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The ‘Revolution’ Robinhood And Reddit Are Looking For Happened Years Ago
"Robinhood investors’ evident lack of skill in aggregate is consistent with commission-free investors behaving as uninformed noise traders," reads a new academic paper by Oklahoma State University's Gregory W. Eaton and Brian S. Roseman, and Emory's T. Clifton Green and Yanbin Wu.
The recent debate over whether the Robinhood set, "informed" by WallStreetBets and other manifestations of "social trading," can beat the pros or otherwise "stick it to the suits," is absurd on multiple fronts.
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Great column! I will keep this for when young relatives ask how to make money in the market.
I think it’s important. Mostly because it’s becoming harder and harder for regular folks to separate the “good” guys/gals from the “bad” guys/gals.
I get a lot of email from people who are signing up for (relatively) expensive “newsletters” and “services,” and now we’ve got Reddit claiming to be the savior of the “little guy,” and then there’s Elon Musk (who was still tweeting about Dogecoin on Sunday), and just on, and on, and on.
Short quotes and properly contextualized/paraphrased citations from good analysts (especially those with a knack for summarizing macro narratives) are both useful and additive, which is why I, like Bloomberg or FT or WSJ, utilize them sparingly in general market coverage.
But totally separate from short sellside quotes, this cacophony of people claiming to be buysiders on Twitter, speculators, charlatans peddling grossly expensive monthly “services,” Redditors, VCs, etc., etc., is not a good thing. It’s overwhelming for most people.
And I think another thing that gets lost is this: Even for investors with what everyday people would consider to be sizable amounts of investable capital, the best strategy is still some manifestation of Occam’s razor. I mean seriously, think about it. Let’s say you have $2 million. Where are your odds best when it comes to growing that? Spread out across several low-cost funds from Vanguard, T. Rowe, and Fidelity, or trying to deploy it across some complicated hodgepodge of strategies you gleaned from who knows where?
I just think people have a distorted view of the world sometimes. And I get it, because I’ve been there. When you have what, to the vast majority of humanity, would be “a lot” of money, it’s sometimes easy to lose track of the fact that when you move out of the regular world context and into the context of markets, that amount no longer counts as “a lot.” If you lose track of that, you can suffer from delusions of grandeur.
Don’t get me wrong, if you’ve got $100 million or something, or you have clients, or you have so much invested that you have legitimate daily hedging needs, etc., etc., then sure, absolutely: You’ll want (and, indeed, you’ll require) more out of your investing life than some simple funds. Depending on just how rich you are, you may even need sophistication that goes well beyond what can be obtained by some local office let alone from Mary, your friendly Merrill rep down the street.
But if that’s you (i.e., if that last paragraph applies to you) you know it. Or you should know it. And I suspect that’s where the problem comes in for a lot of folks. They get $3 million (or whatever) and think they’re “players” or otherwise need to “make moves.” That’s when the trouble starts. 🙂
I mentioned in this comment section this summer that I may have been better off buying 10% a week of SPY starting April rather than stock picking. I was on the early side of some lucrative trades so overall I have done better but had to work at it. I am sure I am not the only elder who dove into deeper trading this downturn. I have learned much and have enjoyed it but will simplify things by July. That will mean keeping many dividend stocks I got at a bargain and gravitating to more tradable funds.
I thank you Mr. H and will continue my education here and at Seeking Alpha, etc. I have always enjoyed Macro Economics and this article goes a long way toward letting me know the kids will be alright. My non-fictitious Niece is now asking about educating herself about markets. Dot.com kicked many of the young back when and they have become mature investors spooked into passive and better off for it. It is hard to argue with success, which is now, as always, rear view mirror.
Excellent post.
Anecdotally, 2/3 of my kids bought IVV and KO with their stimulus checks in a TDA account, so not all Zoomers are Robinhooders.
Finally, I timed myself and my read time was 15- but I had to reread several sections twice to absorb.
If one assumes that these new traders learn and improve (by doing less, say), then shouldn’t the outlook improve for this investor cohort? Certainly there could be churn on the Robinhood platform, making it a perpetual noob mecca. I’m not so sure though, that the ‘someone’ who has to underperform the market will remain the Robinhood trader. There’s clearly plenty of underperformance in the 4.2 trillion of active management already.
