Bad influence: Why you should be wary of the finfluencer

My earliest investing memory is of Harshad Mehta and his replacement cost theory, among other ideas. That was one hell of a bull market.

This was of course followed by the massive FII driven rally. The “foreigners” are coming! Well, they came. They had little idea what they were doing or who they were dealing with. But the fact that foreign money was coming was proof that India’s time had come.

Cut to 1999, the idea Telecom-Media-Technology (TMT) stocks revolutionising the world took hold. This was a time when all you needed was to add a “.com” to you name, and your valuation would take off! This was also the era of Ketan Parekh, and his (in)famous K-10 stocks.

During 2005 to 2008, excesses went to a whole new level. Money was plenty as Alan Greenspan, the then chair of the US Federal Reserve, was slow to slam the breaks. Risk appetite was high. And so, money sloshed all around the world. India had a massive boom in spending on all kinds of things, including massive infrastructure projects. In the stock market, among other things, the idea of value of “land bank” took hold, driving prices of real estate companies to stratospheric levels. Well, people had to find reasons to drive up stock prices! Animal spirits were at their peak in this period.

From 2020, it was all about the goldilocks economy, where everything was expected to be perfect post the pandemic. People would want bigger houses, better holidays, the best durables, premium services and so on and so forth.

Club this with a massive dose of cheap money, and a stock market rally triggered.

But this time around, the flag bearer had no face per se. On the contrary, it was a whole community of people who took to social media to “show” people how to make money. Yes, it was here that the finfluencer was born.

What’s also important to note, and you know this already, is that personalities and ideas as originally conceived in each of these bull markets were ultimately proven to be largely hollow.

A great example here is the TMT bust. Almost all the so called darlings of the market got decimated, never to recover. Very few actually went on to generate serious money for investors. Amazon was one of them. But then for every Amazon, there were probably 1,000 companies that disappointed.

Each time this played out, millions lost part/most of their savings. Sad.

Yet, there’s something about personalities and the “new” ideas they float that gets the masses every time. Even though they may have suffered losses before.

If we can pick this out, perhaps, the next bust can be avoided.

India is once again gripped by endless wealth generating possibilities of its stock market.

This time around, there’s a lot more than hope. The Indian economy is really taking off and should do well in the coming decades (aside of the bumps that are part of the journey). All one needs to do is figure out a way to tap into this to make some serious money.

And again, like in the past, the approach to making most of this opportunity is getting muddied by a new “face” – the finfluencer. The relatively young, social media savvy, all knowing finfluencer.

Now let me be clear. This is not a tirade against this community (yes, it is a community – business is booming!).

The purpose of my writing this today is to share how to go about putting what’s happening in context. Nothing more. Nothing less.

I believe this could help you make more informed investment decisions.

You see, everything we know about how to earn, save and invest to meet one’s life goals is being turned on its head by the finfluencer.

And while it’s possible that this completely new approach will work out, it’s highly unlikely.

Think about it.

In most cases I have come across, the launchpad of the finfluencer is based on either or both of the following, while the third is generally a fact that applies to all of them:

One, massive returns on largely small and midcap stocks that have converted a small investment into a large fortune

Two, the huge payoffs received from sharing their so-called learnings either via platforms like YouTube or learning courses.

Three, all this has happened, for many of them, in the last 3 to 4 years.

Note: I am not talking of finfluencers who have been effectively running a fraud where they encourage their followers to trade by making all kinds of dubious claims, without disclosing the cut they get from the broker (sometimes throughout the life of the customer!). That’s a whole new level altogether and outside the scope of our discussion today. We leave that to the regulators.

So, if I were at the other end of the table with a finfluencer, this is what I would be thinking: First, the fact that this finfluencer hit a jackpot is simply not replicable 99% of the time. Not only that, 99% of the finfluencers will be unable to replicate their own pre-finfluencer success. And the reason is simple. There are too many variables, including a big dollop of luck.

Furthermore, it is difficult to separate skill from luck in the near term and most finfluencers attribute to skill what could be due to luck.

(If you have found the 1% category finfluencer, thank you are in luck – you found the needle in the haystack).

Second, is it possible that this finfluencer is simply a product of a bull market, like so many before him?

Remember, in 2020, when most of these finfluencers really got going, Indian stocks were cheap. This potentially saved the retail investor.

Now that the markets have rallied, curiously, a lot of finfluencers have shifted focus to microcap, smallcap and midcap stocks. They are in unchartered territory with an untested process, and could cause damage to many a portfolios.

Third, the person sitting in front of me (in person or on the screen) has limited experience in life. While that does not disqualify him per se, what are the chances that he has figured the key to success in life (not just financial mind you; our finfluencer is all-in-one, typically). More so because he himself has tested his own approach for a few years at most…and that too in a generally bullish environment.

Now the question begs itself…

If you think rationally about our finfluencer, why would you ever sign up for their learning course (or at the extreme why watch their videos/posts) to figure out what to do with your life?

The answer is obvious. And that’s why I call it a fad.

It appears that the tried and tested ways of the true-blue influencers of the day – people like Buffett and Munger – with decades of proof to back them up, are being challenged.

It’s the finfluencer who is driving the investor today. But then the fact also is that the finfluencer is probably running on empty.

Investor, beware!

Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.

You should always consult your personal investment advisor/wealth manager before making any decisions.