Why your smartphone is likely your enemy when it comes to investing – Kingsport Times News

By CARLA FRIED

Rate.com (TNS)

Spend too much time on your phone, doom scrolling and looking at social media? Do family members complain?

If your smartphone activities include stock trading apps, you could also be setting yourself up for money-losing trades. Recent research that looks at actual trading activity of tens of thousands of brokerage app users finds a pattern of taking on riskier stocks and, notably, joining fellow app users in a practice known as “herding” that leads to big losses.

GameStop as a herding episode

Researchers examined the habits of Robinhood app users, by poring over daily trading activity from between May 2018 and mid-August 2020 (a period when Robinhood published detailed trading data across its platform).

The researchers found that 35% of net buying by app users was concentrated in 10 stocks on any given day, vs. 24% for all retail investors (online and off).

They document that the top 0.5% of stocks bought every day go on to lose about 4.7% over the subsequent month. They further drilled down to look at extreme episodes of herding, when boatloads more investors buy into a stock. They found 45 instances where a stock, which entered a trading day with at least 100 investors, saw its popularity soar by at least 750%. Those stocks lost nearly 20% over the month following their popularity jump.

Sound familiar? GameStop’s stock price went from $43 on Jan. 21 to $347 on Jan. 27 and then back to $40 on Feb 18, a herding episode for the ages.

The gamification of trading that is central to the Robinhood app got the firm in hot water with regulators in Massachusetts even before the GameStop episode.

App investors act on emotions

An influential study in the Journal of Finance in 2000 established that individual investors who engage in active trading do worse than buy-and-hold types. In the recent study, researchers find that the ease-of-use of the Robinhood app —which includes commission free trades — seems to lead users to make emotional bets that aren’t grounded in critical analysis.

A separate study published in January by the National Bureau of Economic Research, looked at trading habits of more than 180,000 clients of two German retail banks between 2010 and 2017, a period when online trading expanded from desktop/laptop to include trading by smartphone. During the period studied, more than 18,000 customers placed at least one trade through their smartphone app.

The researchers found that once the smartphone app was available, investors who traded by phone invested in riskier stocks. Those risky trades weren’t confined to their phone trades; the researchers found that the increased appetite for riskier stocks bled over into their trading habits on their computers as well. They also estimate that app traders were about 70% more likely to chase after hot stocks topping the performance charts.

The case for slowing down

As Nobel Laureate Daniel Kahneman explained in his book “Thinking, Fast and Slow,” our decision-making process tends to either be fast and emotional, or slow and deliberative. Both trading-app research papers make the point that what seems to be happening is that online trading apps facilitate, if not downright encourage, snap decisions.

If you’re a buy-and-hold investor who finds hyperactive online trading a bit mystifying, this latest round of research should give you the confidence to just stay on the sidelines. There should be no FOMO. For those who enjoy the rush of frequent online trading via smartphone apps, the research should give you pause that what is undoubtedly more fun than dollar cost averaging into a target date mutual fund, is not a sure-fire recipe for building wealth.

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