As a final note, index fund investing isn’t necessarily rational for a large part of the American public. As you have wonderfully covered over the years, a large part of the public (investing or not) simply don’t have enough money to to meaningfully compound, even if they hit decent % savings goals (which they cannot). Getting 6 or 7 doubles over an investment lifetime just ain’t that great if you start from 1k. The rational and justifiable play for these people is a lottery ticket stock or momo-chasing.
If one assumes that these new traders learn and improve (by doing less, say), then shouldn’t the outlook improve for this investor cohort? Certainly there could be churn on the Robinhood platform, making it a perpetual noob mecca. I’m not so sure though, that the ‘someone’ who has to underperform the market will remain the Robinhood trader. There’s clearly plenty of underperformance in the 4.2 trillion of active management already.
As a final note, the index fund investing isn’t necessarily rational for a large part of the American public. As you have wonderfully covered over the years, a large part of the public (investing or not) simply don’t have enough money to to meaningfully compound, even if they hit decent % savings goals (which they cannot). Getting 6 or 7 doubles over an investment lifetime just ain’t that great if you start from 1k. The rational and justifiable play for these people is a lottery ticket stock or momo-chasing.
Hard not to agree with most of your column. Sort of.
That said, the vested interests of the different groups you write about are simply not the same. Active managers, be they hedge funds or broader diversified asset managers, seek to beat their broad index benchmarks primarily because those track records lead to more inflows of AUM. Passive managers are really no different: how many hundreds of thousands “benchmarks” have been created by the financial services industry for ETFs to track and ideally beat?
Also, just “beating the pros” shouldn’t be the end in itself. Most retail clients, with or with out an advisor, want to invest toeventually achieve individual goals, one of which is not typically beating this or that PM or analyst. You can find lots of active managers who outperformed their benchmarks in 2000 or 2008 whose clients could not achieve those goals.
The real threat to markets is financial illiteracy. Robinhood and WallStreetBets are just symptoms of that threat.
Good article and timely given what’s happened over the last month. My son was showing me various parabolic graphs and asking if those stocks or “investment instruments” for lack of a better expression (think Bitcoin) were good places to start investing. I told him to go find other places this happened and what happened after. GME was a quick life lesson for him along with his other research. No such thing as a free lunch.
For almost every young adult who has only a small sum to invest, the time and effort required to be a successful active investor would be better spent getting more education, a better job, and advancing in a career.
Start with $5K. To get to $80K, you need +1500% return (four consecutive doubles) of the entire portfolio. To maintain $80K/yr income, you need +100% annual returns for your lifetime. Assignment #1 should be to spend a week researching the top-performing investors/traders and list those who achieved that.
JYL- You are exactly right- that plus learning to live a happy life below your means. Living on less than you COULD spend has some stress reducing elements that can bring you to the point that allows you to focus on what can truly bring you happiness.
Are they victims? Is the behavior of this cohort just more evidence of us being yield starved and going out on the curve for returns?
Another aspect that is easy to forget about when reading articles about this cohort of “investors” is that they have grown up not knowing what it is like to get 5% (or six or seven) on a CD. CDs as an “asset class” (they’re not, just saying) are no longer available to the emerging, retail investor.
Thought experiment: 30 to 50% of this cohort would be happy to receive 5-7% annual returns in exchange for almost zero risk to their capital.
Hypothetical: The majority of this cohort will get it and eventually just go in on SPY…then we have a 5-year, corrective period where markets revert to within some range of historical norms. …more academic articles ensue about how we are all just fodder.
Great article and many great comments.
Today, no investor segment can claim to be pure. Like many areas of life, there is too much emphasis on the desire to beat the system, something or someone else. And, there is too much emphasis on the investing process, e.g., playing vol or liquidity, gamma, etc. – seemingly everything but the quality of the company and fair gain. Ever thus.
Great comments. I would add that there is value in losing, if you really want to learn, instead of being faddish. Also it is not excessively hard to learn about and follow a diverse few select companies over a period of years, in time the benefit of DYI with a small % of holdings in addition to a large majority of Vanguard index funds can help wring out enough performance to make one happy. about the effort Your not sticking it to the man but you are informed and engaged, and therefore nimble. You cannot stick it to the whales as mentioned in the articles but if you know a few companies very well you can make some decent decisions at times. It also helps to be able to cost average down on those companies when needed. The key is to keep it to only a few select companies at any given time and give them and your hard earned money their due attention. Years not months.