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Howdy all!
Insightful article I read this week from the Wall Street Journal on how retail investors have (so far) been outperforming professional investors.
For those who aren’t aware, the WSJ article highlights a 29 year old electrician from Seattle named Cory Gerber who arguably out-traded the legendary Wall Street Investor Carl Icahn.
This is because last month, after the car rental agency Hertz filed for bankruptcy protection – the 84 year old billionaire sold his stake in the company for just 72 cents a share…
…which was a buy signal* for Mr Gerber.
*A buy signal is a signal to buy.
The 29-year-old electrician acknowledges Hertz is saddled with debt, faces intense competition and could have its shares delisted, rendering them worthless.
Yet, the Hertz brand name holds value and the company operates a huge fleet of cars, he argues. The stock was cheap enough to roll the dice.
Hertz shares rebounded past $5.50 before settling back to USD1.73 as of Friday June 19th.
Hence he has been proved right… so far.
New Entrants?
This seems to be a microcosm of what has been occuring in the US markets over the last 8-10 weeks.
Has the pandemic created a new legion of day traders, and could their weight of money be enough to impact US equity markets?
Well… Yes.
It’s increasingly likely that retail investors have been a key driver in leading the market higher in the recent rally.
Volume for shares commonly used in brokerage firms popular with retail investors (like Robinhood) has been up to 30(!) times 2019 levels.
Boom time for brokers!
Which means that online brokers are being flooded with new customers.
About 1.2 million retail clients started new brokerage accounts at Fidelity Investments between March and May, a 77% increase over the same period last year.
TD Ameritrade reported 608,000 new funded accounts in the three-month period ending March 31, a 249% increase from the year-earlier period.
Robinhood Markets Inc., which has a client median age of 31, has grown its customer base 30% through the first four months of the year.
It kinda reminds me of the old saying to buy the shares of the picks and shovel companies during the gold rush instead of going looking for the gold itself.
Old time warnings
The apparent rally in the market contrasts some warnings given by Wall St veterans like Stanley Druckenmiller and David Tepper who have stated that stocks are too high.
Druckenmiller called the market setup at the time one of the worst risk-reward profiles he’d ever seen.
Tepper called the stock market the second most overvalued in history.
Back to the newbies…
Coming back to the WSJ article, these warnings from industry titans don’t deter individual investors like Dayanis Valdivieso who has been tapping an unlikely source of money for her first foray into stocks: the US government’s $1,200 stimulus cheque.
Ms. Valdivieso, a 22-year-old in Louisville, Kentucky who was recently laid off, used a portion of her cheque to trade stocks, using a Robinhood account.
“It was basically free money, so, you know, I decided to play around with it,” she said. “You might lose some, you might win some. It’s like a gambling game.”
Investing in companies including Beyond Meat Inc. and Dave & Buster’s Entertainment Inc., which had fallen during the market’s brutal selloff, Ms. Valdivieso has parlayed her initial $275 investment into around $800 (as of early June).
She is now turning her attention to an even riskier form of investing: options trading.
“You can make a pretty good amount of money in one day,” she said.
Similarly, other investors have also benefited from the market rally.
Thai Gaon, a 23-year-old salesman in San Francisco, bought 35,000 Hertz shares on June 4 at $1.43, spending a little over $50,000, according to documents viewed by The Wall Street Journal.
“It was my entire life savings,” he said. “I decided, you know, if I’m gonna do it, I should do it big, and I’ll make a play and see what comes out of it.”
Mr. Gaon sold his shares a day later at $2.76, netting nearly $47,000 in profit. “I know that if I would have kept it, I would have made like $200,000 by now, but it’s such a high-risk stock that I like to diversify a little bit.”
He couldn’t resist putting around $16,000 back into Hertz, however.
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To be honest, just because professional investors and market veterans believe the market is over-valued, does not mean that the market cannot continue to go up.
This is because the market is made up of all sorts of players – each with their own risk profiles, time horizons and capital allocations.
Remember hedge fund manager Michael Burry in the movie/book “The Big Short”?
He made an absolute killing betting against the housing market in the GFC… but he started shorting the housing market in 2005-2006, fully two YEARS before he was found to be correct.
Just because you believe the market is too heated, doesn’t mean that it will drop tomorrow, next week, next month, even next year.
Which is why it’s always crucial to do your own research, think independently, and above all, manage your risks!
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