Investment Junk Food

Easy and instant access to information is often framed as a major advantage to present day investors compared to their predecessors, but if anything we suffer from a profound information disadvantage. The benefit of improved knowledge is easily overwhelmed by the behavioural challenge of dealing with an incessant torrent of noise. Much of what investors consume is little more than investment junk food, tempting us into decisions that feel good in the moment but come with a material long-term cost.

Whether it be an update on why the stock market closed lower today, a vivid description of a new and profound economic theme, or a compelling account of why we are headed for a recession, such communication bears a striking resemblance to the attractions and dangers of junk food. It provides us with a quick fix, is more interesting than the stuff that does us good and can create long-term damage.

Not only is it appealing, it is everywhere. Investment junk food is prolific. It is like being in a supermarket with row upon row of cakes and ice cream, with the fruit and vegetables hidden on a shelf in the back corner. Making smart decisions in such an environment is incredibly difficult.

The driving force of this problem is incentives. Investment junk food is created for usually one of two reasons – raising assets or attracting eyeballs. The primary motivation is not typically to improve our long-term financial health, but to profit from us in some fashion.

While the occasional chocolate bar is unlikely to be of detriment to our long-term well-being; investment junk food can be more pernicious. Seemingly small, in the moment, mistakes can compound into dramatic long-run costs. This torrent of unhelpful communication matters and is far from benign.

Financial markets are a natural and compelling storybook. A constant stream of heroes, villains, opportunities, threats, failures and successes. This makes them captivating and intriguing – the perfect setting for creating investment junk food.  There is always a new story to tell and sell.

One of the major behavioural problems investors encounter is mistaking the ceaseless action in markets as a call to action in our portfolios. If something is happening in markets, then something should be happening in our portfolios. Investment junk food preys on this misconception. It tells us that things are changing and asks us why we are not doing anything about it.

For most investors financial markets should be chaotic and fascinating, but our portfolios should be stable and dull.

The most common defence of the industrial production of investment junk food is that clients demand it, so it must be produced. If we didn’t tell them how the stock market performed last month, they would demand to know why. There may be some truth to this, but it is also a vicious circle. Clients want it because they are continually fed it. Perhaps we could try reframing those expectations and talking more about good investment behaviour.

The problem with these fruits and vegetables of the investment communication world, is that they can seem repetitive and dull, much like good, long-term investing. There are two solutions to this – communicating the same messages in different ways (which certain people do exceptionally well). Or by telling people about all the enthralling and emotive things that are happening in financial markets, and then why they should not be doing anything about it.

We can look at the junk food, but just not eat it.

My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).