The Rise of Gen Z Investors & AI Investing

The Rise of Gen Z Investors & AI Investing
Photo : Austin Distel via Unsplash

With the rise of easy-to-use investment apps and the constant barrage of successful investment stories shared on social media, young people are investing more than any other generation before them. But are they taking on too much risk and getting too self-confident investing during the longest bull market in history?

Every time you go on social media or talk about investments with friends, you'll likely hear them talk about how much profits they made investing in something risky that panned out. After all, if you invested in any decent company during the last ten years, chances are that you made a profit. But bull markets always end in a crash, and Gen Z investors might be in for a shock if they don't adjust the risk in their portfolios.

Gen-Z investing - speculation over fundamentals

While it is incredible to see Gen Zers devoting a substantial effort in saving up and building a stock portfolio. Research shows they are pursuing extremely risky speculative investments rather than calculating risk and reward. Many Gen-Zers fall for various "Get rich quick" day-trading, swing trading, options trading etc., investment strategies that never pan out in the long run. Nearly half (49%) of those aged 18-24 want to invest their money for only two to five years. Over a fifth (21%) say they want to  "take advantage of the market," while 16% want to "play the market for a quick profit."

Timing the stock market or thinking you can beat the market with short-term bets and speculation is of course, a fool's errand, and history shows that this mentality almost always ends in regret. Younger investors have really adopted these unfavorable investing habits in the last year: a quarter (25%) of Gen-Z investors admit to checking their portfolio more frequently. A fifth (17%) are placing trades more regularly, and 14% of young investors actively seek out more speculative investments hoping to achieve similar +1,000% returns as those spouted on social media.

Sadly what social media doesn't show is for every person who manages to achieve a +1,000%  return, there are thousands who bought in too late with FOMO (fear of missing out) and ended up bag-holding losses, sold too soon or too late due to human biases and investments based on speculation rather than calculated risk and reward.

Compound Interest - The simple rule that will amass wealth

While it is easy for a professional investor who spends all their time researching stocks to judge Gen-Zers for their speculative bets in the market. However, the professional investor might be forgetting that most people simply don't have the time to learn how to do Security analysis, read financial reports, perform valuations etc. But also have the free time to actually research companies every day to find the few undervalued companies in this largely overvalued bull market. This is difficult for even the best investors. Charlie Munger for example has recently put his eyes on Chinese stocks where there is more value to be found.

So what are Gen-Z investors really supposed to be doing? They can't keep their savings parked in cash with high inflation eating it away. Money managers have performed worse than a coin toss or index funds lately, and investing in the S&P 500 during an overpriced market with inflation is not great either.

However there is one huge benefit Gen-Z investors have plenty of... Time, cash flow and the power of compound interest!

Let's assume you invest $1,000 and can make an average 20% return each year for 10 years. Many people still think that would only result in $200 per year. But they are forgetting about compounding interest. With compounding interest your portfolio would actually be worth $7,304 in 10 years.

But what really makes compounding work is adding to your portfolio every month. Let's say you start with just $1,000 invested, but you are able to put aside an additional $500 a month from your income. After 10 years that would result in $161,943 with an average 20% annual return.

Or $1.15 million after 20 years. A much more exciting prospect.

If a Gen-Z was to manage this for 45 years until retirement this number would be $113 million dollars. An amount higher than most Gen-Zers are hoping to achieve with their current speculative bets in the stock market. Of course the big difference here is that this method requires a lot of time and patience rather than just hoping for a winning lottery ticket.

After all, there is a reason Albert Einstein called compounding interest the 8th wonder of the world!

But it still raises the question. How can the average person achieve a 20% return without spending 10,000 hours to learn how to invest like Warren Buffett? The S&P500 for example only manages a 6-9% annual return, barely keeping up with inflation. That's where investment services like Formula Stocks can help. Formula Stocks is an AI strategy that invests similarly to some of the top investors in history like Benjamin Graham, Philip Fisher, Warren Buffett, Jesse Livermore etc. These are long-term risk-adjusted investments based on fundamentals rather than speculation.

As of writing, 92.48% of these investments have been sold with a profit. 

Services like this allow you to find great growing companies selling for less than they are worth with a large margin of safety. By investing for the long run the Formula Stocks portfolio managed a +30.95% average annual return since their launch in 2009 outperforming the S&P500, and +22% average annual return in their backtests.

