Hot Stock on the Dance Floor.

iDd discusses the "Popularity Premium" and makes the case why boring is not just beautiful, but often more profitable than those gorgeous, exciting stocks.

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Chapters

• 0:18 What Is the Popularity Premium?
• 1:52 How popularity upends traditional views.
• 1:59 "Less popular" leads to lower risk and better profits?
• 2:28 Popularity downsides
• 3:35 Behavior's impact

Transcript

Hey, everyone, welcome back.
Ready to dive into something kind of interesting today.
Always up for an interesting dive.
So we're talking about the stock market, right?
Specifically, this idea of a popularity premium.
I've ever heard of that.
I have, yeah.
Like that hot new tech stock, everyone's clamoring to buy.
Drives the price through the roof,
even if the fundamentals don't necessarily, you know,
back it up.
Exactly.
It's kind of like, uh, remember those shoes,
the ones with the, what was it?
The springy soles.
Everyone had to have them.
Oh, yeah, right.
Were they actually that great, debatable,
but everyone was buying them.
So to figure out how this popularity thing
plays out in the stock market,
we're taking a deep dive into an excerpt
from this document called the popularity premium.
Catch you, right?
Definitely grabs your attention.
And I think you're going to find this interesting
because it really challenges some
of those classic investing ideas.
But first, let's define popularity in this context
because we're not talking about like,
the most liked kid in school.
It's more about
excess demand.
Yeah.
It's like a bidding war for an asset,
driving the price up, up, up.
Right.
And that's where it gets interesting
because it kind of throws a wrench
in the whole risk versus reward thing, doesn't it?
It really does.
You see, there's this traditional view in investing
that higher volatility, bigger swings in price,
usually means you have the potential
for higher returns, right?
But what this research found is,
well, it's not always so straightforward.
Really?
Tell me more about this research.
So they dug into stock market data,
like way back to 1972, all the way through 2016.
And what they found was the less popular stocks.
The ones nobody was really paying attention to.
The wallflowers, you could say.
Exactly.
Those wallflowers actually had the second highest returns overall.
No way.
Better than the popular stocks.
Well, almost.
The only ones that did better were companies
with super solid fundamentals, you know,
strong financials, proven track record,
that sort of thing.
Makes sense, those are the companies
that are probably built to last.
Exactly.
But here's the real kicker, those less popular stocks.
They were also the least risky investments.
Get out of here.
So you're telling me it's like finding a hidden gem
in a sea of, well, maybe not junk, but, you know.
Overhyped stocks, yeah, something like that.
It's about finding value where others aren't looking.
I like it.
So why do you think popularity impacts returns this way?
Is it just that overhyped thing or is there more to it?
So there are a couple of key takeaways from the research.
First, popularity can inflate prices, plain and simple.
Think about it.
If everyone's clamoring for a piece of something,
that price is going to get driven up
whether or not the company's actually worth that much.
And that can lead to lower returns
for those who buy in at the peak of the hype cycle.
Ah, so it's kind of like buying high and then.
Potentially being stuck when the hype dies down.
It's about finding value, not just following the crowd.
Which leads to the second takeaway, right?
Choosing left popular investments like small cap stocks
or those value stocks we talked about
can actually be a good thing long term.
Think about like this.
You could buy the flashy sports car everyone's raving about this year
or you could buy a well-made classic
that'll still be running beautifully years down the road.
And probably cost you a lot less.
Okay, this is making a lot of sense.
But there's got to be more to it than just like,
the numbers, right?
We're talking about human behavior here.
You hit the nail on the head.
This is where behavioral finance comes in.
Our emotions and biases can seriously influence
our investment decisions.
Often in ways we don't even realize.
Yeah, we've all made those impulse purchases
we probably shouldn't have.
Is that what leads to these popularity bubbles?
It definitely plays a role.
You see, when a stock gets hot,
there's this fear of missing out, right?
So everyone piles in, pushing the price up even further,
even if it's not justified.
And then there's this thing called constrained short selling.
Which basically means it's tough to bet against a popular stock.
So it's like, if you don't think a stock will go up,
it's harder to profit from it going down, exactly.
And that can create this weird situation
where popular stocks become even more overvalued
just because it's difficult for people to bet against them.
Wow.
So it sounds like what we're learning here is that maybe,
just maybe, zicking when everyone else sags
could actually be a good strategy.
That's one way to put it.
The research definitely suggests that looking beyond
those popular choices and being just a little bit contrarian
could lead to more consistent, less risky returns
over the long haul.
It's like Warren Buffett always says,
be fearful when others are greedy,
and greedy when others are fearful.
Well, on that note, that's all the time
we have for today's deep dive.
Hopefully, this gives you some food for thought
as you navigate the exciting, sometimes confusing
world of the stock market.