Smoke your way to better returns?

Tuesday, 9th April 2019

Smoke your way to better returns?

Do you want to make better and more effective financial decisions?

Do you want to make improved returns on your investment portfolio?

If so, you might want to consider making a left-field move….

  • Forget medical advice….

It’s a move you probably haven’t thought about in the context of your financial performance….

I know I hadn’t….

It’s a move any medical professional would urge you not to make….

But a bunch of German and Danish university researchers have produced a report that appears to suggest you might want to take up smoking….

And if you already do a pretty good impression of the Marlboro man, the research seems to suggest you should summarily dismiss any ideas you have about packing up….

Instead, in terms of the overall returns produced by your investment decisions, it might be better to light up a fresh stogie and stick with the habit….

Why? Because smokers make better and more successful investors than non-smokers….

That’s what the research suggests….

  • I know what you’re thinking….

Now, I know what you’re thinking….

You’re thinking these university folk live in a bubble and have way too much time on their hands to come up with this kind of crackpot nonsense….

You’re thinking there is way too much money sluicing around in the academic pot….

Money which enables these full-time boffins to indulge in ‘research’ that has little or no practical use, benefit or value in the real world….

You’re thinking these pointy-heads should gird their loins, leave the cloistered environs of their University departments and get to work in a proper job….

But, to be fair, I’m probably misrepresenting the research a little bit. I collect silly ideas for a hobby, and I can’t help poking fun when I find them….

  • Control issues….

The research team didn’t set out to find out if smokers make better investors….

That wasn’t the point or purpose of research that led to the publication of a paper called Smoking Hot Portfolios….

Instead Charline Uhr (Goethe University Frankfurt), Steffen Meyer (University of Southern Denmark) and Andreas Hackethal (Goethe University Frankfurt)  were more interested in determining the relationship between the self-control exhibited by individuals and the investing decisions those individuals made….

And the study focused on smokers – a group of individuals who exhibit a clear lack of self-control – and how they performed in an investment context compared to non-smokers. The researchers measured the performance of 5,000 smokers against that of 14,000 investors of the non-smoking variety….

I don’t suppose the researchers ever had the intention to encourage anybody to spark up a bifter in the hope of improving investment returns….

But the results cannot be avoided or ignored. Smokers out-performed the non-smokers where it matters most – in the market….

But there are one or two informative subtleties within the results that it is worth being aware of….

  • There are smokers and then there are smokers….

A generalization is always illogical. And generalizations should always be challenged….

‘Smokers make better investors than non-smokers’. That is a generalization, of course.

And when you look a little closer at the research results, distinctions between smokers become more apparent….

They don’t all make better investors than non-smokers….

And there are distinct variations between the performances recorded by the individuals within the smoking test-group….

There are smokers. And then there are smokers….

For example, the study found that smokers who took control of their own investment activities were prone to trade more frequently than the other test-groups….

They also exhibited more biases….

As a result, they achieved lower returns on their investment portfolio than the other groups in the study….

Smoking didn’t seem to help that group much….

Indeed, the lack of self-control that  contributes to smoking in the first place appears to make a negative contribution to results – frequent and probably erratic and impatient trading in combination with self-defeating reliance on ill-considered but fully bought-into biases….

The smokers who outperformed the rest were those who chose to delegate their investment-related decisions to professional advisors and fund managers….

In other words, they didn’t rely on their own thinking, decisions or actions….

In the end, when everything is accounted for, perhaps their enhanced performance wasn’t really about smoking at all….

Maybe it had more to do with self-awareness. Maybe that second group of smokers are aware of their shortcomings in terms of self-control and are sufficiently self-aware to know that delegating decisions to financial professionals is likely to produce better outcomes than relying on their own flawed make-ups?

  • The way forward….

Perhaps the ability to look at ourselves and to recognize our own shortcomings (and act accordingly) is a better – and certainly healthier – way to improve our investment returns than reaching for a packet of Benson & Hedges?

And maybe investors  would be better served by research projects and papers with working titles that focus on what is actually being studied and measured rather than titles that are designed to create a stir and attract as much media attention as possible….

‘Smokers are better investors’ is a sexier and more interesting message (perhaps) than one that says ‘Self-awareness is an advantage in the markets’….

But I wonder if it is as useful or actionable a message. Probably not.

That’s the truth of it as we see it….

All the best,

Dave Gibson

Money Truths