Stock Trading the New Normal — A New Type of Investor is Born
Early in the pandemic, I wrote a draft that never made it to print.
That happens a lot in this business.
Sometimes the thoughts need to roll out onto the page before you discover what the meaningful part of it is.
As stocks tumbled all around us in March it looked like the bottom was nowhere to be found.
Then just as suddenly as the market crashed, it picked up. Followed by one heck of a rally.
Well, that depends on what sector you’re in. Gold stocks flew. A couple of tech companies did as well. Some consumer staples rebounded like nothing happened.
Some other stocks that should’ve collapsed nearly doubled from the March bottom.
Me? I didn’t trust the market rally.
The eagerness of people clambering in. There is incalculable economic destruction, yet investors were throwing money at the markets.
Australia had just witnessed the biggest and sharpest sell-off in stock market history, yet suddenly people were dying to own stocks?
A pandemic unlike anything seen in a century was at our shores…but people wanted shares.
My view at the time was the unknown economic impact wasn’t being calculated into stocks.
Based on some of the older, more traditional analysts I spoke with, we weren’t convinced in this rebound.
Clearly, we were missing something. Because my phone was blowing up.
I was receiving multiple messages daily from people I hadn’t spoken with in years.
All wanting to know what the hot tip was and how they could put their money in the market. All saying the similar thing ‘stocks have crashed, so they must cheap’.
‘Buy when there’s blood in the streets, even if the blood is your own’, is the often-misquoted Baron Rothschild saying. The whole idea of it is to buy when people are too scared to. In other words, be the contrarian.
The thing is, there was no blood in the streets after the crash.
People couldn’t get into the market quick enough.
And this birthed a new type of investor…
No one was scared, everyone wanted in
Waiting for blood to flood the streets may turn out to have been the wrong strategy.
Because back in April, no one was scared, everyone wanted in.
Stuck at home on government orders back in March, a tanking stock market was met with optimism by a fresh batch of market punters not worn out from years of market gyrations.
With nothing to do — and perhaps some freshly drawn out super money — people turned to stocks.
Some 140,000 new online stock brokering applications were created between 24 February and 3 April. An average 4,675 new accounts a day. In other words, it was 3.4 times higher than six months before.
Brand-new investors now accounted for 21% of all new online brokerage accounts.
A fresh batch of investors arguably helped drive the market higher.
However early on in the rebound, much editorial was dedicated to how concerned ASIC was about these new investors. Our regulator was worried people were piling into the markets because they’d simply had nothing left to do.
Warning them about ‘profiting’ from the COVID-19 downturn.
So much so, that they went on to say:
‘We found that some retail investors are engaging in short-term trading strategies unsuccessfully attempting to time price trends.
‘Even market professionals find it hard to time the market in a turbulent environment, and the risk of significant losses is a regular challenge. For retail investors to attempt the same is particularly dangerous, and likely to lead to heavy losses — losses that could not happen at a worse time for many families.’
More to the point, ASIC went on to point out that new account holders were engaging in ‘worrying’ behaviour. Diving headfirst into small-cap stocks with either no earnings or no proof of their concept even working.
But, by only focusing on how risky the small-cap sector is, which it certainly is, did ASIC miss the opportunity to engage with all these new investors?
At the time all the warnings may have had good intentions.
But rather than simply warning them about the pitfalls that come with investing in small-cap stocks (which are valid of course), our regulator could have taken the opportunity to also engage with this investor about why they wanted to dabble here.
Is this new batch of investors looking for a quick buck? Or perhaps was it more of a case that they felt there were more exciting stories in the small-cap sector than our big and tired old institutions that dominate the ASX?
Why buy bank stocks (snore) or an iron ore-related stock (boring!) when there’s a technology company that is working on a promising idea? Who wants to own a stuffy old telco when this innovative speculative firm is about launch their family friendly idea into the US market…
If the pandemic proved one thing, it’s that there’s an eager group of new investors that are willing to invest in the smaller — and arguably unloved — stocks that sit outside the top 200.
Not only that, given most of the folks entering the market were under 40, they have more time for these stocks to mature then anyone approaching retirement age.
Perhaps they were buying and hoping to make a quick profit. Rather were looking to invest in the next CSL or Telstra languishing at the bottom end of the ASX.
Today’s tiddler is tomorrow’s titan
There’s a new breed of investor in town.
And they’ve worked out a couple of things. For starters they’re looking at possibly a decade of not earning interest at the bank.
Meaning if they want to grow their wealth, what their parents did isn’t necessarily going to work for them.
To boot, many of the young people I’ve spoken with feel locked out of financial advice.
The few I’ve chatted with that have taken steps to seek financial guidance have lamented how useless the advice was for what they got.
As one 25-year-old told me the advice she received was:
‘Exactly what I could have got from my dad for free. Buy either BHP or RIO, pick a bank, a consumer staple, a telco and a utilities company for dividends.’
Professional advice is leaving the younger generation wanting more.
Not only that, they know they have time on their side and are willing to take on more risk when it comes to unheard-of stocks in the market.
The issue here shouldn’t be a blanket warning to newbies, rather the chance to encourage them to learn how to understand and calculate their risk, and then give them the tools to develop their own knowledge.
Yeah, small-caps are unbelievably risky. The sector I dabble in is even worse.
But diving into stocks as an individual is about becoming a self-directed investor willing to take charge of their financial future, rather than just leaving it to a fund manager.
There might not have been blood on the streets a few months ago, but there has been a surge in interest into stocks. And given there’s a low growth future ahead, investors should learn all they can.
And who knows. The small-cap stocks they pick up today could very well be the titans of industry a decade from now.
Until next time,
Editor, The Daily Reckoning Australia
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