Criticisms of Retail Investors Tell an Interesting Story
Retail investing has experienced a surge since commissions have disappeared. This should only be seen as a good thing, but only if you are not very confused about investing.
We should find the criticisms that are being made about the increased participation of retail investors pretty amusing, where critics lay bare all sorts of fundamental misunderstandings about markets and investing, but if you are among the confused, this might seem valid enough.
Aside from producing a few grins, this did remind us that we haven’t really done a good article on how commission-free trading is changing the landscape for both traders and the stock market. This actually is a pretty big deal, especially for those who stake their future on stocks continuing to rise, which includes just about all investors of every kind from the biggest to the smallest.
Seeing accusations such as retail investors being to “blame” to a large degree for the resurgence in stocks since the crash earlier in the year does add some real color to the discussion, as well as providing an opportunity to look deeper into these beliefs and show how foolish they actually are. From looking at mistaken thinking, we can often gain a better understanding of the truth, and it’s just better to be guided by truth than confusion.
There are more than a few people in the industry that are decrying the recent actions of retail investors, and the manner that they are being disparaged does require a response, lest retail investors get caught up in this enough to actually believe these things and use this bombast as a reason to refrain. We may need to caution them, but it needs to be about the right things.
There is much that many in the mainstream misunderstand about the nature of retail investing, and investing in general for that matter, and having them come together in such a retail investing bashing festival provides us plenty to work with in our ongoing quest to provide the higher level of enlightenment that we always seek to provide our readers, many of which are actively participating retail investors themselves.
We’ll discuss why these people think that this is a bad thing as well as why more active retail investor participation in itself is not innately reckless and in fact can manage risk considerably better than you could ever see investing in a fund of any type, including even hedge funds. This more active participation also helps buoy the market not only by promoting more liquidity but by providing more of the upward pressure on stock prices that so many investors crave and depend on.
As we mentioned in our previous article, there are actually two big revolutions going on in retail investing right now, with commission free trading only being one of them. The other, fractional trading, is also contributing significantly to this revival.
While commission free trading has certainly attracted more retail investors, you always needed a stake of at least a decent size to do this, but fractional trading, together with today’s platform technology, and especially in concert with commission free trading, has opened the door to everyone no matter how small a stake they have. The account sizes may be negligible, but together, this can add up to quite a bit of action indeed.
A new day has dawned in retail investing, and this crowd is really starting to become heard, to the extent that they are being hit with all sorts of criticisms about how foolish they are. We need to look at both sides to see who really needs to wear the dunce cap though.
Somehow, it is seen as reasonable and safe for us to put our life savings in funds that both cannot adapt and have no intention of adapting to risk, but when you have the gall to go off and try to invest yourself, you are seen as acting very recklessly even though you may be practicing much more caution. As bizarre as this ends up, taking the bizarre side is not a deterrent if you do not even know how bizarre your ideas are.
What has really spurred this discussion is seeing how many retail investors are jumping on the bounce in stocks that we have seen, particularly with their interest in stocks that have been particularly beat up by the crash and lockdown. We’re seeing remarks like they are investing like it is the Wild West, engaging in “rampant speculation” with “reckless abandon,” this should at least have us questioning the appropriateness of these characterizations, to see if these terms do merit being used.
It’s not hard to imagine what real recklessness and real rampant speculation by investors would look like, for instance by their putting a lot of their money in options trades or leveraging heavily with futures trades that they do not have either the skill or bankroll to be messing around with, but to call what are essentially regular stock trades reckless or rampantly speculative is another matter.
We Have No Idea Why Good Investing Should be So Chastised
Many people jumped on stocks after the crash, including a lot of institutional investors, as this presented a rare opportunity to get stocks at fire sale prices, given we just had such a big fire. Buying Disney, for instance, at the $100 per share that they were at when we recommended them wasn’t rampant speculation, it was because the expectation with this stock is that it was oversold and would recover and would therefore represent some easy money.
