Brian Schartz on the retail investor and parallels to 2000

We have also taken note of the significant spike in retail trading activities.  In our mid-year letter last summer, we referenced a friend who had gone from asking for help rebalancing his retirement funds to opening a Robinhood account to day trade option contracts in a matter of months.  The financial press has been littered with similar anecdotes, and retail trading account openings have been extraordinarily strong over the course of 2020.  We are reminded of the E-Trade and Ameritrade account openings of the late 1990’s by scores of unsophisticated traders who thought that they knew how to invest, simply by virtue of making a lot of money trading in the run up to the dot-com bubble.  Of course, when that bubble popped, their trading accounts suffered mightily and most found themselves in new careers.  These new market participants CANNOT determine valuation simply because they lack the experience and training necessary to make those determinations.

~ Brian Schartz, Downtown Associates 2020 Year End Letter, January 26, 2021

Ameritrade online trading commercial
Circa 1999-2000

The Economist on Reddit traders and GameStop frenzy

Events on Wall Street have become so strange that Netflix is said to be planning a show to immortalise them. But what should be the plot?  One story is of an anti-establishment movement causing chaos in high finance, just as it has in politics.  Another is how volatile shares, strutting online traders and cash-crunches at brokerage firms signal that a toppy market is poised to crash.  Both gloss over what is really going on. Information technology is being used to make trading free, shift information flows and catalyse new business models, transforming how markets work.  And, despite the clamour of recent weeks, this promises to bring big long-term benefits.

~ The Economist, "The real revolution on Wall Street," February 6, 2021

Kevin Duffy on GameStop madness

While I'm not shedding any tears for the big hedge funds getting crushed by swarms of Robinhood day traders, this is a warning - exactly the kind of insane behavior you would see at a generational top. I follow the stocks of retailers pretty closely.  On a good day, GameStop (GME) might be worth $2 billion.  It hit a market cap of $30 billion yesterday and is set to open up 70% (after getting being down 44% yesterday). 

We've lost sight of the fact that the financial markets exist to efficiently allocate capital.  Mock and destroy that function and you've done the same to a functioning economy.

As Charles Mackay warned in Extraordinary Popular Delusions and the Madness of Crowds (1841): 

Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.

~ Kevin Duffy, Facebook post, January 29, 2021

Randall Forsyth on speculation in shares of black-owned companies

While Corporate America is taking steps in reaction to the recent protests, including cosmetic ones—like removing Aunt Jemima pancake mix or Uncle Ben’s rice from supermarket shelves—shares of some black-owned companies are being frantically bid up.

Once again, it appears the action is being driven by day traders, many new to the stock market, on platforms such as Robinhood, as I reported here nearly a month ago.

For instance, the class A shares of Urban One (ticker: UONE), a multimedia company that operates radio broadcasters targeting primarily African-American listeners, increased nearly 20-fold in the past week, to $36.30. Trading volume surged as high as 57 million shares Thursday; a month ago, fewer than 10,000 shares changed hands on an average day. The D shares (UONEK) saw an even bigger jump in volume, as they hit $4.15 Friday from 88 cents a week earlier.

Both series of shares have been at the top of the popularity list on Robintrack.net, a website that tracks the trading on Robinhood.

~ Randall W. Forsyth, "Unlikely Stocks Soar As Societal Issues, Speculation Collide," Barron's, June 20, 2020