The effects of social media on the individual investor (Part 2)

How posting about your portfolio and positions can influence your decision making

Last year I wrote a post here called “Social media and investing”. In the post I wrote:

The incentive of investing content creators is, not to get great returns in the market, but to get more views, more likes and sell products to their audience. The incentive of the content creators is to grow their subscriber base and offer paid products and promotions.

After one more year of observing social media dynamics (content posted on YouTube and X), I am more convinced than ever that this remains true. However, there is another part of the equation that I did not realize last year (which we will talk about later).

Last year I concluded that I would spend less time creating content and more time improving my investment skills, and I am pretty satisfied with the results. Despite all this, my returns still do not beat the S&P500, so I clearly have much more work to do. Last year I wrote:

In the future, I will decide if I add a paid tier to this substack or completely stop sharing content.

After a 19.8% return in 2023 and a 12% return year to date (2024), I have made more money investing each of the past two years than the amount of savings I could add to the portfolio each year, it has been a great experience that has shown me the life-changing possibilities of compounding and a high savings rate. However, I still kept making mistakes that reduced my returns, and I think I can still get much better if I learn to avoid them (although I’ve come to the conclusion that one should expect that a big part of their ideas will be wrong, and should learn to exit them fast once they realize the reason why they bought was wrong or the situation has changed).

Despite my good returns, it would have been better to just invest in the index though, since it has returned 21.9% in 2023 and 18.8% year to date (S&P500 total return in euros). Thus, I conclude that I am not good enough to offer a paid substack tier to anyone. Although I could make some money doing it with disingenuous marketing, I would feel like a scammer and that’s something I can not live with.

Now back to the topic.

Posting about your investments and portfolio in social media creates enormous biases

Although there are some benefits from consuming investment content in social media, such as being able to discover great ideas (for example, I discovered Fairfax Financial in 2022 through a writeup posted on X) I have come to the conclusion that there are no real benefits on posting content in social media (unless you are seeking a career on finance or want to sell paid products, which is not my case).

What does one gain from posting on social media?

• You will get judged by thousands on each and every one of your moves

• You will be judged negatively if you ever change your mind, people will see you as a traitor if you exit a position that they still own

• You will get confronted if you ever talk negatively about a stock (there are many fanatical groups out there)

• You will get ridiculed if you ever make a mistake (which you surely will)

• You will lose your anonymity and privacy if you post with your real name or get doxed

• If you ever exit or reduce a position without informing your followers, you will be shamed for it

• You will make someone lose money on some of your ideas (and win money of course, but it won’t matter much when that happens)

All that and more, is the downside of posting in social media and everyone with a decent following knows about it.

There is something even worse: Posting about your trades and portfolio on social media will make it harder for you to change your mind. You might think you can avoid this, but speaking positively about a trade in front of thousands of people (because followers are actually people) creates a psychological commitment to your position. Once you've publicly endorsed an investment, the pressure to maintain consistency in your stance can become overwhelming.

This dynamic introduces several biases:

1. Confirmation Bias: You'll likely seek out information that supports your original idea, ignoring or downplaying any negative news or data that contradicts your position. This can lead you to hold onto losing trades longer than you should.

2. Commitment Bias: The need to appear consistent in the eyes of your followers will make you reluctant to change your position, even if new evidence suggests that you should. The fear of looking indecisive or wrong in front of others can cloud your judgment.

3. Public Scrutiny: When you post about a trade, you invite the opinions and judgments of others. Some followers may have taken your advice and invested in the same stock, which adds an emotional burden. You'll feel responsible for their outcomes, making it harder to admit if you were wrong or to exit a bad position.

4. Ego and Reputation: As your follower count grows, so does your desire to protect your image. Acknowledging that you made a mistake can feel like a blow to your reputation. You might end up holding onto a trade just to avoid public embarrassment, even when it's clearly the wrong decision (more interested in being right than making money).

5. Loss Aversion: The pain of admitting a loss publicly can feel much worse than the actual financial loss. This emotional reaction can prevent you from cutting your losses quickly, resulting in deeper losses over time.

In short, the act of sharing your trades on social media can trap you in a cycle of emotional decision-making and hinder your ability to objectively reassess your positions. The need to save face and avoid criticism can severely limit your flexibility as an investor.

For all the reasons above, I have concluded that I am not gaining much from social media and I am being negatively impacted both in my life and my returns, so the only logical conclusion is to quit posting, and keep trying to improve my investment skills and compound my capital in private.

Kind regards,
Oscar.