Access & Noise Facilitates Poor Investment Choices

TruePoint Capital

If you’ve ever vacationed overseas, you know that the most interesting spots to visit and the best places to eat aren’t the tourist traps where the masses go.

The best spots are usually recommended by locals – off the beaten path and away from the crowds, but offering far more enjoyable experiences. These hidden treasures are hidden from the masses because they are not easily accessible and are usually only discovered if you know or come across a local who recommends them to you.

Investments are like vacations. The most easily accessible investments and the ones that make the most noise on social media are not typically the best options for your portfolio. Like tourist traps that are overrun by the masses, investors flock to investments that are the most easily accessible and the ones that get talked about most.

In the field of behavioral finance, two biases explain these behaviors and explain why mainstream investors stick to stocks or flock to the next big thing in investing.

Availability Bias says investors will invest in easy, convenient, and what clamors for their attention most. In the world of investing, it has never been easier to invest in stocks or crypto. With free trading platforms like Robinhood for stocks and coinbase, crypto.com, and FTX for crypto, even novice investors can be up and trading within minutes. Moreover, because stocks and crypto get all the press and dominate social media and internet buzz and attention, investors will flock to them because it’s what’s occupying their thoughts.

Here’s an example of Availability Bias:

Which of the following causes more fatalities in the United States in a year?

a)  Shark Attacks.

b)  Airplane Parts Falling From the Sky.

c)  Homicide and Car Accidents.

d)  Diabetes and Stomach Cancer.

If you guessed a) and c) sharks, homicides, and car accidents, like most people, you would be wrong. It’s a crazy statistic, but airplane parts falling from the sky are thirty times more likely to cause death in the U.S. than shark attacks, and diabetes and stomach cancer are twice as likely to cause death as a homicide and car accidents.

This is a case of availability bias, where people will believe what they hear and see the most.

Herding Behavior or Group-Think, another form of behavioral bias, says investors will invest in what everyone else is investing in, whether it makes financial sense or not. During the pandemic, herding behavior was on full display as investors flocked to meme stocks of flailing companies because everyone else was doing it.

The problem with investing biases is that they lead to irrational behavior and ignoring facts for hype. All the access and noise surrounding certain types of investments usually lead to poor investment choices at an individual level and investment bubbles at market levels.

Like the savvy tourists seeking obscure and off-the-beaten-path locales for the best sightseeing and food experiences, savvy investors seek out investments that are neither easily accessible nor get all the attention in the press or social media.

These private alternative investments allow smart investors to tune out all the noise and biases plaguing mainstream investors to properly weigh the merits and analyze the substantive metrics of an investment opportunity.

The preferred asset classes of the ultra-wealthy – assets like commercial real estate and private company investments (private equity) – don’t get talked about much in the news, and investors often only find out about them from people in the know – making these investments exclusive.

Smart investors prefer to keep it this way because they know the herds tend to overrun and ruin things they touch.

To avoid making poor investment choices, ignore the noise and resist the easily accessible and convenient investments. Seek the exclusive investments that get little attention in the press to make wise investment choices.