Alasdair McKinnon is the Lead Fund Manager of The Scottish Investment Trust. In this article McKinnon shares his thoughts on the explosion of retail investing, and how it may affect the psychology of young investors.
Trading by individual retail investors has seen a meteoric rise in the recent past. The reasons are varied: they have more time on their hands during the lockdowns; the astonishing growth in, what we would consider to be more speculative investments such as cryptocurrencies, and the role of social media in the advertising and provision of access to investment platforms, are just a few. In combination, these factors have instilled a confidence that anyone can be a successful day trader, a view held especially among the younger generations.
Trading and investing platforms are far from a new phenomenon. Charles Schwab, Hargreaves Lansdown and Fidelity are some firms that for decades have offered broker services that remove barriers between individuals and the stockmarket. But it appears their success has inspired a new ‘type’ of online platform that discards the traditional style synonymous with the ‘old’ investment world, in favour of a more engaging interaction and the use of branding such as Robinhood and eToro.
These platforms are adept at selling themselves to a new audience: they are more likely to be seen on YouTube than in the Financial Times. Their users are more often investing student loans than their pension pots. This group has fundamentally altered the risk profile of the retail investor class, a change that can be characterised as the ‘gamification’ of investing.
Speculative bets are a central characteristic of gamification. Without experience, advice or often sufficient knowledge, this new investor group has stumbled into some comical mishaps, resulting in cases of extreme mispricing. On the 7th of January, Elon Musk, whose online musings have long been a source of stockmarket angst, tweeted his praise of messaging app Signal, leading to a 1100% surge in an unrelated stock with a similar name. Although an amusing anecdote, mistaking two companies is worrying proof of how little research can go into these real-life investment decisions.
Another recent example of gamification occurred with GameStop. This saga pitted the buyers, millennial retail investors brought together through online forum Reddit, against Wall Street’s hedge fund community with declared short positions. After a flurry of purchases and the capitulation of the shorts, the surge in the share price indicates that, for now, the retail investor side are ‘winning’ the battle. This gives a real-world example of what Keynes’ meant with his famous line “the market can stay irrational longer than you can stay solvent”.
But does all this matter? It feels far-fetched to think that a more speculative retail investor will be able to sustain meaningful distortions in value across the market. More interesting, however, is the question of what this experience of speculation will mean for the psychology of investing and, equally importantly, their regulation in the future.