June 25, 2020 Guy Carson

THE RISE OF THE RETAIL INVESTOR ARMY

BY GUY CARSON

 

Sharemarket investing has never been easier to access. The rise of Apps such as Robinhood and Stash have enabled people sitting at home to invest more easily and more quickly than ever before. Robinhood has seen its user numbers rise from 10 million to over 13 million in the first six months of this year. The combination of easy access plus people having increased time on their hands due to lockdowns has led to the rise of the retail investor.

The below chart shows the rise of retail investment since the selloff began earlier this year.

These new investors have found life easy so far. The market has gone up in a rapid fashion and some of the new found cult leaders are proclaiming stocks will never go down.

There is some speculation that Robinhood traders are the ones driving the market higher. This is untrue, the size of the market negates the possibility. Liquidity from central banks plus hopes of a v-shaped recovery combined with lower discount rates are the more likely drivers.

What is interesting though is the stocks they are buying. In May, the car rental agency Hertz filed for Chapter 11 bankruptcy. At the time 43,000 Robinhood accounts owned shares in Hertz; that number rose to 73,000 in the first week of June and hit a peak later in the month at 171,000. The share price rose from 56 cents to $5.53. Carl Icahn sold his stake at 72 cents and took a $1.8bn loss whilst these retail investors piled into shares that are almost certainly worthless.

If we look now at the top ten shares bought in June we see a mix of Technology companies (Apple, Go Pro, Microsoft), travel and tourism related companies (Disney, American Airlines, Delta Air Lines and Carnival), some fallen companies with long histories (Ford and GE) and finally one cannabis stock (Aurora Cannabis).

As mentioned above these investors have found things easy to date whilst some of the most experienced investors in the world such as Warren Buffett and Howard Marks have been ridiculed for their scepticism. Investing in the share market however is not easy. Our experience has been that when it feels easy, people become complacent and things can turn rapidly.

We need to remember that despite the record monetary and fiscal stimulus, risks remain. A potential second wave of Covid-19 (or first wave part 2) is rearing its head across parts of the US. This could be particularly bad for the travel and tourism stocks mentioned above which have rallied sharply despite zero clarity to their earnings. We still have millions of people unemployed (and we are unsure whether increased benefits will be sustained). We have also seen civil unrest and there is talk of a fallout in the trade negotiations with China. To cap it all off we have an election later this year which is shaping up as a close affair.

Retail investors have a history of being late to the party such as back in the 1999 dotcom boom. Investing is difficult and following the herd can be a dangerous strategy. Advisors we work with are becoming cautious once more and the rest of the year will shape as a challenging period. Some of these advisors have applied protection to the portfolio and increased their allocation to alternative asset classes.

If you wish to speak to Southpac about your investment options please contact gcarson@southpacgroup.com

 

 

Disclaimer: The above contains the opinion of the author and is for information purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice

 

Guy Carson

Guy Carson is Southpac's Investment Specialist. Guy manages Southpac’s external relationships with investment advisors and banking specialists in client relevant jurisdictions around the world. In addition he works with clients to find the most appropriate solutions for their circumstances.
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