Disney has had its ups and downs since then but is now at $115 per share and that means that the return here has been 15% so far in a very short period of time. This is a sort of move that should appeal to any investor, from those looking to make a quick buck to those interested in holding the stock long-term, and the light was green on all fronts then, as green as these things really get.
While most stocks have done well since the market bottomed, some have been particularly lucrative, like airline stocks for instance. Getting in when Warren Buffett was bailing might seem to be a crazy idea among those without the proper knowledge of how to trade, which includes a whole lot of people, including and perhaps especially including a lot of stock analysts who know nothing about what good trading even looks like.
Buying them at this point was far from a reckless trade, and in fact the risk here was pretty low overall as they already had taken at least close to the biggest punch we could deliver, and Warren’s exit was the final big blow and this was simply a good time to get in as we told you.
This trade was on a completely different level of quality compared to the ones that investors typically make, where they often buy with no regard to a stock’s direction and often don’t even care to check if it is in a downtrend. That may not qualify as reckless but it certainly qualifies as careless.
There’s also the matter of people holding stocks with no regard to what is going on, like those who held throughout the crash, which does qualify as reckless, and extremely so. If you think that we can get hit with something like we did, with all the panic and the lockdowns that went on, where you somehow think that they are more likely to go up than down, a good bet here rather than a very bad one over the next while, that’s not just not recklessness, it is foolishly reckless.
They didn’t call out these people and in fact were almost certainly among them, but they are overlooking this sheer madness and instead calling those who waited for the smoke to clear and then take advantage of the huge opportunities this crash presented reckless. That should bend their minds, if they weren’t so bent already that is.
You Just Can’t Call People Reckless, You Need to Back it Up
The battle cry here is being led by stock analysts and strategists, such as Tobias Levkovich, Citigroup’s chief U.S. equity strategist, who accuses retail investors of “chasing performance.” We wonder what other good reason we would want to be in stocks, what else we would want to be pursuing, if performance is actually what we seek. Perhaps he prefers to chase underperformance, which actually may be the case.
Maybe he thinks that it is better to have chased these stocks on the way down, we don’t know. This is just a completely bizarre criticism, like saying someone is holding a stock because they expect it will go up and it does go up, and trying to use that against them. The fact that a stock is moving your way is in itself a good thing, but someone needs to ask Levkovitch why he thinks this is a bad thing, especially with the upside of these moves being so unusually great.
Deutsche Bank analyst Parag Thatte is up next, and his remarks are equally disturbing, where he sees retail investors as “inexperienced” and having a “voracious appetite for risk.”
A lot of them might be inexperienced, but if what he calls experience, his own included it would seem, leads to views this out of touch, that’s not experience anyone should want. The people who rode these all the way down would be the ones we may want to accuse as having a voracious appetite for risk, but if you wait for the risk to die down to the point where it becomes so unusually low and that is seen as voraciously risky, you simply do not know what the word risk means.
We recommended some of these plays so he’s swinging his fists at us as well, and while these small investors aren’t experienced enough to hit back, we must, to at least help people over whatever confusion that he may be pushing them toward. The risk was simply sucked out of these plays, to a level well below normal, and while there is always risk in a trade, these were plays that could be made with a much higher level of confidence than normal, even longer-term, being just about as good as we will ever find.
The Sound of Silence may have been a hit single in the 60’s, but it isn’t appropriate to hear the sound of silence when it comes to validating criticism. Without sufficient reasons, the argument is limited to expressions of disagreement alone, which is just not meaningful in itself. Among all of these misgivings, not a single word justifying them has been uttered, and we need to require that someone not just say it but back it up if we’re going to want to believe any of it.
This is probably the biggest thing that is wrong not just here but with investment advice generally. It might seem over the top to call this a cult, but that’s exactly what cults do, they feed you dogma and you relinquish your desire to question it, where anything outside the belief system is decreed to be wrong. This can lead to outlandish pronouncements such as those discussed here and have so many just nod along.
You can’t even speak of risk in isolation, as you also need to account for the reward side, and these plays had both the qualities of a much lower level of risk than you usually see along with a much higher potential for return than you ever see. To consider this reckless just doesn’t expose your confusion, it screams it.
