When Winning Makes You Worse

The headline above was posted on Wednesday and accompanied by the following quote:

"I think more and more investors are feeling somewhat invulnerable right now," Sosnick told Yahoo Finance. "Everything they’ve been trying has been working for them. If the basic stuff’s working, why not try a bit more speculative stuff?"

In behavioral finance, this is known as Outcome Bias. A fancy way to say humans evaluate the quality of a decision based on its outcome rather than the thought process or reasoning that led to it.

Investing in meme stocks (purchasing stocks hyped up on a message board without considering their fundamental value) is a low-quality decision. Just as buying Fartcoin* is a low-quality decision.

However, when we confuse good outcomes with good decisions, bad things happen.

First, when our bad decisions lead to good outcomes, we are more likely to repeat them. The person who made money on one speculative bet is more likely to make a larger, even more speculative bet the next time. Second, when our good decisions underperform, it becomes tempting to stop making good decisions.

For example, the investor who is currently allocating between passive index funds is likely underperforming their friends and neighbors who are speculating on crypto and meme stocks. The FOMO makes the investor more likely to abandon the sound process in the future.

The irony, and the thing that makes investing hard, is that the more disciplined your process, the more often you’ll look wrong in the short term.

But maximizing returns in the short-term doesn’t matter if you fail in the long-term, and the only way to survive in the long-term is to maintain a sound decision-making process.

So that is what we’ll continue to do: focus on making informed decisions based on the available information and not worry about the rest.

Speculative bubbles are as common as dirt, and they always end the same. Despite what you may read on the Reddit message boards, this time will not be different.

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*If you aren’t familiar with Fartcoin, I’m jealous. As of 7/23, it is the 62^rd most valuable cryptocurrency and trades with a market cap of approximately $1.5 billion despite having no utility other than a name that provides a few laughs.

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Interesting But Unrelated Chart

China’s working-age population is expected to shrink from approximately 900 million people today to 253 million by 2100. This massive change is being driven by the lagged effects of the one-child policy, an aging population, and a significant decline in fertility rates, which currently stand at 1.09 births per woman, far below the 2.1 needed to maintain population size.

Source: Apollo

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Last weekend, we dropped our kids off in Arkansas at Camp Ozark. It turns out that this camp doesn’t have air conditioning, and the temperatures have been approaching 100 every day this week, but according to the pics we get from camp, they’re getting along fine.

We’ll see if they still love us when we pick them up tomorrow.