Insights & Advice


Make way for the retail investor!

By now, you may have realized that this is not your father’s stock market, nor will it ever be again. An entirely new army of investors have arrived on the scene with different attitudes, values, and beliefs. You can either get on this train or be left behind.

Back in the day, burnt by the Financial Crisis of more than a decade ago, many investors decided to forsake the stock market, embracing bonds instead. Over that time, Americans amassed more than $3 trillion in savings and 94% of that money went into bonds. Those bond buyers have had a good run, but all good things must come to an end.

Most fixed income investors are scraping the bottom of the barrel if they are hoping for further increases in bond prices. Interest rates are less than one percent, and there isn’t much room to fall further. Dividend-paying stocks are yielding more than most bond investments. Plus, the chances for price appreciation appeared to be much greater in the equity than in the bond market. The retail investor is waking up to this fact.

Last year, while Main Street suffered under the black hand of the coronavirus, the stock market roared higher, after a big correction in March 2020. That pullback was just the excuse many investors needed to dip their toes back into equities. After all, what better way was there for the unemployed worker or small business owner to supplement their income than in a market that was suddenly 30% cheaper than it had been at the beginning of the year?

Americans of all ages, spurred on by the pandemic-induced, stay-at-home trend, took a new interest in the financial markets. The government’s stimulus checks provided the capital they needed to get involved.  For those working remotely, there was also a lot more time to trade with no boss watching over their shoulder. The commission-free trading and ease of execution also helped. The rest is history.

It would be too easy for old timers like me, who have witnessed doubles and then triples in stocks of fledgling companies in mere days, to warn of the excesses that this is causing in the market. It may be, but the fact that Google or Apple have done the same thing is perfectly acceptable because that happened over a longer period. Who is to say that what has happened in the past must happen in the future?

Others might scoff at these newbies who know so little about markets, earnings, and the trends that make a difference. The mantra I hear most is that this will end badly, so just wait for it. Talk of bubbles abound.

In the meantime, these new traders continue to invest in areas where they see a future. Electric vehicles, solar power, ESG investing, the Cloud and more. While seasoned investors point to the fact that many of these companies earn nothing and won’t for years and years, Robin Hood traders ignore them. They are buying what they know, and so far, they have been right. If price talks, then these new traders are walking the walk, in my opinion.

Check out what has happened to Bitcoin (or “digital gold” as investors are calling it). A year ago, high-paid strategists and analysts were still writing off crypto currencies as a fad with no future, while retail buyers ignored them. And well, they should, because they were already using Bitcoin to make purchases and pay their bills.

But what of the excesses, surely there will be a time when some of these traders will hit a brick wall? I am sure there will be a reckoning of some sort.  For example, this week’s craze is to buy stocks with heavy short interest, bidding up prices and forcing the “Big Guys” to cover their shorts. Thousands of retail buyers converged on this week’s phenomena, GameStop, a console and video game maker, to do just that. The price of the stock has been climbing by almost 100% per day and where it will end no one knows. In the meantime, other heavily shorted stocks are rising in sympathy. It won’t last forever.

The point is that the markets are changing. And like with all change, there is good and bad. I have no doubt that the excesses will be dealt with in due course. Some traders will get burnt, but many more will continue to profit. I for one, encourage these young bloods to experiment. Their participation helps me in my y own investing and has taught this old dog a whole bag of new tricks, so I say keep it coming.

Posted in BMM Articles, Exchange Traded Funds, Investment Styles, Market & Economic Overview, Stock Market, The Retired Advisor, The Retired InvestorTagged , , , , ,