This was enough testimony in itself to prove how mixed up he is, but when he adds the fact that the problem that these investors have caused was to have professionals need to chase the moves more than would otherwise be needed, the so-called smart money in his mind, the confusion gets even more twisted.
The smart money cannot be doing this this alongside the stupid money, as it is either stupid or it is not. It can’t be smart for them to do it but stupid and reckless for individual investors to profit from these trades, especially since individuals are in a position to manage risk so much better, and can get out anytime they choose. That’s far from the case with the big investors and they must lay down and take it to a large degree after it’s time to go.
It didn’t take much smartness to see these moves, and even the inexperienced folks saw them, but this was smart nonetheless. This is not even about worrying about their hanging on too long, even though the risk of doing so is much higher on the institutional side since they need to commit to hanging on longer. Even if airline stocks, for instance, managed to encounter an event that shut them down more than this so that they may be looked on even more dimly than at the bottom, the situation just can’t get much worse and this is what really defined their low risk.
It didn’t even matter if they hold on too long and give back too much if they get in close to the bottom, because they will be still up on the trade. Recklessness involves the risk of big losses, not waiting for the huge losses to already happen and jump on there and risking giving up too much of your profits.
CNBC’s Jim Cramer also calls this “rampant speculation,” and goes as far as to say that “now we all have to suffer as the get-rich-quick crowd gets blown out.” This is a true gem, not because it assumes that the get rich crowd will be blown out, it is the fact we’ll all suffer from it that draws a blank. We always have been able to figure out where someone’s thinking has gone wrong, but we have met our match with this as it is too incomprehensible to even be able to make a guess.
When we step back and consider that all those folks who got burned lately are the safe investors and those who played this rebound are the reckless ones, we wonder how anyone could think such a thing and even pretend to be thinking. You don’t have to pretend though to have the media want to share this knowledge, where they will just let it stand unquestioned, but we need to be a lot smarter than this, unless we wish to share their confusion.
We applaud those retail investors who have stepped up to the plate here, in spite of accusations that they think that they are smarter than Warren Buffett by entering when he exited. Some even boast of this. They deserve to brag though as in this instance at least, they beat the pants off of old Warren in terms of smartness. We hate to say it, but they were taller than Warren this time because they were standing while he was laying on the ground.
The tremendous growth in retail investing needs to be something we all should be applauding, and this is the case whether you are a long-term investor or anyone else participating in stocks. Even people who love to short enjoy the added liquidity this provides, even though you want things to run the other way.
They do serve to push us up hills higher, which is good if you like being higher on the hill, and this includes anyone on the long side of stocks. Stock prices move over time from the cumulative forces of demand and supply, and more demand on your side of this tug of war makes you win more, beyond question.
The concern that a lot of these retail investors are thinking that success is easy given how much they have had lately is one that does have some merit, as it doesn’t get any easier than this has been, this reckless investing of theirs. Ironically though, they have actually shown many people how easy it can be, and they should be thankful, not resentful.
It is actually a lot easier than most people think to succeed at this game, and these new investors appear to have a huge leg up on the crowd by actually realizing how important it is to manage stock positions based upon risk/reward. Holding during a crash isn’t being guided by this, nor is keeping stocks that have lower potential just because you think it’s a good idea to have junk in your portfolio for the sake of variety or you just don’t pay attention to performance much.
Trading your own stocks is not the mindless game that buy and hold investing is, and therefore requires a process to master. People will make all sorts of mistakes as they are unavoidable, but are also part of the necessary learning process that is the guiding force toward success beyond just picking such big cherries hanging so low to the ground.
Investing on your own can be immensely more enjoyable and considerably more profitable than just turning things over to a fund manager, and the taste that so many people have gotten lately may inspire many to continue on and continue to learn. We welcome them to the crazy world of investing, with the hope that they will continue to think for themselves no matter how much people may resent it.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
Contact Ken: ken@marketreview.com
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