We talk incessantly (and often derisively) about “the retail investor.” We’re never very precise about who we mean.
Part of the problem is that investors come in all shapes and sizes, and hail from diverse backgrounds such that neat classification is impossible. Some readers are familiar with Kevin Muir, of The Macro Tourist fame. Is he a “retail investor”? Well, it depends on who you’re comparing him to. If the bar is Dan Loeb, then yes, Kevin is a retail investor. If the bar is Reddit-inspired day-traders whose preferred execution platform is Robinhood, then no, Kevin isn’t a retail investor.
Lacking a universal definition, we can’t make claims about retail investors as a group. Or, actually, we can, but we’ll invariably talk past one another, because my definition is different than yours, and yours is different from the next person’s, and so on. That’s why it’s best to ignore mainstream financial media articles about retail investors. They tend to quote multiple sources, but the data never matches because everyone’s classification system is different. That’s why, if you rely on mainstream media outlets, it can often seem as though retail is buying dips and selling en masse during the same week.
The only way to be consistent is to avoid commingling sources or to stick to some reasonably clearcut distinction that separates institutional managers from individual investors, for example.
With that in mind, Goldman’s David Kostin cited the bank’s trading desk in suggesting that retail investors have now sold almost the entirety of the stocks they bought during the pandemic boom. The figure (below) plots an estimate of retail-trader purchases and the relative performance of the bank’s retail favorites basket.
According to Goldman, it’s over, where “it” is the retail mania. Kostin didn’t put it quite that way, but I’m not sure how else to describe the situation.
Notwithstanding a big inflow during the latest weekly reporting period, billions fled US equity ETFs and mutual funds over the preceding several weeks as macro concerns undermined sentiment.
Kostin noted that “a reversal in household equity buying” has accompanied a regime shift from the long-running TINA environment to TARA, “There Are Reasonable Alternatives.” I suppose that depends on your definition of “reasonable.” Besides commodities, nothing has worked in 2022, and you’ll have a very difficult time getting positive risk-adjusted (let alone inflation-adjusted) returns.
The figures (above, from Goldman) give you a more comprehensive look at cross-asset performance than the simpler chart I used in “The Stock Selloff Probably Isn’t Over.”
In any case, the point is just that however you define retail investors, they’ve de-risked. As Kostin wrote, fiscal stimulus and near-zero interest rates have given way to rising rates and recession concerns. And, so, the party’s over.
If you think you might be a retail investor, and you’ve been trimming exposures after losing money, don’t fret. You’re not alone. “Institutional managers have also continued to cut leverage,” Goldman said, adding that aggregate hedge fund net leverage was the lowest in a half-dozen years as of March.
Meanwhile, high-frequency data from Goldman’s Prime desk suggests hedge funds continued to de-lever into the second quarter. On an average, asset-weighted basis, overall equity L/S managers have returned -17% this year, Kostin said.
Apparently, hedge funds, institutional managers and individual investors have all been selling. Assuming these stocks weren’t left in a shoebox at the fire station, who’s been buying?
Bingo! Some smart people bought every dollar of what was sold and they will make out. What people don’t seem to get when they sell is the idea that every day all the assets you own have a value that equals the present value of all the returns that asset will produce from this day forward. The past is irrelevant. Unless one has a choice that will produce a risk-adjusted return that is superior using the net proceeds of the sale, one should not sell. The buyers who have been buying up all this stuff, we must assume, think they can get a better risk-adjusted return in the future on the stuff they just bought from all those sellers than they could get from any other alternatives. In many cases that means a whole lot of those sellers probably blew it, especially if they kept the cash. Every day each us has a choice to make, keep what we have or sell. Unless something else is better than what we have, selling is fruitless.
You haven’t mentioned Kevin Muir in so long, I was beginning to think you’d had a falling out.
No, not at all. He transitioned The Macro Tourist to a Substack letter, so cross-posts weren’t really feasible anymore.
I’ve learned, the hard way, to listen to people who have more subject-matter knowledge than I do. While the Heisenberg Report author won’t tell you what to do or how to invest, he does lay the ground work for you to make sound decisions with your money. I’m willing to miss an opportunity or two to make additional money if the anxiety it creates impacts my serenity. I’m 60% cash 35% oil and gas, and 5% miscellaneous. I’m up almost 10% YTD in my portfolio. I’m not that smart. I’m lucky and I listen. Thanks, Mr. Heisenberg.
Your 10% YTD return is excellent, those hedge funds that have lost 17% or more don’t deserve to survive.