Let Them Vote

Last week I saw the following TikTok video (h/t TikTokInvestors) that had the financial world up in arms:

I get why this kind of content can be so upsetting.  Here you have two investors (@ChadAndJenny) who are doing well in the markets despite not knowing all that much about investing.  You see their success and feel like they don’t deserve it.  They didn’t earn those returns, right?  On one hand, this thinking makes sense.  It would be like watching someone who has never played basketball before make 10 shots in a row.

On the other hand, their strategy of “buy stocks that go up and sell those that go down” is actually one of the most successful in all of investing.  Informally it has been called the newspaper strategy and works as follows:

  • Every January 1st you look at the newspaper and find the best performing stocks of the prior year.  You invest your money among those stocks and then go about your life for 12 months.
  • On January 1st of the next year you check the newspaper again to find the best performing stocks over the past year.  Any of your current holdings that are no longer on the list are sold and any newcomers are added to your portfolio.
  • Repeat every year until rich.

While @ChadAndJenny have an approach that is less rigorous than the newspaper strategy, this doesn’t make it less effective.  In fact, during a raging bull market, even an imperfect implementation of the newspaper strategy can do well.

In academic circles the newspaper strategy is known as momentum investing and it has generated some of the highest historical risk-adjusted returns of any factor (i.e. value, size, etc.) ever studied.  In fact, in their paper Momentum Has Its Moments, researchers from the University of New South Wales and the National Bureau of Economic Research stated:

From 1927 to 2011, momentum had a monthly excess return of 1.75%, controlling for the Fama and French factors.  Moreover, momentum is not just a US stock market anomaly.  Momentum has been shown in European equities, emerging markets, country stock indices, industry portfolios, currency markets, commodities, and across asset classes.

So it has high excess returns and has worked basically everywhere it has been tested, what’s not to like?  As the authors go on to say, this incredible performance is also accompanied by periodic, soul-crushing declines:

In 1932, the winners-minus-losers (WML) strategy [momentum] delivered a -91.59% return in just two months. In 2009, momentum experienced a crash of -73.42% in three months. Even the large returns of momentum do not compensate an investor with reasonable risk aversion for these sudden crashes that take decades to recover from.

This is why momentum investing can be so deadly.  When things are going right, they can go very right, but when they go wrong, it can get ugly fast.  Of course, not every investor that uses a momentum strategy is guaranteed to see any such downside.  Some people will quit before they experience a big crash, while others won’t be so fortunate.

Either way, just because some people are succeeding with this strategy (or a similar strategy) right now, doesn’t mean they should be attacked.  They are trying their best like anyone else.  Some of the negative things I have seen directed toward amateur investors like @ChadAndJenny are completely unnecessary and uncalled for.

Not only did @ChadAndJenny not brag about their performance, but even if they had, who cares?  Are you so insecure about your own investing skills that you feel the need to attack them?  Why?  There is no point.  Just leave them be.  Maybe they don’t realize how much luck is involved in this game. Who cares?  You don’t need to be the one to teach them.

If it wasn’t obvious before, it bears repeating now—some people are going to beat you at investing.  Some of them will be dumber than you.  Some will be less knowledgable.  Some will even be completely wrong about the future.  But they will beat you just the same.  There is no great arbiter of justice in the investment world.  There is no cosmic force that ensures that only the knowledgable make money.  If there were, then I would be a far richer man today.

But what does exist in the investment world is the inevitable pull of fundamentals.  The inescapable attraction between prices and reality.  Like a moth drawn to a flame.  Yes, markets will go through periods where some people make lots of money very quickly with little effort.  We are seeing such a market today.  But, eventually, these same markets find their way back.  As the legendary Benjamin Graham once said:

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

So let them vote.  Let them vote on which stock will be the next to double in a day.  Let them vote on which non-profit will make them rich.  Let them vote on what to buy and what to sell. Let them vote I say.  Because gravity will eventually set in.  Maybe not today.  Maybe not tomorrow.  Maybe not next week or even next year.  But eventually it will set in.

So there is no point in making fun of other investors because they happen to be doing better than you, even if they are using a seemingly foolish strategy.  If they are truly fools, they will learn their lesson.  Maybe not in this market, but maybe in the next one.

What you should really focus on in the meantime is not losing your head while everyone else is losing theirs.  After all, the only returns that really matter are your own.  Not your neighbors’, not your friends’, and definitely not those from random people on TikTok.  So stay the course and let them vote.

Happy investing and thank you for reading!

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This is post 224. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

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