Evan Lorenz on the retail investor-dominated stock market

Opendoor Technology, Inc. accounted for almost 10% of all U.S. stock market activity last week with 1.8 million shares traded in a single session.  On Monday, Opendoor postponed a special meeting to vote on a reverse split following a share price spurt to $2.05 from a low of $0.51 on June 25.  This marked a sharp turnaround for the unprofitable home-flipper, which had been warned by Nasdaq, Inc. about a possible delisting in May for failing to maintain a stock price above the $1 mark.

Here is just one of the many sightings from a market dominated by small investors.  Retail traders now account for 20.5% of equity trading, more than the combined participation of fundamental traders (14.6%) and banks (5.6%), according to Bianco Research, LLC.

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At the same time, we are in the 98th percentile of all periods since 1990 for penny-stock trading, the 96th percentile for stocks valued at 10 times sales or more and the 85th percentile for unprofitable stocks, according to Goldman Sachs. 

~ Evan Lorenz, "Notes from the Joe and Jane market," Grant's Interest Rate Observer, August 1, 2024

The Wall Street Journal: speculative fervor is back

Individual investors have purchased an average of $1.35 billion a day of U.S. stocks and exchange-traded funds on a net basis so far this month, according to Vanda Research through Thursday.  That puts their purchases on pace for their highest monthly average since January, the month when the recent bull market peaked. 

The clamor is reminiscent of the speculative fervor that cascaded over markets in 2020 and 2021, when millions of Americans got hooked on trading stocks, options and cryptocurrencies.  Stuck at home during the Covid-19 pandemic and flush with stimulus checks, newbie traders banded together on online forums, pushing up shares of favorite stocks.  Some made small fortunes.  Others lost big.

~ Caitlin McCabe, "Meme-Stock Investors Are Back! Sort of, Anyway," The Wall Street Journal, August 13, 2022

Kevin Duffy on the flawed ideology of the millennial trader

There are few certainties in life, among them death, taxes and the reluctance of young adults to accept advice from their parent’s generation (“OK, boomer”).  If severe losses of the past 12 months haven’t broken the resolve of the retail speculator, what will?  Why such conviction?  In a word: ideology.

Millennial traders have hardly been “milked” by Wall Street.  No one forced them to the craps table.  Instead, they were victims of an ideology that sees capitalism as exploitative, a view no doubt shared by most financial journalists...  Through their win-lose worldview, HODLers saw a chance to turn the tables on the wealthy fat cats; for a time it even worked.  Eventually the odds caught up with them and the dice came up snake eyes.  Yet when ideology was confronted by reality, many responded by going into denial.

~ Kevin Duffy, "The Hangover," The Coffee Can Portfolio, March 1, 2022

Kevin Duffy on amateur hour at the casino (2021)

Christoph Gisiger: What's your general advice for investors who want to invest their money in a reasonable and prudent way in this challenging environment? 

Kevin Duffy: If you want to live off the grid and live off of fruits, berries or coconuts, that’s one thing. But if you want to accumulate wealth or protect it, you’re in the investment game. You don’t have a choice. So you have to ask yourself: Who are your competitors out there? First of all, I don’t want to compete in the short-term trading arena with high frequency traders like Ken Griffin, the CEO of Citadel. That’s like competing against Tiger Woods on the golf course. The reason why guys like Griffin are doing so well is because you have a bunch of amateurs trying to compete with them.

~ Kevin Duffy, "The Next Bear Market Has Already Started," The Market/NZZ, July 1, 2021

Warren Buffett on bubbles

But a pin lies in wait for every bubble.  And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street -- a community in which quality control is not prized -- will sell investors anything they will buy.  Second, speculation is most dangerous when it looks easiest.

~ Warren Buffett, 2000 Berkshire Hathaway Chairman's Letter

Kevin Duffy on what drives the young trader

“If it sounds too good to be true, it probably is.”  

