Let’s begin with a thought experiment.
Each morning, 512 apes gather in a room to participate in a curious game involving ten random stocks. The apes are divided evenly into two groups: half are assigned to represent a rise in a particular stock by day’s end, while the other half are assigned to represent a fall. None of the apes are making predictions—they’re simply standing in for two possible outcomes.
At the end of each day, the outcome of the stock is revealed. The apes on the wrong side quietly leave the room, while those on the correct side remain.
This process repeats daily, with the remaining apes assigned new roles each morning. The number of apes steadily halves, day after day, until, finally at the end of 10 days, only one ape remains—the one who, through sheer luck, has successfully “predicted” the stock price of all ten stocks in a row.
The ape feels good about itself, and the media raves about its stock-picking prowess. The ape is hailed as a stock market genius, whose track record beats the likes of Warren Buffett. But the truth is far less impressive: the ape’s so-called expertise was pure luck, a random outcome disguised as skill.
When you hear someone claim that “Investing is easy,” without putting much effort into researching the stocks that they buy, consider it a red flag and give whatever they say a healthy dose of skepticism. They might be the ape who survived the game of chance, but their hubris blinds them to the possibility that they might be merely lucky.
It’s easy for retail investors to get complacent and think that we can outsmart the market without doing any homework (i.e., studying what the company does, its competitive positions, etc.). Stocks popularised by the media attract flocks of retail investors who buy pieces of companies without understanding the underlying business. The proverbial “hype train” fuelled by the hopes and dreams of speculators will eventually run out of steam. It becomes a game of “who’s still holding the bag?”, which is more akin to gambling than a deliberate investment strategy.
Speculators
Gamblers
Just like those in the gambling den who believe luck is on their side and start to think that making money is easy, these retail investors (or speculators) buy a stock simply because, as Peter Lynch aptly stated, “the sucker’s going up”.
A speculator’s confidence usually stems from luck. They buy a stock without understanding it, see that the price went up, and they start to tell themselves something along the lines of “I’m a genius”.
Consider the case of Pfizer during the COVID-19 pandemic. When news broke that Pfizer, alongside BioNTech, had successfully developed an effective vaccine, it seemed likely that their stock would explode. And indeed it did. In a little more than a year, Pfizer’s stock price appreciated from a trough in March 2020 to its peak in December 2021 by a staggering 113%. Media outlets were raving about the company, retail investors flooded in, and many assumed the company was set for monumental gains purely because of its vaccine breakthrough. Yet, those who took the time to examine Pfizer’s balance sheet, business model, and historical earnings growth might have realized that a vaccine – even one as globally impactful as theirs – wouldn’t transform the company overnight.
Over that period, retail investors voted for the value of the company to double for a vaccine that only accounted for a part of Pfizer’s revenue. Speculators looked back at the large appreciation that the stock has had and started making unrealistic extrapolations of the stock price. Pfizer also spent a significant amount of R&D expenses to develop the vaccine, which will exert pressure on the bottom line in the ensuing years. From Pfizer’s peak in 2021 to its current price, the company’s market valuation has since fell by 55%. To put this into perspective; It takes 100% of gains to recover 50% of losses. When the share price dropped, a common investment “wisdom” among speculators is to simply “buy the dip”. But without understanding the company’s fundamentals, they were merely gambling on the stock price going up. Eventually, those who simply bought the dip were left holding the bag and had their fingers burnt.
It’s important to add here that I do not know if Pfizer will do well in the future. I haven’t done any analysis on the company, I do not know. The point here is that it is not easy to accumulate wealth long term simply by following the crowd and popular media narratives.
Blind faith and mere hope will not bring us success in investing. Be humble and learn to dicern between pure luck and true value creation. Learn from the best investors, not finance YouTubers / gurus who boast about their lucky picks and exclude their losers. Accumulation of wealth is the end goal here, not short-term dopamine hits from stock price movements.
The narratives spun by the media might captivate audiences, but they’re often the equivalent of sensationalist fiction of optimistic “What-If”s – entertaining but seldom reliable. Rely on your due diligence and start building wealth for the future.
P.S. This lecture by Peter Lynch is one of my all-time favorites. In a straightforward and humorous tone, he highlights many common fallacies held by investors. Have a listen!