How many times have you checked today to see how your investment portfolio is performing? This is an important question to ask because the answer has a lot to do with your investment decisions and, in turn, your long-term performance. Checking your portfolio balance is not a benign activity; The more you check the more likely you are investing in lottery type stocks. The occasion to discuss this trend is the recent release of Berkshire Hathaway’s BRK.A, -1.91% BRK.B, -2.18% annual report, which includes CEO Warren Buffett’s much-anticipated thoughts on investing. It famously occupies one extreme of the holding-period spectrum, with a preferred holding period of “forever”. At the other end of the spectrum are traders whose holding period is a few days. I don’t need to remind you that Buffett has outperformed them in the long run. Declining Cheap Stocks The stocks Buffett favors are “cheap, safe stocks,” according to a 2018 study in the Financial Analysts Journal. According to the study’s authors, Buffett favors stocks with low price-to-book ratios, relatively low volatility, and companies whose profits are growing at a faster than average pace and which pay out significant dividends. Earnings as dividends. The safety and quality of such stocks is what makes Buffett comfortable holding them indefinitely. A high-flying stock riding the wave of investor euphoria does not qualify, as such stocks are destined to lose heavily sooner or later over the long term. Short-term traders generally find the stocks that Buffett favors too boring. They are instead looking for stocks that can pay big in a very short period of time. They don’t mind that such stocks are poor long-term bets. Critics have long suspected that smart phones and social media are creating a lottery-type focus on stocks — stocks with low prices — above-average volatility and positive distortions. This latter property refers to the distribution of returns of such stocks: unlike a symmetric bell-shaped distribution, a lottery-type stock will have most of its prices cluster near the left, negative, side but whose opposite, positive, side extends a long way to the right — in statistical parlance. The long tail on the right. Such stocks often lose money but, when they win, they can win big. The average American checks their cell phone 344 times a day—an average of every three minutes during waking hours, according to one survey. That’s the equivalent of checking 140 times during a trading session on Wall Street. During the session, care to bet whether traders on their smartphones are focusing on the cheap and safe stocks Buffett favors, or the lottery-type stocks? Recent research has the answer. The study, distributed by the National Bureau of Economic Research, titled “Smart(phone) Investing? Within-Investor-Time Analysis of New Technologies and Trading Behavior. It was conducted by Ankit Calda and Alessandro Previtero of the Kelly School of Business at Indiana University; Benjamin Loos of the University of New South Wales; and Andreas Heckthal of Goethe University Frankfurt. To conduct the study, the researchers focused on the trading behavior of clients of two large German banks between 2010 and 2017. It was during this period that the two banks created trading apps that enabled customers to trade stocks with their smartphones. The researchers were able to determine whether customers of the banks were actually executing transactions from their smart phones. Researchers found that, after clients started trading from their smartphones, they became 67% more likely to invest in lottery-type stocks. What happens when brokers text your smartphone? This evidence is compelling enough. Perhaps an even stronger causal link between smartphones and risk-taking comes from another study published last year in the Journal of Financial Economics. The study, titled “Attention Triggers and Investors’ Risk Taking,” was conducted by Marc Arnold of the University of St. Gallen in Switzerland; Matthias Pelster of the Center for Risk Management at the University of Paderborn in Germany; and Marti Subramaniam of NYU’s Stern School of Business. Researchers studied the trading records of clients of a large broker that periodically sent messages about individual stocks to clients’ smartphones. The researchers limited their study to messages sent by brokers that contained no fundamental news about the respective company. Yet they found that these messages caused more risk-taking — 19% more, according to the researchers — by consumers who received them. Given that these messages contained no fundamental news, the researchers concluded that brokers’ messages were a direct result of the stock being mentioned. The simple fact of focusing on a particular stock – paying attention – led to greater risk taking. “Focus less on how our portfolios are doing and turn off text messages and social media feeds about the stock market. The most obvious investment implication of this study is that we should focus less on how our portfolios are doing and stop texting and social media feeds about the stock market. But it is unrealistic. Human nature being what it is, telling someone not to pay attention only increases the desire to pay attention. The next best option is to devise a specific action plan for your portfolio that details how you should react to whatever may happen – and then follow that financial plan. This may include hiring a financial advisor to manage your portfolio according to that plan. If you do these things, then you can pay attention to social media feeds that focus on the stock market. Mark Hulbert is a regular contributor to MarketWatch. Their Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com More: Buffett loves cash dividends and here’s why you should too – plus 8 stocks with higher yields to get you started. Also read: Stock investors are still so bullish that one believes this selloff will spark a strong rally in the market