Of course these are all past results, and while history generally does tend to repeat itself, there is no guarantee the stock market in the future will continue to behave as it has in the past.

Here are some tips to become a smarter investor.

1. Rule #1, don't lose money

This may sound obvious, but there is a reason Warren Buffett keeps repeating this rule in investing. If you invest $1,000 and the stock price drops 50%. Just to get back to break-even you now have to make a +100% return (twice as much as you lost). This is why losing money when investing sets you back so much further. Just one poorly timed speculative investment can set your financial goals back several years.

Your investment strategy absolutely must have an asymmetric relationship between risk and reward, with reward being substantially higher than the risk you are taking.

Formula Stocks for example has an excellent Risk to Reward ratio:

The 92.48% winning investments had an average return of +74.99%

The 7.52% losing investments had an average loss of -16.74%

You can calculate the mathematical expected return of any given investment with this formula 

(0.92 * 74.99) - (0.08 * -16.74) = 68.09%

You can significantly reduce risk of losing money by investing in a diversified list of stocks with a high probability of positive returns.

If the strategy you are considering doesn't make their results public (they are most likely not worth your time) Although there are other ratios and charts to consider like Gain to pain ratio, Sortino ratio, Omega chart, Max drawdowns etc. (although explaining these requires an entire article by itself).

2. Invest with facts, not emotions.

If you ever bought stock because of FOMO. Please stop and re-evaluate your entire portfolio. Throughout the history of the stock market, there is not one thing more damaging to an investor than investing based on fear of missing out or greed.

If you look at your portfolio and you don't have a justified objective reason for holding every single one of your stocks at their current stock price. You need to put in the research and re-evaluate those companies.

Is $TSLA (Tesla) really worth a market cap of $1.05 Trillion USD, a stock price that is 342 times higher than the company's actual earnings? You may very well have a justified reason to believe it is worth that. But make sure you have a valid reason to believe that Tesla would continue to grow their earnings  by over 100x in the coming years to be worth their price tag. What is your valuation of the company's worth and is it less than its current price tag? Always remember this quote from Benjamin Graham: "In the short run, the market is a voting machine but in the long run it is a weighing machine."

Whether a company is overvalued or undervalued, the price tag will eventually match the value of the company.

If you're not sure how to evaluate your current portfolio. Formula Stocks includes a stock screener with their service called the "AI Score".

This tool evaluates all stocks in the market  and assigns it a simple score between -100 and +100 by analyzing all past financial reports and stock prices of the company with no emotions involved.


You can use this tool to evaluate your current portfolio or find new potential companies for your own investment research.

3. Select your investment tools and strategies with caution!

The FCA has stated that this emerging segment of self-investors is increasingly reliant on modern media for tips and news, such as YouTube and social media or fall for many of the short-term investment strategies on social media claiming to make impossibly high returns in a very short time period.

It is absolutely critical that if you choose a strategy to follow whether it be Formula Stocks or any other stock signal service, or stock screener, that you can evaluate their past performance, risk, what the strategy is and why they think they can beat the market in the future.

And know that all investment strategies have some downsides. For example day-trading and options strategies often require that you are able to spend at least 4 hours a day trading signals with extremely high risk. If the tools you are using are not upfront about the downsides of their strategy. Express extreme caution when evaluating their service.

Formula Stocks is also no exception to this rule. While they only require to update your portfolio once a month and thus are very low maintenance. They do not claim to perform well during market crashes and are very upfront about the amount of patience required to follow a long-term slow-paced investment strategy like Warren Buffett or Charlie Munger.

The below table shows their backtested losses during such market events compared to the S&P 500

Always remember that if something sounds too good to be true, it usually is.

Final Thoughts

Gen-Z is simultaneously the most responsible and most irresponsible generation of investors thus far. They save up and invest far more than any other generation has in the past. But their investment portfolios are based on extremely risky bets, rather than sound fundamentals and compound interest.

Will Gen-Z with the most valuable investment asset of all (time) continue to go all in on $GME, $TSLA, crypto and the latest hot options on pharma? And what will happen when the eventual market crash comes? Do you think Gen-Z will continue investing in risky bets, or learn some lessons about value investing?

© 2024 iTech Post All rights reserved. Do not reproduce without permission.
* This is a contributed article and this content does not necessarily represent the views of itechpost.com

Tags

Company from iTechPost

More from iTechPost