Entertainment vs. Investing

One of my favorite things about financial media is the profiles of individual investors in the Wall Street Journal.

I don’t know how they do it but somehow the Journal gets regular people to spill their guts about thoughts on the markets or how they’re positioning their portfolios.

This week’s piece on the rise and fall of amateur investors didn’t disappoint.

Gunjan Banerji profiled 25-year-old Omar Ghias who amassed more than $1.5 million trading stocks using gobs of leverage during the pandemic.

It didn’t last:

As his gains swelled, so did his spending on everything from sports betting and bars to luxury cars. He says he also borrowed heavily to amplify his positions.

When the party ended, his fortune evaporated thanks to some wrong-way bets and his excessive spending. To support himself, he says he now works at a deli in Las Vegas that pays him roughly $14 an hour plus tips and sells area timeshares. He says he no longer has any money invested in the market.

“I’m starting from zero,” said Mr. Ghias, who is 25.

According to the story, he racked up more than $300,000 in credit card bills on bottle service, Super Bowl trips, Lambo rentals and sports betting.

As a young person with those kinds of gains he must have felt invincible. Once that feeling sets in there is no way you’re going to cash out.

The biggest revelation from this story for me is when Mr. Ghias admitted, “I really started treating the market like a casino.”

In a casino the deck is stacked against you. The longer you play, the greater the odds are you will walk away a loser since the house holds an edge over the players.

This is not the case in the stock market. Historically speaking, the longer your time horizon, the better your odds have been in terms of experiencing positive results…as long as you’re able to stay out of your own way.

Gambling at the casino is a form of entertainment. Successful investing is not supposed to be entertaining.

Following the markets can be a form of entertainment as long as you don’t act on every impulse but the act of investing itself should not be exciting. In fact, good investing should be relatively boring.

Investors need to remember this when they’re in search of investment advice as well.

If you’re taking recommendations from people in the financial media you must understand the difference between entertainment and advice.

The people who appear on financial media who offer market calls or stock picks don’t know you. They don’t understand your risk tolerance, time horizon, market acumen or investing process.

You cannot offer blanket financial advice to the investing public without an understanding of their goals.

William Cohan wrote a profile of Jim Cramer for The Spectator in which he dug into the numbers for Cramer’s stock picks:

The CramerTracker guy said he started the site to track the stocks Cramer recommended to viewers on CNBC. “But the more I spent time on it, the more I realized, like ‘Holy cow, this guy has thousands of calls each month.’ And just kind of highlighting the ones he got right and the ones he got wrong, more often than not, he hit some rock.” He decided to analyze the performance of the stocks Cramer recommended between 2017 and 2021 — his 12,564 individual calls — and compared them to the simultaneous performance of the S&P 500. The analysis showed that Cramer’s picks underperformed the S&P by around six percentage points. Not horrific, by any stretch, but far from stellar. “A little bit closer to the market than I would have anticipated,” he said.

The analysis also showed that the volume in the stocks Cramer recommended increased some 25 percent the day after: people were following his advice and promptly losing money.

I’m not sure how reliable these numbers are because it’s not like Cramer offers a time horizon for each stock he picks.

Regardless of the numbers, if Cramer really did make over 12,000 individual stock picks over the course of 5 years, that would be more than the number of holdings in the Vanguard Total-World Stock ETF (which currently counts a little more than 9,500 holdings).

I’m sure some of those calls involve stocks Cramer has recommended in the past but it’s a mind-boggling number. Unless you’re running funds for Ken Griffin as Citadel, making that many moves in your portfolio is bound to lead to poor results over the long-run.

Cramer is an easy target these days because he makes so many stock picks that he is bound to make some bad calls. If you’re on TV 5 days a week offering stock picks eventually you’re going to end up with egg on your face.

That’s why stock picks from Cramer or anyone for that matter should be viewed first and foremost as entertainment, not advice.

Don’t buy or sell or hold anything because someone on TV or YouTube or Twitter or a blog or a TikTok video tells you to.

You can use someone else’s analysis, opinion or recommendation as a jumping-off point to do your own research but never blindly hit the buy or sell button simply because someone else tells you to.

If you don’t have a good reason for making a purchase, that’s not investing; it’s speculation.

And speculation can get you into trouble.

Peter Lynch once said “When people look at a house, they’re very careful. They look at the school system. They look at the street. They look at the plumbing. When they buy a refrigerator, they do homework. People spend more time and effort to buy the right refrigerator than they do to buy the right funds.”

Ben’s first rule of portfolio management is to know what you own and why you own it.

That might sound boring but boring is beautiful when it comes to long-term investment success.

Save the entertainment for the casino.

Further Reading:
How the Stock Market Works

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.