be very costly to make perfect the enemy of the good. People routinely overestimate their abilities in trying to outsmart other investors and beat the market. Most of them fail; but investors who stay within their limits, keeping costs low and diversifying widely, tend to prevail in the end.
That doesn’t mean confusion triumphs over certainty in markets. Knowledge and skill are what make markets the efficient places they are, after all. But you don’t need to have solved markets to meet your investing goals, making it fine to say “I don’t get it” and sit things out.
Headlines notwithstanding, there are far more people sitting GameStop out than actively partaking. Even after its meteoric rise, the stock was only around 0.05% of the US stock market as of January 29, 2021. That leaves a lot of us looking on at this spectacle from the sidelines, bewildered and wondering what we missed. But that’s nothing new. In a sense, bored, confused, and lonely are the long-term investor’s resting state. And in that, hopefully some of us can find community and comfort.
