An army of young day traders is placing risky bets … and many of them are making big gains. What does it mean for the broader stock market?
Say it with me … Stocks only go up. Only losers take profits.
So says Dave Portnoy, founder of internet company, Barstool Sports, and recent day trader.
Portnoy is not exactly an investor.
In fact, prior to the quarantine, he had bought just one stock in his life.
But with the country shut down in recent months, meaning no sports and no betting, Portnoy was bored. So, he turned to the stock market, saying “with the volatility, it is kind of like watching a sports game.”
He now day trades, live-streaming his account as “Davey Day Trader Global.”
Portnoy is also a tad less-than-humble about his alleged success. Just a few days ago, he raised eyebrows tweeting:
I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.
Portnoy’s Davey Day Trader Global livestream gets hundreds of thousands of viewers on Twitter alone. But Portnoy hardly feels any responsibility for someone following him into a speculative trade.
A few days ago, on CNBC’s Fast Money, Portnoy said that if other day traders follow his actions and lose money, he “can’t be held responsible for total idiots.”
***Portnoy is hardly the only newly minted day trader swaggering into today’s market
Robinhood is a free trading app that enables investors to trade stocks and options. Because many younger investors use it as their preferred investment platform (the average client age is 31), the name has come to represent “less experienced” investors.
Here’s how Yahoo! Finance describes them:
A new generation of investors & amateur traders are rising out of the ashes of one of the most volatile and uncertain markets in history.
These stock market newbies have created an entire cultural movement with an “investment strategy” that looks more like gambling than the traditional buy and hold approach of past retail investors …
People are starting to question whether the baseless stock and option purchases of this new generation are investments at all or is Robinhood just a casino for bored-stiff homebound youth.
In recent weeks, many Robinhood investors have been placing bets on risky (yet surging) stocks. Below are the top names over the last month (as of June 5), alongside their gains.
These big, fast wins have come to the dismay of many older, seasoned investors.
Experienced investors have been bewildered by the behavior of retail investors in recent weeks as the newbies poured money into stocks most affected by the global pandemic, like airlines and cruise lines.
In particular, criticism has increased surrounding those trading on millennial favored stock trading app Robinhood, where not only have the number of clients and trades ballooned, but where investors make “nonsensical trades,” such as buying bankrupt companies and penny stocks like Hertz or J.C. Penney.
Earlier this month, CNBC profiled 26-year-old Robinhood trader, Lequon Godbolt, who made $1,500 in less than 24 hours buying options on American Airlines.
Then there was Rodney Henderson, 27, who turned his sister’s $1,200 stimulus check into almost $10,000 with pharmaceutical stocks.
For Portnoy, he’s made money on some well-known brands including Spirit Airlines, buying when it was near $8 per share. As I write, it’s up roughly 150% from there.
***Is this a sign of an impending market top?
As we noted in the Digest earlier this week, market tops tend to form when investors are wildly confident, bullish, and greedy, while bottoms are typically carved out when investors are despairing and hopeless.
The idea is that when investors are irrationally exuberant, that enthusiasm draws practically all investors off the sidelines, into the market. And when everyone is invested, and there’s no one left who’s willing to buy at nosebleed prices, that’s when the bubble bursts.
For example, there’s former Federal Reserve Chairman, Alan Greenspan, coining the phrase “irrational exuberance” to describe investor sentiment during the 90s dot-com run-up, which drew in newbie investors not wanting to be left behind.
This paralleled the classic magazine cover from Newsweek in 1999, capturing the greed and “fear-of-missing-out” that accompanied the era. This was published just months before the markets collapsed.
Today’s Robinhood “me too” trades aren’t the same, but they have echoes of 1999.
There’s also a similarity to the dot-com era in that some Robinhood investors today are claiming “this time it’s different” in response to the dismay of older investors.
Scott Nazareth, a 29-year-old day trader from Toronto, said he’s a fan of Portnoy’s videos and believes older investors such as Buffett are missing opportunities in technology and airline stocks.
“I kind of make fun of some of these investors,” Nazareth said of Buffett. “They just have a hard time understanding the new normal, the new business models.”
First, I wasn’t aware that airlines operated according to “new business models.”
Second, Nazareth’s idea about business models is highly-reminiscent of 1999 idea that the new “clicks instead of bricks” business model (a company’s website clicks were more important than old-fashioned bricks and mortar profits) was here to stay, replacing business models that focused on actual sales.
***So, is this avalanche of younger day traders reflective of the euphoria that accompanies a market-top?
As of now, no.
First, these Robinhood traders don’t command the collective wealth to move the overall market; two, their trades are mostly concentrated in a handful of volatile stocks; and three, many of them are already losing.
From Yahoo! Finance:
This exploding wave of investors is taking on an aggressive risk-on approach and have no shame in losing it all.
A Reddit community of “Degenerates” (as they refer to themselves) called r/wallstreetbets is a discussion board where amateur investors/traders tout their massive losses just as much as their gains.
These “degenerates” are gambling what sounds like all their life savings on highly risky option plays.
This “subreddit” is creating a generation of speculators, with some striking big money, but for every one winner, it seems like 10 are losing more than they can afford to.
But even though these Robinhood traders likely don’t signify a “top,” their actions could be pushing us closer to it …
Today, with the market surging as it has done since March … combined with headlines of huge gains fast … combined with “investors sitting on the biggest pile of cash ever” according to the Wall Street Journal … combined with a growing belief that the Fed will simply throw trillions of dollars at the economy, flat-out preventing stocks from crashing … we’re at risk of even more-seasoned investors getting lured into questionable stocks, which historically, doesn’t end well.
The action of the Robinhood traders is a good reminder that you and I should occasionally pause, and reevaluate our own market activity.
***With that in mind, a few questions to ask yourself …
What’s driving your investments today? Long-term trends or short-term FOMO?
Is your market exposure reasonable in light of your personal financial situation, or is too much at risk?
If you want to take part in any of these Robinhood trades, are you doing so with an investment amount that won’t cripple you if you’re wrong?
At the heart of all this is a question each of us should answer amidst the craziness of today’s market …
Are we making wise, reasoned investment decisions that align with our long-term goals or not?
If it’s not 100% clear that you are, perhaps you should X-out of your brokerage account before making your next trade.
Portnoy actually got it right with these words of wisdom …
People have to make decisions for themselves, obviously.
Of course, he then tacked on …
If you want to jump on, you jump on. The facts are I’m not going to feel bad when I have like 400% returns since I started doing this.
Have a good evening,