Investing Apps: Just Say No

January 26th, 2022 by Potato

Perhaps Commissions Aren’t So Bad

Dan Ariely talks about the difference between free and nearly free. Nearly free and free have basically the same effect on your overall net wealth: whether you pay 14 cents in ECN fees every month or zero as you accumulate your investments is going to have no measurable impact on your ability to retire. But the difference between a few cents and free on your trading behaviour is huge — people will trade a lot more when it’s free. Plus the sales commission on the selling side for Questrade is good for investor behaviour: not high enough to actually be a real barrier to selling, but puts just that little bit of psychological stop in before selling and prevents dabbling in day-trading.

So I’m worried these days that so many people don’t ask “what’s a good brokerage to use?” but “which investing app should I use? Is Robinhood in Canada?”

And as much as lower fees are better, perhaps there’s a behavioural benefit to paying a little bit of commission and we shouldn’t encourage zero-fee platforms. Plus these companies make money somehow, which may include providing worse fills (though that doesn’t seem to be allowed in Canada).

Smartphone Addiction

Your smartphone is an ingenious device, carrying more power than the desktop computer I had in university, and able to carry out many very useful functions. It’s no wonder many of us have them practically welded to us. But they are an insidious thing: they short-circuit our brains in some of the worst ways.

Paying by mobile phone reduces the pain of paying even beyond that of using a credit card, so it’s all too easy to impulse buy something and not even notice how much you spent with that tap. And so many apps are addictive (sometimes purposefully so) that just touching your mobile phone short-circuits all of your careful reasoning faculties. [only a modest exaggeration on my part]

Do. Not. Trade. On. Your. Phone.

Investing Apps

Long before there was daytrading involved, WealthSimple bragged about how a third of their users checked in with the app daily. Daily! For a robo-advisor. There’s nothing to do! The whole point is to have a long-term investment plan that you don’t have to babysit!

From their point of view it was great: more mindshare, better odds that someone is checking on their phone and a friend goes “oh hey what’s that.” So of course they loved it. But I was horrified. Setting aside the unhealthy relationship people had with their phone and this app, it was setting investors up for loss-aversion disappointment (or panic): the more often you check in on your portfolio, the more likely you are to catch a downturn and see that you’ve lost some money.

So mobile phone investing apps had a horrifying relationship to engagement and addiction before they threw day-trading into the mix.

Do. Not. Trade. On. Your. Phone.

Dark Patterns, Advertising, and Active Investing

The trailblazer in no-commission app-based trading, the brand that has become synonymous with the product itself, is Robinhood in the US. And Robinhood has been criticized for its dark patterns, gamifying parts of the user experience to encourage people to trade more often and make more speculative bets. For example, they’d flash digital confetti up on the screen as a kind of reward/congratulations for placing a trade, and list trendy stocks.

Now WSTrade looks to be copying some (but thankfully nowhere near all) parts of the playbook, with a mobile-only [update: mobile-first, as I took forever to publish this and got scooped in some ways and they now have a desktop web version] app, offering zero commissions and fractional shares. And they’ll give you a free stock, to really drive home that idea of trading individual stocks, with a lottery-like component (will your sign-up bonus be a penny stock or a really valuable share?).

They also moved beyond stocks into an even more speculative space with crypto trading. And while not a dark pattern within the app itself, their ads are highlighting all the new speculative investments you can trade with them (rather than focusing on the good parts, like that you can do long-term investing in an all-in-one ETF with no commissions — in fact I can’t say that I’ve seen a single ad along those lines).

Screengrab of a WSTrade ad on Twitter highlighting the recent highly speculative securities you can now trade. I'll snark for posterity that anyone that bought ARKK is down 35 percent since.

Screengrab of a WSTrade ad on Twitter highlighting the recent highly speculative securities you can now trade, including a crypto coin that was explicitly created as a joke. I'll add some snark that this highly speculative thing is down 50 percent since being added to the platform, and indeed has never traded above that point.

In the US case at least, there are plenty of stories of people getting caught in things they don’t understand and losing lots of money — whether through mistakes, or through functionally a fully enabled gambling addiction. Thankfully, here in Canada investing apps don’t push users toward derivatives to add risk on top of daytrading, though they are moving toward “instant deposits” to wipe out any chance for cooling off periods and do include crypto. And the “first stock” promotion of “up to $4,500!” reinforces the gambling aspect of investing, and fractional share ownership promotes speculating in individual securities long before a user is ready for that.

And that’s not to mention fat-finger trades — how many typos have you made texting on that device?

Do. Not. Trade. On. Your. Phone.

