The New Fidelity Stock-Trading App Makes A Bad Idea Even Worse
Josh Barro has the full rundown over at the New York Times.
But here's the bottom line: this makes a bad idea worse.
Fidelity is home to the Magellan Fund, once managed by Peter Lynch who is perhaps the best mutual fund manager of all time. Lynch managed the fund from 1977 to 1990 and averaged returns of 29%, just an outstanding performance run.
And Lynch's major investing maxim was: "Buy what you know."
Buy What You Know
The "buy what you know" strategy, while certainly an easy way for a brilliant investor like Lynch to distill his ideas for a broader audience, has some problems.
Last February, Business Insider's Sam Ro highlighted comments from BlackRock's Russ Koesterich, who pointed out two major flaws in the "buy what you know" line of thinking for novice investors.
Koesterich wrote:
- "Investors often exaggerate the benefit of physical proximity. The fact that a company is headquartered in my hometown probably doesn't make me any better qualified to judge its investment prospects. If it did, everyone who lived in Seattle could simply day trade Microsoft and Nike for a living."
- "Focusing too much on local companies leaves investors with an overly concentrated portfolio. One investor I knew had a disproportionate share of his portfolio in companies domiciled in his mid-sized southern town."
And of course the irony for Fidelity here is that the new "Stocks Nearby" feature is specifically designed to capitalize on an investors physical proximity to an investing idea.
REUTERS/Jim BourgPeter LynchKoesterich also added this critique of Lynch's idea, which in the wake of Fidelity's location-based feature seems particularly prescient.
"While [Lynch's strategy] provided some psychological comfort, it was a seriously flawed strategy, as the relatively small size of the business community led him to over invest in a very narrow list of companies," wrote Koesterich.
"In fact, investors who disproportionately favor local investments will struggle to assemble a well-diversified portfolio, taking on unnecessary risk in the process."
The Lynch Legacy
Here is Fidelity's release announcing the feature:
Fidelity Investments® has introduced Stocks Nearby, a new visual way for users of its iPhone® brokerage app to generate investing ideas. Created by Fidelity Labs, the company's center for innovation, the feature enables investors to discover public companies as they view their present location, then pull up a quote and conduct additional research directly in the Fidelity Mobile® app.
"As the investing maxim goes, buy what you know," said Velia M. Carboni, senior vice president, mobile channel at Fidelity. "The Fidelity Stocks Nearby tool enables investors to immediately research businesses that show promise - on the go. Imagine an investor coming upon a store that is packed with customers - with Stocks Nearby they can easily begin to answer the question if it's a good investing opportunity."
In his piece, Barro quipped that, "I always thought the best investing maxim went 'buy low-fee index funds.'" And in 2014, most investors thought it was, too.
It is, of course, understandable that Fidelity would tout the investing maxim of its most famous and successful fund manager as something like the best investing maxim.
Options At Home
Over at Bloomberg View, however, Matt Levine noted that Fidelity's announcement has some unintentionally hilarious language, too.
Levine notes that in Fidelity's release the company boasts that its mobile app can, "support single- and multi-leg option trades and trading of specific shares."
As Levine writes:
"When I got to 'even execute options trades,' I was like, whoah, whoah, slow down there Fidelity, it's not enough that I'm walking around buying the stock of every store I see, I have to execute multi-leg option trades on them too? But of course the ideal retail brokerage customer, the guy that retail brokerage marketing officers dream about at night, is exactly the guy who wanders through the world saying "hey you know what's a good idea for an iron condor? Whatever I just looked at.'"
And watch any retail brokerage commercial during a sporting event and yeah, the image of the casual day trader making tons of money executing complicated strategies on an iPad is mostly just hilarious.
How To Make This Bad Idea Worse
As fate has it, I ended up at a dinner with Barro last night and his piece came up. Some other folks mentioned that the next logical step is sharing the trade you just made using Stocks Nearby, or logging onto the app and seeing what Stocks Nearby your friends just bought, both which seem like even less-thoughtful ways to make whimsical investment decisions.
But as Barro noted in his piece, Fidelity's announcement says that, "Many businesses are owned by lesser-known parent companies, but in many cases Fidelity's iPhone app will display the ticker symbol so investors can conduct additional research and make smarter investing decisions."
To this Barro adds, "A good rule of thumb: If you didn't already know the name of a business's parent company, you probably don't know enough about the business to systematically beat the market by investing in it."
This is all exceedingly correct.
Good investment decisions, particularly for the retail-oriented investor at whom the Stocks Nearby feature is targeted, are based on research and care and not taking outsized risks.
And so it seems unlikely that someone prudently saving for retirement would want to walk down the street, see a busy store, and buy some stock - and what's more, it is unlikely that this person should.