Why Pay For Speculation?

Most people understand that state lotteries are the lowest form of gambling. There’s nothing you can do to change your odds of winning. Either they pick your numbers or they don’t. 

Gambling in Las Vegas, depending on the game and whether you are a professional or amateur, typically offers better odds than state lotteries, yet most people still expect—rationally—to lose. This is why Las Vegas includes so much more entertainment than just gambling. It’s all entertainment. 

People who buy individual stocks are gambling as well, since the odds of outperforming an index fund bought and held over time are very low. The odds are even lower for beating value-tilted index (or asset class) funds, if over 90 years of US stock market history and modern academic research is any indication. 

We usually call gambling in the stock market speculation as a way to make it seem at least a bit more thoughtful than throwing darts at a list of thousands of company names. But this is just another Wall Street mind game designed to sell research, generate fees and commissions, and perpetuate hope for the traders. Mindless dart throwing still offers better odds of success. 

Some people don’t know the odds or they think they can outsmart all the other millions of investors betting on the same stocks because they have special knowledge, talent, or luck. These people are delusional, of course, since we have reams of evidence that the vast majority of professional investors fail to beat the market over time. 

Still others live in blissful ignorance (until things blow up) because they never compute an accurate time-weighted rate of return with which to compare far less risky and less costly alternatives. They tell themselves (and others who question their sanity) that they’re “winning” at the game because the “winners” (stocks outperforming at the moment) are top of mind. Proportionality, among many other useful statistical and behavioral tools, is missing from their thinking. 

Finally, some people speculate in stocks because they find it entertaining (albeit not likely on the same level as a Las Vegas outing). This, in my view, is the only reason to speculate in individual stocks. Which brings me, finally, to the point of this article: why would you ever pay someone else to speculate with your money? 

Where’s the entertainment? 

Because “renowned investor” Cathie Wood is unlikely to close her speculative ARK Innovation Fund (ARKK) based on the realization that she really isn’t God, she will remain a classic example of professional hubris and delusion for some time. So, I’m going to keep picking on her for a while. 

Selecting Tesla, Robinhood, Zoom, Roku, bitcoin, etc. because they’re “disruptive” technologies is not insightful. You can do that. You can also buy very expensive stocks at historical P/E multiples (or with no E at all). When you do this, you’re feeding your FOMO demons, of course.* And when you sell some or all of those expensive stocks when they crash and burn (as most have in the past year or so), you’re feeding your FEAR demons. See, you can be Cathie Wood too. You just don’t have the marketing clout to suck a bunch of other “investors” into your game. 

Ms. Wood isn’t the only one who does this. There are investment advisors who will add Vanguard or Dimensional index funds to their actively managed portfolios along with 20 or 30 individual stocks and charge you a fee for the whole lot. 

There’s no thought, really, of structured asset class diversification with an expected portfolio return and measurable risk, disciplined rebalancing to keep those metrics fairly predictable over time, or even any kind of a buy/sell discipline for the individual stocks. These advisors buy what’s popular, sell when those stocks become unpopular, rinse and repeat. 

The stocks give the advisor something to talk about at your quarterly meetings. What’s done well, what hasn’t, and what changes they’ll be making to “earn your fee.” They’ll talk about the Fed, Covid, Ukraine, “Putin’s price hike” (couldn’t resist). Everything is justified and rationalized. Always. 

Of course, the index funds are an admission of the advisor’s lack of confidence in their active management skills. Why else would they have them in there? One reason, which they’ll never admit, is to cushion the blow from their bad stock picks and bad timing decisions. 

So why pay for speculation? You got me. 

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*FOMO = fear of missing out. FEAR = fear. 

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