Today such commonsense wisdom is lost on many young traders in a toxic cocktail of greed, envy, anger, resentment, desperation, nostalgia (for dying brands like GameStop and AMC), techno-utopianism, historical revisionism and economic illiteracy.  They see profit as loot stolen from the laborer by the entrepreneur: win-lose.  The greater one’s net worth, the bigger the thief.  Trading in packs and holding on for dear life (“HODL”) is a way to tilt the game in their favor and even the score.  As Barron’s explains, “the bad guys are the short sellers, the market makers, and the Wall Street elites, in that order.”

~ Kevin Duffy, "Memecraft 2.0," The Coffee Can Portfolio, August 26, 2021

Bloomberg Businessweek: retail investors account for 60% of trading on Indonesia's stock market

Like the U.S., Indonesia has seen a convergence of social media with a new interest in trading by small investors.  Retail investors accounted for about a third of daily trading in Indonesia's stock market as of June 2020.  A year later, that has almost doubled to 60%.  About 80% of these people are 40 or younger.

~ Bloomberg Businessweek, "Mixing Markets, Faith, and Instagram: A celebrity preacher in Indonesia shows that meme stocks are a global phenomenon," July 19, 2021

Hendrik Bessembinder on the boom in retail trading

I welcome the increase in retail trading, the idea of the stock market being a place with wide participation. Economists can't tell people they shouldn't get some fun.

~ Hendrik Bessembinder, professor, Arizona State University, July 11, 2021

(As quoted in Barron's, "The Market's Meme Generation")

Kevin Duffy: "This kind of wild frenetic rotation is not unusual at the top of bubbles"

I think we’re in a rotation phase right now.  All of the speculators – young people and day traders – have been drawn into the casino, and they’re not going to leave until they’re flat broke: When the poker table shuts down, they move to the roulette section, and when that stops working, they go to the blackjack table.  This kind of wild frenetic rotation is not unusual at the top of bubbles.

~ Kevin Duffy, "The Next Bear Market Has Already Started," The Market, July 1, 2021

Bloomberg Businessweek on the FOMO economy

It's not just crypto: It's stocks such as those of AMC Entertainment Holdings, GameStop, and Tesla that are beloved on Reddit and Twitter, and it's the houses and condos being snapped up almost as soon as they list. The pressure to keep up with neighbors, friends, and social media meme lords who seem to be in the process of becoming wealthy - or, at least, talking about it - can feel unbearable.

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People flush with pent-up savings after a year of lockdowns have more ways than ever to throw darts at the financial dartboard: zero-commission, zero-minimum trading apps; social media message boards; and exchange-traded funds you can hop in and out of as easily as stocks, including a few that explicitly play to the trend-chasing crowd with such tickers as BUZZ and, yes, FOMO.

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Another cause of FOMO right now is the lack of a strong competing narrative.  Warning against risky short-term speculation and saying "it'll all end in tears" are widely derided as boomerisms.  Partly because it seems out of touch with Generation Z's economic reality, but also because asset prices keep bouncing back.  Bitcoin's rebound from a more than 80% decline in 2018 to a record high this year, along with property and stocks, is classic regret fuel for those who missed out.

~ Lionel Laurent, "The FOMO Economy," Bloomberg Businessweek, June 14, 2021

Berna Barshay: "AMC stock is a slot machine now"

To be honest, I’ve never seen anything like this in my nearly 30-year career in the markets.  To me, with the banners and signs, we have officially crossed over into “weirder than GameStop” terrain. 

While professional investors might want to wade into the treacherous waters of betting on a fall in AMC, I would recommend that non-pros just stay away.  As I told a friend, “AMC stock is a slot machine now.”

~ Berna Barshay, "Here We Go Again... AMC Is the New GME, But This Time with Free Popcorn," Empire Financial Daily, June 2, 2021

Myles Udlard on AMC Entertainment's $230 million capital raise

Q: The thing that's funny about this is they're raising cash to buy assets, to buy more of a thing that's not full already?  So we'll see how that strategy works out over the longer term.  It doesn't really matter, I guess, but if you're going to spend the cash, buy more movie theaters?

Myles Udlard: That makes sense.  They're in the movie theater business.  It goes all the way back to Hertz.  Hertz last year was being told by the market that it didn't have to file for bankruptcy and so these CEO are now looking at the meme market and they're saying, "Screw it.  I will go on offense.  The market is telling me to do that, whether it's a joke on Reddit or not."