Academic Research Backs Me Up

Two recent papers back up my instinctive refrain that you should not be trading on your phone.

First, Does Gamified Trading Stimulate Risk Taking? looks at the gamification aspect:

“We find that gamification “nudges” participants to take on more risk, particularly when trading high-volatility assets. The effect is stronger for inexperienced traders with lower financial literacy.”

You can read a more lay-friendly version here.

Their finding on the moderating influence of financial literacy gives me some hope. However, it also worries me, as people with low financial literacy are the ones now searching for “investing apps” rather than “best brokerage” – the term brokerage is almost entirely missing from new discussions on Reddit, for example, so the people using these apps are much more likely to be the low-finlit ones most susceptible to the gamification, gambling, ads, and dark patterns.

Next, Smart(Phone) Investing? A within Investor-Time Analysis of New Technologies and Trading Behavior looks at people’s behaviour when trading on their phone.

“we find that smartphones increase the purchase of riskier, lottery-type, non-diversifying assets, and of past winners and losers. […] following the launch of smartphone apps, investors are—if anything—more likely to purchase risky, lottery-type, and non-diversifying assets as well as chase winners and losers on non-smartphone platforms. […] We find evidence against investors offsetting these trades on other platforms and against digital nudges mechanically driving our results. Smartphone effects are neither transitory nor innocuous: assets purchased via smartphones deliver lower Sharpe ratios. Our findings caution against the indiscriminate use of smartphones as the key technology to increase access to financial markets.” [emphasis mine]

That reinforces my more instinctive view that even touching your phone short-circuits your self control thought: simply trading on your phone increases the likelihood of buying riskier things, and it infects your trading even off your phone. They also include a reference to another study on purchases, supporting the idea that smartphones reinforce system 1 thinking, where people ordered more unhealthy food on their mobile devices.

Conclusion

If you’re looking to start investing, do not look for a zero-commission “app”. Start by reading, and then open a brokerage account and only use your desktop/laptop to trade. Even if the brokerage you ultimately choose has a mobile app, don’t use it, as even occasional usage may change your appetite for lottery-like stocks. Controlling costs is important and a virtue, but zero costs changes our behaviour in ways that may be counter-productive. A few dollars here and there (or even $10 big bank commissions) are not going to derail your long-term plan, but may keep you from trading more than necessary. And finally:

Do. Not. Trade. On. Your. Phone.

Covid and School Lunches

January 23rd, 2022 by Potato

I’ve been very quiet about covid over the last two years, and I feel bad about that. I’m a science communicator, and this is one of the biggest science stories ever, yet here I am largely sitting it out. I admittedly haven’t been writing much of anything these days with my own issues on the go, plus it seems to be a topic that attracts such controversy that I just didn’t want to even go there. And besides, lots of other science communicators are on the job, and virology wasn’t my field. But still, I kick myself wondering if perhaps if I wrote and article and said “folks” enough maybe it would be the one to get through to DoFo. Anyway, the past is the past and I’ll have to sit with my private-mode ranting. Why am I finally inviting a war in my comments section?

A recent article in the Star really resonated with one aspect: how the heck our kids are dealing with this nightmare.

So far Blueberry is handling things fairly well, but as much as I love getting to spend time with her, the kid needs to hang out with kids her own age and not her parents. She’s been at in-person learning whenever the schools have been open. And for the most part we’ve been dealing with the risk of contagion there: she has decent custom-made masks (we even did a fit test with nutrisweet and recorded it all for a podcast that we then never followed-through with publishing /fail), she’s good at wearing them, her hand hygiene, and getting tested whenever she has any symptoms.

And those are the key ways to manage the risks: the kids need in-person learning, but balanced against the risks of the disease. Closing the schools in the prior waves was ~the right call (though they should have closed them earlier so the duration could have been shorter but then we get back to me raging about the mis-management or enacted other restrictions earlier to try to save the schools) because community transmission got too high and that has to stay down to keep the schools at a reasonable level of risk.

But now with the Omicron-driven wave and this most recent re-opening, we have lost two of the layers of protection: our testing system is overwhelmed, so kids with the sniffles aren’t getting tested, and we have not kept community transmission down. So the odds of someone in her classroom having covid is much higher than before, and chances are good that it will go undetected. Which brings us back to the big weakness in the in-person learning model: lunch (and snack) time.

You simply cannot maintain the layer of protection from masks and also eat (and by the same token, in-person dining should also be the first to close and the last to open). And it’s -20 in January so the school isn’t sending them outside to eat (which also has the issue of trying to eat in gloves or freezing little fingers).

