The recent resurgence of retail trading, coupled with evidence of real returns, has sparked people's collective imagination as to what's possible and where they might be able to take their financial situation. Even prior to the famous Reddit wsb-inspired Gamestop mega-trade, we've been seeing retail traders experience nice gains on various stocks over the past several months (generally attributed to the "Robinhood effect", i.e. people with time on their hands taking advantage of no-commission trading). An interesting question becomes, are these gains the sheer result of a self-fulfilling prophecy of bullish sentiment paired with bullish actions ("BDFT"), or something else more akin to an actual edge? If there's no real trading edge, folks are setting themselves up on the edge of a cliff, ready to take a tumble once things change.
It's likely a combination of both. On one hand, newbie traders are popping up like they did during the dot-com bubble and killing it by simply buying the hottest names and holding for a few days. The problem with this kind of early "dumb luck" is that these traders have no context of what happens when sentiment and trader behavior splinters from the bullish + bullish combination mentioned earlier. Even the past week in Gamestop has proven disastrous for blind believers in the short-squeeze story. Yes, there are still plenty of shorts ready to buy back shares, but the main squeeze is over, leaving many with painful paper losses as sanity returns to the valuation in share price and as early buyers slowly exit their positions a well (not so "bullish" anymore when met with a choice to cash out with large paper gains).
The aforementioned scenario will likely play out for a while, and will require a bit of due diligence mixed with an eye for identifying the next potential viral stock on wsb and other forums. However, the initial edge that was present until everyone and their grandmother heard of the potential of meme plays could soon erode, just as it usually does with any strategy that becomes well-known. But for now, the relentless bullishness and Fed money printing don't seem to have any end in sight.
What interests me more, and in line with what I've spoken about in prior years, is whether the recent resurgence in retail trading has actually woken people up to the fact that account size matters when it comes to expected returns. In other words, the fact that a typical retail account can experience outsized gains far beyond what Wall Street funds market to us to lure us into handing our money over to them. I do see interesting examples of substantial, verified account growth these days. They're not scalable beyond say "only" several million dollars, but imagine the effect that exponential gains in small accounts would have on the public if people woke up to this fact. Instead of rejoicing over a 15% return on a 10k or even a 100k account, the little guy can finally play catch-up, or at least handily defeat the hidden tax of inflation that's thrust upon him. Think wealth transfer without forced taxation and government intrusion! Then again if this happens at scale, be ready for laws that actually limit retail advantages due to Wall Street lobbyists finding a reason to curtail retail behavior that gives them an advantage (like making it illegal to simply participate on a message board and "voting" with one's money as to what position to take as the group forms a consensus).
A small follow-up to this post. As the price action in meme stocks and SPACs has dried up as of late, so have the profits of many of the aforementioned newly minted successful traders from what I can tell from anecdotal evidence. However, that isn't to say they have necessarily squandered all their gains, but seem to have taken varying amounts of hits to their capital or profitability. What this points to is either a over-reliance on dip buying (with the assumption that an uptrend was still to be expected) or over-reliance on small-cap stock volume.
ReplyDeleteBut what's interesting is that it appears that many new retail traders are actually learning pretty good practices from others' examples. Although I am not a new trader, I find myself benefitting from this new wave of self-consciosness and an eye toward best practices by legit folks willing to share their journeys. It's like sitting around a virtual campfire sharing war stories and wisdom gained, crystalizing what you knew the whole time and teaching you a the same time. And I cannot dismiss the fact that people just have much better access to know-how and perspectives on trading than even 5-6 years ago, accelerating the development process. Not sure where I stand on this from a life perspective, since facing and overcoming your own bumps in the road teach invaluable lessons in the larger context of things. I've always been a bit wary of people who have had great mentors or life circumstances from the get-go, who then see spectacular success, but then open themselves up to the possibility tremendous adversity in the face of black swans that is contrary to their fundamental life history...one example being Tiger Woods, or some hedge fund managers that blow up in spite of having tangibly "made it" with little to no risk of ever going broke. Then there are those that may never see the other side of success (failure), who just live in a state of blissful ignorance and view all success as a function of their own merit or hard work. Bless their clueless hearts.