Global stocks mostly bottomed in late March or early April, only to rebound and erase all losses in record time. Fueling part of the dramatic recovery in stocks was the influx of mostly millennial investors and traders who embraced new cheap brokerage platforms.
Over the past few years, a plethora of new financial technology companies shook up the way young investors can participate in the stock market.
Perhaps the most notable company that dominated media headlines was U.S.-based Robinhood because it offered the ability to buy fractional shares. Just above the border, Canadian cheap discount brokerages offer the ability for retail (i.e non professional) investors to trade certain products like mutual funds and ETFs for free.
Investors outside of North America are able to take advantage of similar offerings. London-based Freetrade offers the ability to buy and sell stocks commission-free. New Chinese brokerage platforms companies like East Money attracted so many new clients the company has become more valuable than the century-old bank Credit Suisse.
The Retail Investor Recognized Long-Term Value
The plethora of new retail investors who wanted to take advantage of cheap trading platforms wanted to get in on the stock market surge. These new investors were able to easily find trading strategies and tips from social media outlets, especially TikTok. In fact, videos with the hashtag #investing on TikTok was viewed more than 278 million times by mid-June.
Many of the videos focused on promoting investing strategies and ideas or specific stock recommendations.
Naturally, the ability for investors to buy heavily beaten up stocks amid the COVID-19 pandemic was an appealing long-term proposition. One example is the American maker of plant-based food, Beyond Meat.
Shares of Beyond Meat fell as low as $48.18 and this was an attractive proposition for young people that are just starting to invest for their future. Even prior to the pandemic, sales of plant-based food were soaring across the world. For example, sales of meat-free foods in the United Kingdom grew from £582 million in 2014 to £816 million in 2019 and are expected to exceed £1.1 billion by 2024.
Sports Betters Wanted In On Quick Action
While some long-term investors took advantage of cheap stocks for their retirement, many sports betters started to use cheap retail platforms to day trade. Sports betters were looking for anything that offers the familiarity of gambling and the instant gratification of big gains or losses.
At the forefront of the charge was Barstool founder Dave Portnoy. He live-streamed his trading action to millions of people, many of whom are core sports betters. As thousands of his followers followed suit, financial media outlets declared him to be theleaderof an army of new day traders.
Portnoy even went so far as saying day trading is “the easiest game” to win and he is a better investor than multi-billionaire investing legend Warren Buffett.
One of the more telling signs that retail investors and traders armed with cheap brokerages are becoming a major force that can’t be ignored is the reaction from Wall Street pros.
Dennis Gartman, for example, wrote in an op-ed the influx of inexperienced traders will soon feel the results of the market’s “illogical” and nearly one-sided behavior. He further wrote:
“Portnoy and his legion are having their proverbial day in the sun. But eventually, that sun shall set, or eventually, darker clouds will eclipse that sun.”
Amateur day traders armed with cheap brokerage accounts are over their heads when it comes to competing against professional traders that are equipped with the most advanced trading platforms and access to real-time information and analysis.
One particular example is appropriate to show the volatility and dangers of new traders playing with fire. U.S.-based airliner American Airlines cautioned investors in early June it expects second quarter revenue to be down 90% year-over-year.
Yet the stock moved higher following the announcement, perhaps as many new investors speculated a 90% decline is still better than 100%.
But something else was going on behind the scenes.
Professional traders could have been baiting the retail traders in the pre-market action by bidding up the stock a little bit higher. This “brings in the suckers” who will continue pushing the stock higher for all the wrong reasons.
American Airlines wasn’t the only example of how new traders brought with them irrational stock movements. Car rental company Hertz saw its stock rise after it declared bankruptcy.
The notion that a car rental company can reverse its dire situation during a global pandemic when travel has ground to a halt is at best a fantasy. Billionaire investor Carl Icahn threw in the towel and sold Hertz for a loss of nearly $2 billion but the market declared no one cares.
Instead, new traders may have unilaterally pushed Hertz’s stock higher by a mind-boggling 900% in just a few weeks. The simple and most logical explanation is these new traders failed to comprehend a bankrupt company’s stock is more likely to fall to zero than gain in value.
Conclusion: Know What You Are Doing
No credible expert is saying new traders can’t do what they want with their money. They are free to enter the market and buy companies on the verge of bankruptcy if they choose to do so. Sure, they should be cautioned about the dangers of investing, but they are free to do what they want.
Perhaps more importantly, they need to be reminded of the old saying that a fool and his money are soon parted.