Which brings us back to that Star article I mentioned:

According to Dr. Anna Banerji, a pediatrician and University of Toronto professor, lunchtime is the riskiest period of the school day for COVID-19 transmission because of the removal of masks, even if it is partial or brief.

Banerji said bringing kids home for lunch if possible is “not a bad idea.”

I had the same thought, and have been taking Blueberry out of school for lunch every day that they’ve been back. I know that most parents can’t do that: they don’t have the flexibility in their schedules, or don’t work from home in the first place, so I get to do this from a place of privilege (but also a place of necessity — Wayfare is ~immunocompromised so we have to be extra cautious even with her 3 doses). But I was surprised that I was the only one showing up at the school’s front door every day.

I don’t know if I should be trying to convince the other parents who are BbtP readers to look at take a wild guess at the rate of transmission in their community and think about whether they too should pull their kids out for lunch (or have their kids eat outside or just do intermittent fasting to skip lunch entirely), or if I should be encouraging you all to talk me off the ledge of paranoia.

For now, it’s working well for us, and we feel like our risk of catching covid is lower because of it, and the only cost is that my work day stretches into the evening to make up the time. Hopefully in a few weeks this wave will have crested and we can get our testing infrastructure back online and maybe reduce the risk that any kid in a class is carrying covid for that moment when they all take their masks off to eat.

Grad School, 10 Years On

August 19th, 2021 by Potato

Coincidentally, I had this post on grad school and mental health come up across my stream today. (It’s a coincidence because I got out 10 years ago today though the server time on that old post indicates I didn’t post until after midnight)

Grad school is about as harmful to a person’s mental health as the death of a spouse was one tweet summary. Collectively, it causes as much disability adjusted life years lost as HIV/AIDS and other STDs per the post, which yeah, tracks about right.

I had a lot of good times in grad school, faced some interesting challenges, made some friends, and learned a lot. It was far from all bad. But I also wasted years of my life, with a huge opportunity cost.

My mental health has been terrible for the last year and a half or so. But this last decade I think overall it’s been fair to good (highs and lows, of course). Part of that is that fatherhood suits me. Yet even having to face the pressures of the real world and all the monkey feces it has thrown at me, I’ve been less anxious and less depressed than in grad school. To say it plainly: I, too, suffered with bouts of anxiety and depression on that journey. Of course, I can’t place the full blame on grad school: part of that was pre-existing. It may be generalizable/self-selecting, as I suppose you don’t go get a PhD unless you’re already a little cracked in the head in the first place.

It’s also a little sad to see that 10 years on and Science-with-a-capital-S still hasn’t figured this shit out. The profession is structurally hostile to people looking to reproduce, is more than a little exploitative and pyramid-schemy, and yet absolutely vital to human progress. We’ve been talking for years about how PhD students are often poorly prepared for “alternative” careers (though academia and research are the minority outcomes, by a lot). We under-value research talent (severely in many cases), and even then can’t manage to pull out sustainable and secure funding programs. On the bright side, I am seeing more positions for people as working scientists (e.g. Research Associates) that aren’t some under-paid holding-pattern position on the mythical ladder to tenure.

I wasn’t planning on posting anything to mark the day, but when I saw that tweet I had to put something up, so this rambling mess is all the retrospective you get today.

— Doctor Potato

Non-Internalized Lessons

July 30th, 2021 by Potato

It’s been a hard slog for mental health this last year. Tough on physical health, too.

Err… year and a half. Damn.

Anyway, it just never seems to end.

There are some things we can do to help cope better, of course. They’re not panaceas, but they can help at least a little. The thing is, I have never managed to internalize those lessons.

Some pretty basic things can help with mood and energy levels: if I do some exercise, if I eat some fresh fruit, and I do it consistently, I’ll start to feel a little better in about 2 weeks. I’ve done enough tests with getting into a depressive funk where I don’t do those things and then forcing myself to do them again and it helps (not a full cure, but helpful).

So I try, every day, to at least go for a walk and it’s such an easy sounding thing to do and yet so hard. The eating is even harder — pandemic baking and potato chips have done a real number on my diet, but I consciously work in at least one piece of fresh fruit.

Then someone posted this meme of a determined/upset-looking bald eagle and that has become my new slogan. “I’m going on a stupid walk for my stupid mental and physical health. See you in an hour.” and I repeat it each night.

It’s still not a habit, and it’s still not an internalized lesson — I very much consciously get up and go for that walk (and repeat my refrain about my stupid mental and physical health). Maybe one day I’ll be one of those people who jumps out of bed and then exercises before staring the day, though that has always sounded just terrible to me. I also have to try to remember the gremlin rule: no snacking after midnight (I mean, no snacking ever would be even more effective but it’s not as cute and super-hard).

