Don’t Be a BOOB
Study: Finfluencer advice is killing your profits
It’s been a while, I know. The last note I wrote was in November of last year. Where have I been? I’ve been heads down putting my latest ideas to the test by risking my own capital in the markets every day.
In short, I’ve been trading, and I’m happy to report that the results have been most encouraging. From November 1, 2023, through today, my futures trading account is up over 61% vs. 34% for the S&P 500.
What I learned in eight months of trading
There are a couple of reasons that I needed to focus exclusively on my own trading for a while:
Most importantly, I needed to validate my new tools and ideas. I’m not comfortable selling anything unless I know it really works. Check.
I needed the constant and continuous feedback of real markets with real money at risk to help me identify the most important new ideas and learn how to best share them with you. Check.
Some fascinating new research out of the Swiss Finance Institute and my own alma mater, U.C. Berkeley, will help to explain the big idea that I’ve been working on.
The research paper is titled simply Finfluencers, and it tracks the social media posts of 29,000 different financial influencers on StockTwits. The researchers find that 28% of these finfluencers actually gave good advice that resulted in “monthly abnormal gains of 2.6%.” That’s better than I expected, frankly. These finfluencers are called “skilled.”
As for the other 72% of finfluencers? 16% provided no added value and the remaining 56% of finfluencers provided negative value – i.e., monthly abnormal returns of -2.3%. These latter folks were deemed “antiskilled.” Ouch.
Why bad advice wins
You might think that the skilled finfluencers would attract more followers, but sadly, that’s not the case. Per the authors, “antiskilled finfluencers have more followers and more influence on retail trading than skilled finfluencers.”
I’ve suspected this for a long time, but it’s good to see the data confirm it, and it really speaks to our present predicament in so many ways. The social media echo chamber we’re all subject to these days elevates the antiskilled.
How and why does this happen? The authors explain this in one of the more telling sentences I’ve ever read:
“The advice by antiskilled finfluencers creates overly optimistic beliefs most times and persistent swings in followers’ beliefs.” (italics mine)
There you have it, folks. Most financial social media consumers are BOOBs – buyers of overly optimistic beliefs. They love the sweet seduction of false certainties, and they even seem to love the persistent swings in their own beliefs. It’s all part of the dopamine nation.
Optimism kills profits. Be a realist.
If you want to be successful, you can’t afford to be a BOOB. In fact, you’ve got to actively watch for the pumpers and dumpers of overly optimistic beliefs, and you’ve got to tune them out – or better yet, fade them. (Again, per the authors, “A contrarian strategy yields 1.2% monthly out-of-sample performance.”)
Which brings me back to my own work and what I’ve been putting to the test these past eight months.
It’s a way to avoid overly optimistic beliefs and the persistent swings that accompany them. It’s a system built on realistic beliefs and expectations, and it’s actively hostile to the wild swings most traders take for granted. It’s a way to survive and, ultimately, to thrive.
I started this journey in 1998. I made trailing stops available to the investing public in 2005 in a way that had never been done before, and I helped people understand the “why” of trailing stops. I’m very proud of that.
I think what I’ve developed today is the most important work I’ve ever done, by a long shot.
I’m resigned to the fact that my new work will not be taking me to the top of the social media charts, because the things that really work aren’t flashy or easy enough to go viral.
But I’m more convinced than ever that there is a small, powerful group of independently minded investors and traders who really want to succeed and who are willing to do the hard work to make it happen.
If you’re one of them, I sincerely hope to contribute to your success.
I’ll be rolling out the new tools by the end of the summer. In the meantime, you can get a glimpse by watching my new YouTube show on FSC’s Cycles TV.
Fight the noise,
Dr. Richard Smith
P.S. In my role as Chairman of the Board for the Foundation for the Study of Cycles, I’ve been devoting a lot of time lately to some exciting plans that I think will interest investors. Please sign up for the newsletter to find out more about what’s to come in 2024!
Love your work and use of higher educated lexicon to catch my attention! Yes lots of charlatans and scoundrels out there (~72%) ready to take your money, but also a few good persons (~28%) worthy of the challenge! Thanks to the FSC and its bevy of finfleuncers for performing a class act!