Winning stock investors make money spotting trends early - and this one is just starting

MW Winning stock investors make money spotting trends early - and this one is just starting

By Charlie Garcia

Charlie Garcia responds to readers about why younger Americans choosing real-world activities is the real deal

Younger people are connecting more often without smartphones.

Editor's note: Columnist Charlie Garcia shares select emails from his virtual mailbag every Friday.

Social media is 'squeezing more juice from fewer oranges.' That's not growth. That's the last harvest.

Dear Charlie,

I work at a major social-media company and read your column about Gen Z unplugging while I was scrolling Instagram during my morning commute.

Then I shared it on our internal Slack. Then 12 people reacted with emojis. Then we had a meeting about it on Zoom.

If everyone's so desperate to unplug, why are our user-engagement metrics still going up? Why is my company spending billions on artificial-intelligence features to make the apps even more addictive?

You're betting against my industry while the industry is literally printing money.

Our quarterly earnings aren't showing any great unplugging. They're showing the opposite. So either your thesis is wrong, or there's a massive lag between what people say they want and what they actually do.

Which is it?

Anonymous in Menlo Park

Dear Anonymous in Menlo Park,

You work at a social-media company and you're telling me your engagement metrics are up. Congratulations.

The tobacco industry's sales were up right until the moment they weren't. Growth isn't the same as health - ask any tumor.

But let's address your actual question, which is: If everyone wants to unplug, why are they still plugged in? The answer is simple. Addiction.

You know this. Your company knows this. That's why you're spending billions on AI features to make apps more addictive. You literally just admitted that your job is to engineer compulsion.

So when you ask why people aren't leaving despite saying they want to, you're asking why heroin addicts don't just quit despite knowing it's killing them.

The lag between what people say they want and what they actually do isn't a mystery. It's called withdrawal. And it's profitable right up until it isn't.

Here's the thing: I'm not betting your company dies tomorrow. I'm betting that at the margin, people are choosing alternatives. Not deleting accounts, just using them less.

Not swearing off screens, just going to more concerts. Your engagement metrics are up because you're squeezing more juice from fewer oranges. That's not growth. That's the last harvest.

Markets move on marginal changes. If 20% of users decide they'd rather play board games than argue online, your stock drops 25%.

Your company's growing like a tumor. I'm betting the patient gets chemo. Both can be true for a while, then one stops being true, and that's when it gets interesting.

Capitalism finds us all eventually,

Charlie

P.S. - I admire the discretion. Silicon Valley runs on two things: optimism and nondisclosure agreements. You've mastered at least one of them.

Dear Charlie:

Why am I picking six stocks based on a cultural trend when I could just buy the SPDR S&P 500 ETF Trust SPY and avoid the risk of being wrong about everything?

You've done all this analysis to essentially match the index, except with way more concentration risk and the very real possibility that this trend evaporates next quarter.

What's the alpha here?

Mike

Dear Mike:

You're asking why pick six stocks when you could buy SPY and avoid the risk of being wrong?

Because my picks are up more than 20% on average and your index is up 13%. That's why.

Look, I'm not going to pretend I'm smarter than the market. But when you ask "what's the alpha here?" - the alpha is the more than 10 percentage points I'm beating you by while you're congratulating yourself on diversification.

The S&P 500 is up because the so-called Magnificent Seven tech stocks are holding the whole thing hostage. Strip those out and the index is basically treading water. So yes, if you own SPY, you own a little bit of everything, including a lot of companies going nowhere while Nvidia (NVDA) does the heavy lifting.

I'm not saying you should bet your kid's college fund on Hasbro $(HAS)$. I'm saying that if you think a cultural trend is real, and you can identify companies positioned to benefit, you should put money on it. That's called investing.

You want to avoid concentration risk? Great. Put 90% in the index and 10% in this basket. If I'm wrong, you lose 1%. If I'm right, you beat your neighbors by 3% and get to be insufferable about it at barbecues.

That's the alpha, Mike.

May we both survive our convictions,

Charlie

P.S. - Check back in a year. Either I'm right and you made money, or you learned the first rule of capitalism: "Caveat emptor" isn't Latin for "trust the guy with the column."

Dear Charlie:

You have the rare gift of making financial analysis feel like sitting at a bar with the smartest cynic in the room.

As a behavioral economist, I must ask: You're betting on a behavioral shift (unplugging) to drive investment returns, yet the science tells us that people are terrible at predicting their own future behavior.

The "intention-action gap" is massive - 81% of Gen Z says they wish disconnecting were easier, but revealed-preference theory suggests we should only believe what they do, not what they wish.

Smokers say they want to quit. Dieters say they want to eat less. Then they don't.

Why should "I wish I could unplug" be any different from every other failed intention in human history?

You're essentially betting on willpower winning against dopamine. When has that ever worked?

Dr. Rachel

Dear Dr. Rachel,

You're right. I'm betting on willpower defeating dopamine, which is like betting on the Jets winning a Super Bowl before I die. Technically possible if you believe in miracles, but I wouldn't risk the mortgage on it.

The intention-action gap is real. People say they want to exercise, then buy gym memberships they never use - which is why Planet Fitness (PLNT) is on my list.

People say they want to read more, then watch Netflix $(NFLX)$. People say they want meaningful relationships, then spend three hours scrolling through the relationships of strangers.

But here's where behavioral economics and investment strategy diverge: I don't need everyone to follow through. I don't even need most people to follow through. I just need enough people to follow through that it moves revenue for these companies.

If 81% of Gen Z wishes they could unplug, and only 20% actually do it, that's still 20% more people buying concert tickets, joining book clubs and playing board games than were doing those things five years ago.

Millions of people lose weight and keep it off. Not most dieters - just enough to create a $90 billion wellness industry.

I'm not betting on willpower alone. I'm betting on infrastructure. When bookstores close, it's hard to buy books. When they reopen (which they are doing), it's easier. When running clubs don't exist, you run alone. When they proliferate (which they are doing), you run with people.

Behavior follows infrastructure as much as intention.

The dopamine isn't going anywhere - but maybe, people are figuring out that there's better dopamine available from real experiences than from algorithmic feeds. Concerts produce dopamine. So do friendships. So does finishing a book.

The brain doesn't care where it gets the hit, it just wants the hit. I'm betting people will chase the better high. Will it work? We'll see.

Yours in chemically induced optimism,

Charlie

P.S. - The irony of a behavioral economist making suboptimal career choices to critique my thesis about suboptimal life choices is not lost on me.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more.

Agree? Disagree? Share your comments with Charlie Garcia at charlie@R360Global.com. Your letter may be published anonymously in Friday's "Dear Charlie" reader mailbag. By emailing your comments to Charlie Garcia, you agree to have them published on MarketWatch anonymously or with your first name if you give permission.

You understand and agree that Dow Jones & Co., the publisher of MarketWatch, may use your story, or versions of it, in all media and platforms, including via third parties.

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Winning stock investors make money spotting trends early - and this one is just starting

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