Am I feeling better now that it’s been a few months of semi-consistent bare minimum self-care? I don’t know, I guess, a little.

I think there was also something about sleep? Crap, forgot about that one.

Anyway, I think because the effects are so delayed I never learn that lesson. I don’t often feel energized after exercising, I feel tired and sweaty — but after a few weeks of doing it every day, I do feel more energized. But such a long stimulus-response delay keeps me from internalizing that message, and without that constant conscious effort, I quickly slip back into slothful inaction.

I can of course relate that back to investing: there are lots of lessons that aren’t easily internalized and we have to keep reminding ourselves of. Market timing and adding complexity are two that immediately spring to mind, especially in the current age of meme stonks and bubble warnings.

An Object Lesson in the Dangers of Leverage

April 28th, 2021 by Potato

I have so much to say about the last crazy, lunatic, unprecedented year, and not sure how to say any of it — my own thoughts are still all muddled. Covid was just a part of that for me — we’re also coming up on a year since my dad died. I haven’t properly eulogized him, or told his story Speaker for the Dead style, and don’t know if I will ever be able to.

This may be a personal blog, but a big focus is on finances so let’s stick to that aspect. It’s easier to talk about, at any rate.

Doing taxes was painful this year, for lots of reasons. I had to prepare the final return for him, as well as a T3 return for the estate, which had quite the learning curve and lots of weird CRA idiosyncrasies. Some examples to delay us before getting to the meat of the post? Sure, why not. Let’s start with where to simply mail the form. It wasn’t a simple Ontario and East send it here, Manitoba and West, send it there — Ontario was spit up with some cities sending it to one tax centre, others to another. Why does that matter? It’s not on its own a complex thing to figure out, but it’s one more step of complexity in what was already a hard process, and one that most people only face under hard circumstances. And it seems like the sort of thing that makes no damned difference so why is the CRA making it needlessly harder? Oh, and there was also one page that got sent on its own to another tax centre in Quebec. Why? Who knows.

It was painful because it was the “final” return and well, that’s a reminder that he’s dead, that’s it. Things are final now, and there are feelings there.

But the other reason tax season was painful was that I had to go over all the financial losses from 2020 to report capital losses. For most people, 2020 wasn’t such a big deal, investing-wise — scary for a brief while, insanely bubbly in a few pockets of the market, but a buy-and-hold index investor ended the year in the positive. Not so for us.

I’ve said many times before that my dad was a good investor. He got me into investing at a young age, etc. etc. That was an understatement: he was a great investor. He didn’t want to be famous, but would give his head a little shake whenever someone else tried to proclaim themselves “Canada’s Warren Buffett”. He was Canada’s Warren Buffett, or at least it seemed that way for a long time.

But as Buffett said, a long string of impressive numbers multiplied by a single zero is still a zero. In the end my dad wasn’t Canada’s Warren Buffett: he was Canada’s Bill Miller or Hwang.

The problem was that he was so good for so long that he got over-confident. He was not afraid of leverage — indeed, he used a lot of it.

On an episode of Because Money (I can’t remember which one to link it now), I shared the tale of how he was in the hospital, sick from his cancer, and needed to check in on the market — because a drop of 5% would be enough to trigger a margin call.

We argued a lot about leverage after that.

I tried to tell him that he was taking too much risk — risk he didn’t even need to take. He tried to convince me that if I ever wanted to be rich, to do more than just get by on my public sector salary (which he also argued I could do much better if I just switched careers), I needed to use leverage.

So he gave me a two-part gift: the first was an amount of money, which here we’ll just call X, a large amount that was roughly a year’s salary for me. The second half of the gift was that he would manage it for me, including by using margin. When I was young he had taught me to invest, but he never really taught me how to invest, at least not like he did. Dad was not the teaching type — he had no patience for it. So this was a chance to finally pass along that knowledge, as I could see what he did in an account in my name almost in real time.

X went into a brokerage account, and he borrowed another 2.48X against it. All it would take would be a 28% market correction to completely wipe me out, which was terrifying. “Relax,” he said, “you need to get used to this. If I do lose you your money, I’ll just write you another cheque. But it won’t happen, and this is something you have to learn.”