~ Myles Udlard, "AMC higher on $230M capital raise," 3:05 mark, Yahoo Finance, June 1, 2021

Charlie Munger on early 2021 speculative frenzy

The frenzy is fed by people getting commissions and other revenues out of this new bunch of gamblers, and, of course, when things get extreme, you have things like that short squeeze … and it’s really stupid to have a culture which encourages [so] much gambling in stocks by people who have the mindset of racetrack bettors and, of course, it will create trouble, as it did.

~ Charlie Munger, "Charlie Munger says it’s ‘really stupid to have a culture which encourages [so] much gambling in stocks’," MarketWatch, February 25, 2021

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

Nate Geraci on the speculative mania in "Reddit stocks"

The speculative mania in ‘Reddit stocks’ has simply overshadowed Ark Invest and pretty much everything else in the markets.  It’s a fascinating dichotomy right now with investors pumping money into companies of the past versus companies of the future. 

~ Nate Geraci, president of the ETF Store, "ARK Mania Finally Fading After GameStop Fever Sweeps Wall Street," WealthManagement.com, January 29, 2021

Steve Goldstein on the investment experience of GameStop and AMC speculators

And those traders are inexperienced. Cardify, a consumer-data firm, did a survey of 1,600 self-directed investors in GameStop and cinema chain AMC Entertainment, and found that most were inexperienced investors having less than 12 months of experience, and another quarter with one to two years’ experience. Nearly half made their biggest-ever do-it-yourself trading investment in the last four weeks, according to the survey that ended on Monday. 

Why? Of these overwhelmingly young and male investors, 45% said for quick financial profits. Nearly 20% said it was part of a long-term investing strategy, and 16% said to spite big hedge funds and institutional investors, according to Cardify.

~ Steve Goldstein, "GameStop’s meteoric gains have almost entirely disappeared — here’s advice for those who didn’t get out in time," MarketWatch, February 5, 2021

Reddit user on the rise of retail investors (2021)

This is a big moment.  A tug-of-war between tradition and the future.  Hedge fund managers live in the past, and continue to look down upon the retail investors.  They truly believe that we, the average retail investors, don't know anything about finances or the market (which may be true), and we're just gambling our money away.  This is the world they want to live in.  This was the past.

~ Reddit user benaffleks, week ended January 29, 2021

(As cited by Barron's, "The GameStop Revolut Has Just Begun. Get Ready." January 30, 2021)

Glenn Greenwald on Reddit traders vowing to drive GameStop stock up to $1,000

It has also enriched a lot of people who bought at $20 or even $30 or $40 or $100, and the stock is now at $350 with no sign of it going down because they're vowing to hold onto the stock and even drive it up to $1,000 a share.  That's the vow on Reddit.  We'll see if that happens or not. 

~ Glenn Greenwald, "The Reddit Revolution, GameStop and Melvin Capital," 15:40 mark, January 28, 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

Ronald Stöferle et al. on speculators, political connections and Warren Buffett

Good economists are rarely good speculators.  Much more dangerous is, however, the popular notion that a good speculator has to be a good economist...

Speculation is largely a question of timing, and decisions regarding proper timing are a rather intuitive affair...

However, it is quite possible that the conscious manipulation of trends is already a predominant factor these days.  Attempts to control the economy are increasing as well.  With that, the character of speculation has an especially good ear for the scheming of politicians or even enjoyes good political connections.  This is true of most famous speculators, especially the number one: Warren Buffett.  A large proportion of this wealth comes from taxpayer funds.  Rolfe Winkler summarized this for Reuters as follows:

Were it not for government bailouts, for which Buffett lobbied hard, many of his company's stock holdings would have been wiped out.  Berkshire Hathaway, in which Buffett owns 27%... has more than $26 billion invested in eight financial companies that have received bailout money. [...] The federal deposit insurance corporation (FDIC) backs more than $130 billion of their debt.

~ Rahim Taghnizadegan, Ronald Stöferle, Mark Valek and Heinz Blasnik, Austrian School for Investors (2015), p. 68

Buffett with Goldman Sachs CEO Lloyd Blankfein