Insights for Investors by Investors

Retail investors smarter than you think

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New retail investors entered the sharemarket in droves over the first six months of the pandemic’s impact. Contrary to widely held views, for the most part, on average, they did very well. Very well indeed.

But one has to be careful of averages. They can often mask skews from big single numbers and rarely do they tell the full story. Here’s a party trick: most people have more than the average number of feet.

The full story includes the extremes in behaviour and results, such as the story of ‘Robinhood’ in the US, which became an online trading phenomenon after its sports betting site had to close down, along with most sports, due to COVID.

The good news part of the real story happened in Australia, as told by Gemma Dale, the director of SMSF and investor behaviour at nabtrade. Using the bank’s online trading service data, alongside publicly available information, Dale debunked the assumption that retail investors, especially those who are new to the market, represent “dumb money.”

In the extreme conditions between March and July, Australian retail investors opened new accounts in record numbers – a ten-fold increase in March alone – and quickly became active on the buy side, with, still, not a lot of profit taking. And they bought well, sticking to tried-and-true names which have been represented in the list of nabtrade’s Top 10 most-traded stocks for some time.

Dale told the Morningstar annual ‘Individual Investor’ conference in October that the new investor influx happened all around the world, sparking three main theories as to how it would play out: the new investors would buy only the stocks they knew or had heard of; they would speculate away their money in the belief that the stock market only went up, not down; and, that Australia, too, would experience the Robinhood phenomenon. As it turned out, none were true.

Another theory, also untrue, was that the influx would sit mainly in cash on whatever online platform was accessed, as it had done for much of the past five years, Dale said. With nabtrade, the platform offered a relatively high interest rate but that had disappeared as it did with all the others. “So, investors waited for their opportunity,” she said.

The build-up of cash peaked in February as the COVID news got darker and then economies started to go into lockdown. In March, the market had its sharpest correction on record, similar only to the crashes of 1987 and 1929. It lasted only three weeks but the ASX 200 fell 40 per cent in that time. And then it bounced. It bounced until June. The investors who bought in March and April caught that bounce.

The ‘dumb money’ hypothesis would have had that money sit on the sidelines during the bounce, with retail investors too skittish to get back into the water. “But that’s not what happened,” Dale said. Google Trends searches showed that there was an enormous amount of traffic searching for market information in March, which translated into a big jump in new accounts. The ten-fold increase in account openings in March at nabtrade tailed off until July, but remained above the rate it had been before March.

The split between the different age groups opening new accounts was: 41.9 per cent Gen Y (born between 1981–1994); 27.8 per cent for Gen X (1965–1980); 17.3 per cent for Gen Z (1995–2012, with the caveat that you have to be at least 18 to open an account); and, 13 per cent for pre-boomers and boomers (born up to 1964).

“They didn’t open those accounts just for fun,” Dale said. While her data did not include dollar amounts invested – only account numbers – “they were absolutely using those accounts to buy.”

While the same thing was happening in the US, many of those new investors got caught up in offerings of a very different nature to the bank and broker platforms in Australia. The most famous of these was ‘Robinhood’, whose real name is Dave Portnoy. Dave was an old-fashioned spruiker of the kind that seems to be more prevalent in the US than countries with stronger regulatory regimes. He may or may not have done anything illegal but he certainly lacked transparency.

Dave’s sports betting company, ‘Barstool Sports’, had developed a big online following of mainly young men. Dave publicised the service aggressively throughput the media. He was a larger-than-life internet celebrity. Due to COVID he pivoted his interest to the sharemarket, under the brand ‘Davey Day Trader’, taking much of his following with him. Dave has referred to himself as “the new Warren Buffett.”

Dale said: “He said some very controversial things and there was a real concern that people would blow themselves up. The followers liked the exciting social media-driven financial news he provided which was very different to the boring Wall Street news that you and I are familiar with…

“The worst story is of a young man in his 20s who committed suicide after using Robinhood and finding himself to be $700,000 in debt,” she said. “And to make it worse still… he hadn’t lost any money at all. He didn’t understand how the data was presented. He had no-one to call and ask, because there was no phone number on the site, just an email address. By the next morning his account was in the black.”

There was no equivalent of Robinhood in Australia, which was a “free” platform. But, of course, it couldn’t be free, Dale said. They had to make their money from somewhere. There were various ways. Davey Day Trader took a commission on the investment options, which included those with big spreads such as crypto-currencies and derivatives. They provided incentives for investors to move into product where their commissions were higher, some of which were very complex for a novice to comprehend.

Perhaps the biggest cost, certainly to the integrity of the market as a whole, is that the platform promoter sold its trading data to high-frequency traders, who were then able to ‘front-run’ the trades from the platform’s customers.

“We have a very different regulatory environment in Australia,” Dale said. “ASIC takes a very dim view of that kind of activity.” nabtrade and the other brokers had regular discussions with ASIC during the COVID period, with the regulator wanting to know details of the new account holders, such as whether they were also taking out margin loans, investing in options, buying speculative stocks and day trading.

The really good, and perhaps surprising, news is that not only did the new investors avoid speculative stocks, they picked, on average, one of the best possible portfolios for the market recovery. This was consistent across the age groups and across the six-month period analysed.

The top 10 stocks were: three of the banks – NAB, Westpac and ANZ; three travel stocks – Qantas, Flight Centre and Webjet; two technology stocks – Zip Co and Afterpay; and BHP and the Vanguard ETF for the S&P/ASX 200.

“This is the kind of portfolio that your mum would tell you to buy. It doesn’t feel like a highly speculative portfolio… The percentage of buys in the trades was about 80 per cent (20 per cent sells), so the tendency was to buy and hold,” she said. “Based on what we’ve seen, the investors who came to us in March and April have done unbelievably well. If they bought Afterpay they have had their first ‘10 Bagger’ (10 times the investment) in their first period of trading.”

The figures almost certainly mask some poor experiences in the total mess of new account holders, but not on average. When you think about what it takes for the average person to have fewer than two feet, it is just one person – one person with only one foot will bring the average down to 1.999999 recurring, or less.

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