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What’s the Secret to Picking Winning Stocks? Don’t Fall for the Bullshit

According to the Financial Trust Index, Americans’ trust in the finance industry is at a measly 33%, which is an all-time high

It’s no surprise Americans are so distrustful of the finance industry either. We’re constantly bombarded with stories of bad actors like Bernie Madoff, billionaires are getting richer while regular folks are having trouble paying their rent, and at the most basic level, the finance industry uses complicated jargon to make regular people uncomfortable with investing so they’ll hire a financial advisor to do it for them. 

But unless you’re a millionaire, hiring a financial advisor is a complete waste of money. You’ll end up paying them, at best, only tens of thousands of dollars over your lifetime. At worst, you’ll pay hundreds of thousands or millions to have them manage your money, and many will do a worse job than if you’d learned the basics and invested it yourself.

Like financial advisors, 401ks and investing apps use marketing tricks to get you to make bad investment decisions too. If you’re looking for the secret to picking winning stocks, it’s to not fall for these bullshit marketing tactics. Here’s how to do it.

Skip the Aggressive Growth Mutual Funds

Aggressive growth funds are the sexiest looking mutual funds. They charm you by promising super-high rates of return, but long term, they usually fail to beat the returns of cheaper passive funds. Aggressive growth funds are commonly offered in employer-sponsored retirement accounts, like 401ks, which is why their poor long-term performance can’t be overlooked.

When you invest for retirement, you leave your money invested for decades. Because of the long-term nature of investing for retirement, you want to invest in funds that offer the best long-term returns. Actively managed funds, like aggressive growth funds, don’t do that. After just 10 years, only 11% of active funds beat comparable passive funds. 

The reason active funds fail to achieve the outsized returns they promise is because they charge much higher fees, called expense ratios. These fees are charged as an annual percentage of the assets (cash) you have invested in the fund. The higher the percentage, the higher the fees.

Fees for mutual funds, like aggressive growth funds, are higher because they try to beat the market. The market refers to the stock market as a whole. Indices like the S&P 500, Dow Jones, and Russell 2000 track a large portion of the stocks available on the market, and indicate the performance of the market. Passive funds mimic these indices and provide the same return as them. For example, if the S&P 500 goes up 25% this year, so will the funds that track the S&P 500.

Active funds, on the other hand, try to beat those 25% returns, and to do that, they need to hand-select which stocks they put in their fund. To find the highest-performing stocks, brokerage firms hire fund managers and analysts to do tons of research. This is an expensive and labor-intensive task, which the brokerage firms charge you extra for.

The bad news is that it is incredibly difficult to pick top-performing stocks in the short term, and nearly impossible to do it for decades. Because of that, these funds often fail to achieve returns that are high enough to compensate for the higher fees their investors pay. This leaves their investors (you) with lower returns than if you’d just invested in a passive fund instead.

The Alternative to Aggressive Growth Funds

Target date funds are often offered in 401ks and other retirement accounts and are great low-fee passive investments. These funds are incredible because they manage the risk and asset allocation of your portfolio up until retirement for you. Learn more about them here.

Don’t Fall for the Democratization of Investing Line

Cough cough, Robinhood, cough cough.

Robinhood has had its fair share of highly publicized issues, from stopping r/WallStreetBets traders from making trades during the runup of GameStop last year to a recent data breach, but those aren’t even their worst offenses. 

Vlad Tenev, one of Robinhood’s founders and its CEO, says he started the company to give more Americans the opportunity to participate in the US stock market, aka democratize investing. To do that, Robinhood ditched trading fees and became the first brokerage firm to offer commission-free trading.

This helped Robinhood investors pocket more of their earnings, but Robinhood isn’t exactly the white knight they claim to be. Commission fees were one of the main ways other brokerage firms made money. Without charging these fees to their investors, Robinhood had to come up with other sources of revenue. And thus, Robinhood’s predatory tactics begin.

The number one predatory tactic Robinhood uses is gamification. By adding emojis and game-like features to its trading app, Robinhood gets its investors to trade more frequently. This may not seem like a problem because these trades are commission-free, but it’s a huge problem.

Trading stocks is one of the fastest ways to lose money in the stock market. For a company that promotes itself as a hero for average investors, manipulating its users to adopt bad investment strategies that will most likely lose money seems pretty, to put it lightly, off-brand.

One study found that 80% of day traders lost an average of 36% of their money within 12 months. Another study from Fidelity found that its best-performing investors were either dead or had forgotten that they had an account. Why were these investors the best performers, you ask? Because they traded the least frequently.

While pioneering commission-free trading to help the everyday American build wealth through investing is a great marketing story, using gamification to get these beginner investors to adopt a losing investment strategy is predatory. And while these trades are “free” to investors, they make Robinhood a lot of money.

One of Robinhood’s main sources of revenue is something called payment for order flow (PFOF). I have a full breakdown of how Robinhood makes money using this strategy to the detriment of its investors here, but long story short, the more its users trade, the more money Robinhood makes.

On top of that, Robinhood also makes money by offering even riskier ways for its users to invest, like margin trades and options trading. With traditional investing, called taking a long position, an investor can only lose the amount of money they initially invested. When investing in options or on margin, investors can quickly lose even more money than they initially invested. 

For a company that bases its entire existence on helping the everyday investor, it sure doesn’t seem to be living up to its mission.

Robinhood isn’t the only platform conning investors into thinking they’re getting a good deal, though. Acorns, a subscription-based investment app, also charges exorbitant fees to its investors under the guise of making investing easier for the 99%. You can find a full breakdown of all of the problems with Acorns here.

Alternatives to Investing with Robinhood and Acorns

Low-fee robo-advisors are a great alternative to apps like Acorns. A well-priced robo-advisor will charge a management fee of around .5%. For self-directed investing, like Robinhood offers, apps like Public that don’t use payment for order flow, don’t allow day trading, and don’t provide super risky investment options are great alternatives.

It’s no wonder people are so skeptical of investing when the most popular investment vehicles are using predatory marketing tactics to try to trick you into making bad investment decisions. The good news is that the secret to picking winning stocks is to keep it simple, and if you do that, there are only a couple of things you need to avoid. 

  1. Don’t invest in funds with high fees
  2. Don’t buy and sell investments frequently
  3. Don’t risk more money than you have to lose

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