Return of the Retail Investors

Published on 13 March 2021 at 17:25

Joe Biden’s COVID direct stimulus package is expected to be delivered any day now, to the tune of $1400 per person (earning <$75,000), or about $400 billion for the economy as a whole. While many individuals will use this to pay off bills or reduce credit card debt, a large proportion of people are planning to invest some of their cheque into the stock market.



These “retail investors” are non-professional individuals that invest often in Exchange-Traded Funds (ETF’s) or fashionable stocks such as Tesla or Apple. These amateur investors came into the limelight with the recent GameStop short squeeze, and they are now set to shake up the financial markets once again, with a rapid influx of investment.



In a recent study, Deutsche Bank found that retail investors were planning to spend on average 37% of their cheque on equities. In particular the 25-34 year old investors that were surveyed planned to invest an average of 50% into the stock market, the highest proportion of any cohort. This will result in up to a $25 billion injection into the market, with slumping tech stocks expected to gain the most. While this will provide a short-term boost for stock valuations, there is a serious threat of a mini-crash for many people’s favourite stocks. With just under half of the investors surveyed beginning trading within a year, their naïveté may soon be shattered.



Retail investors that are overly leveraged with tech stocks and particularly highly speculative ones such as GameStop, are at risk of succumbing to the pressures of increasing interest and inflation rates. The individuals on Reddit R/WallStreetBets are planning on doubling down on GameStop, AMC and other “meme stocks”.



While they will see an initial rise in value, the gold will turn to dirt as soon as they try and cash out and realise their profits. Institutional investors such as pension funds and hedge funds are moving away from the high growth stocks that dominate the tech industry, towards value stocks and more asset-heavy businesses such as oil and LNG. These are favoured by economies with higher interest rates, as this reduces the value of growth stocks’ prospective profits.



There is no appetite for GameStop and similar stocks among institutional investors at the moment, because the unbelievable ballooning of their valuations has reduced the possibility of them being a good investment to 0. This leaves retail investors in an unfortunate position where their profits are based entirely off of the “Greater Fool Theory”. The theory posits that people will continue to buy stocks at exorbitant prices, if they believe they can sell it at an even more unbelievable price to the “greater fool”. The issue with this is that the buck has to stop with someone, and in this case, it stops with retail investors.



While there was merit in the early rise in buying GameStop, the short positions held by Melvin Capital and other funds have now closed. The only thing propping up the price is the attitude of sticking it to the man, and the Greater Fool Theory. As you can imagine, that is not a sound financial foundation, and soon it will crumble.



Massive funds will be safe in their value investments, and will ride out the coming economic expansion with great success, and the unfortunate retail investors will be left with nothing other than a bitter taste in their mouth, and an empty Robinhood account. The gamble they took on meme stocks won’t pay off, but in time they will surely find new ersatz gold. Retail investors are not in control of billions, they have a finite amount to invest, so it begs the question, when will the Game Stop?

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Oisín Luff
3 years ago