Sunday investors vs. Monday investors
In my Friday posts, I write about research that elicits a WTF moment in me. While I will probably never find anything as good as this article again, I think this note qualifies as a textbook example of this kind of research. Is it actionable? I doubt it. Is it fun and insightful? You bet.
Retail investors are famous as noise traders who just flock to the latest attention-grabbing stocks they can find. And of course, by flocking to meme stocks and other attention-grabbing stocks, they lose money on average. Because retail investors don’t have a professional investment process, their usual approach to investing is to google a company and read up on the latest news. This is why Google search trends can predict future retail trading volume and share prices.
But what if I asked you if it matters on which day you search for a company? Surely, it doesn’t matter for your performance when you look up some information about a company.
Ahem, apparently it does. Retail investors who search for a company on Sunday do systematically better than retail investors who search for the same company on Monday.
If that sounds weird, think about it this way. On a weekend, retail investors have more time to read up on a company and digest information. They even have to wait a day before their trades get executed on the stock exchange.
Meanwhile, on a weekday, we all are bombarded with more news and are under bigger time pressure from our jobs and our families. We simply have less time to sit back and reflect before acting. And the difference between weekends and weekdays gets bigger the more demanding a task is. And let’s face it, making investment decisions is a cognitively challenging task, especially when it is not something you do every day.
Apparently, this is what leads to this difference in performance. While most retail investors search for a company during the week and only a small fraction of retail investors search for companies on weekends, it is these weekend investors that are better able to predict future share prices. Companies in the S&P 500 that have higher search volume on weekends compared to past weekends or relative to other companies in the S&P 500 tend to outperform because retail investors don’t just blindly follow a headline but instead reflect on the company and make up their minds about risks and returns. And compared to the noise traders on weekdays, that little bit of reflection helps them avoid losing stocks or selecting some winners.
It’s obvious once you think about it. Can you exploit this? Yes, but instead of tracking google search volume for each weekday and every stock in the market, rather change your investment process.
If you are a retail investor, refuse to buy or sell investments during the week. Only allow yourself to think about investments and make decisions on the weekend. It’s a simple trick to clear your mind for what arguably are important decisions that shouldn’t be taken in a panicked moment.