Well, Covid-19 hit. I bought some puts on the S&P500 in the early days as a hedge — I briefly felt like a market genius when the virus escaped Wuhan and the market started to wake up to the risk. I sold those for a small profit as things got volatile and it reduced the margin a tad. But the market kept going down, violently. The overall markets were down about 30% by the end, but the highly concentrated active portfolio he was in was down even more, despite appearing more conservative. But all those staid dividend-payers suddenly looked like broken businesses in the wake of shutdowns, and the overall indexes were buoyed by tech stocks that we didn’t own. I threw more money from my savings at the account to try to stave off a margin call, but finally got margin called on March 22, and became a forced seller just a day before the bottom was in.

In the end, X became 0.1X — my inheritance was essentially gone. The market recovered over the rest of 2020, but I did not leverage back up, and even if I wanted to there are limits to how much I could have added.

That’s the real danger of leverage: even if you have the psychological risk tolerance to ride out a volatile period in the market, a big enough dip can cause a permanent loss of capital as you’re forced to sell at the bottom to cover the loan. I should perhaps interject that while that non-registered account was actively managed, I do have registered accounts that are invested in passive index funds, which fared much better though the market crash and recovery, and which is my general recommendation for people — obviously active investing entails various risks, doing so with leverage even moreso.

The story sadly doesn’t have a silver lining, as I also didn’t learn much about his style of active investing — the cancer made him tired, and a little extra motivation to teach didn’t magically imbue him with the patience for it. “So tell me son, why did I do that trade?”
“I don’t know.”
“Well if you’re too fucking stupid to see it then I guess this family is doomed.”
“Thanks, Dad.”

He wanted to spend what little energy he had left on trading, not teaching.

In addition to learning a lot about leverage — or rather, strongly reinforcing my previous view — I also got an object lesson in risk correlation. Because part of this whole experiment was a compromise that stemmed from those arguments on leverage: I would have an account with more leverage to get used to it and see first-hand its power, and he would in turn take down the level of leverage on his own portfolio. Because even setting aside how nuts it was to run so close to the red-line that a 5% correction would make you start blocking the margin clerk’s number in good times, it was not good times. He had by that point had several run-ins with the hospital system for his cancer, and many more days where he didn’t want to get out of bed to trade. So he agreed that he was going to reduce his own leverage, begrudgingly. But “reduce” didn’t mean “eliminate,” and he too was margin called, almost every damned day through March, 2020.

The ability of an insurer to pay out insurance that was also tied to that very risk — risk correlation is not a good scene. So very understandably, Dad had to renege on his promise to insulate me from losses related to the leverage. In hindsight that was a completely obvious outcome, but it somehow never occurred to me when I let him go nuts with margin loans in my account.

That whole year was crazy in so many ways, and I want to try to be clear (I know I’m not, but I’ll try) that the human losses were the real tragedy… but those are hard to talk about, and this is in many ways a personal finance blog, and there are financial aspects to talk about.

Another aspect of the whole affair was a huge whipsaw in my own financial planning.

Back before we found out my Dad had cancer, before we found out it had returned and spread, before we knew that it was terminal, we did a Because Money episode on expecting vs *expecting* an inheritance. Basically, I never factored in receiving an inheritance into my own financial plans, at least not in a major way. My parents were definitely better-off than I was, so my standard-of-living in part is facilitated by gifts from them. While they don’t pay my rent or anything quite that co-dependent, a lot of my luxuries have come from gifts: plane tickets for vacations, curling equipment, or new video game systems. A good portion of my clothes I didn’t buy myself. So of course I was leaning on them in some ways (hashtag privilege?) but I also wasn’t factoring an inheritance into my long-term plans.

Suddenly that was changing. I was getting a rather large gift up front, and dad was dying — the prospect of an inheritance was becoming very real and updating my planning to take it into account seemed like the next step. In-between arguments over leverage and trading strategies, we also argued about frugality. I’m a pretty frugal person by nature, and over 8 years of grad school only reinforced that. I save a decent portion of my earnings, and have nearly zero affinity for conspicuous consumption. Dad tried to convince me to spend more, and live more in the moment. He didn’t want me to save that gift for the future — he wanted to grow it briefly, then have me plan to spend the dividends on the extra gas and insurance for a new showy gas guzzler to replace my Prius. He wanted me to spend 100% of my income — I already had enough saved up for the first few years of retirement, and I could count on an inheritance after that.

I wasn’t willing to go that far (I mean, I love my Prius), but hey, I can get greedy too. I was off work to take care of him, but was already imagining what it would be like to spend a few extra thousand per year once I had a paycheque again. I had started *expecting* an inheritance.

Then Covid hit and we got to be on a first-name basis with the margin clerk and it all went to hell. Whipsaw: back to planning to save the normal way.