In recent weeks the stock market has felt more like a casino than the backbone of the financial system.
Dizzying spikes in the stock prices of some companies at first where being attributed to a V shape recovery from the corona virus crash. But what’s becoming clearer now is that the lockdown itself could be causing all this buying.
When the market is acting irrationally which it often does, rather than try to analyze the why, I try to figure out the who.
It turns out that a lot of the buying is being done by bored gamblers. There are no sports to bet on, so attention has turned to the stock market. And it’s never been easier and cheaper to trade stocks. In recent years Robinhood has led the charge in democratizing the stock market with no minimums, no trading costs and a fun app to use. Most brokerage firms have followed suit as well as banks. I ran into a friend this week who said he’s been buying stocks for the first time because his online bank app makes it easy to put in trades.
But it’s a cautionary tale. For example, in just one week 96,000 people invested in the company Hertz, after it declared bankruptcy. Luckin Coffee enjoyed a similar degree of buying even after being threatened with delisting for financial fraud. There are many more examples and of course these are not the behemoth companies that drive the indexes, but the same players are buying them as well.
The resulting feeling of missing out is being felt by across the spectrum of investors. But when it comes to this kind of trading environment the house always wins as friend pointed out this week. The aforementioned stocks crashed as quickly as they rose. Another example was Carver Bancorp this week that went from $3 to $21 per share when the stock market opened and back to $9 by the end of the day. If you don’t follow the market, I can assure you that is shocking! As the old saying goes the hardest thing about Wall Street is knowing when to get out. At least with sports gambling there is a final whistle to close out your bet.
As many success stories you have heard or maybe assumed about the recent rise, there are sure to be as many disappointments.
For those who have invested for the long term we have been conditioned not to sell. And not many did when the market crashed this year. From what I can tell most long-term investors didn’t panic and held their ground and enjoyed a seem-less rebound. So, who sold and where are they now?
It’s a good question and good time to consider algorithm trading or machine trading. It makes up a huge percentage of the daily trading volume. Well over 50% by some accounts. Machine trading ranges from efficient execution of an order given by a human, to the machine making decisions on what, when and how much to trade. They were certainly complicit in the crash and are probably riding the coattails of bored lock downers. I think it’s important to be aware of the machines when hearing the term “investor sentiment”. The stock market might not be as sentimental as it used to be, for good or for worse.
So, who is the house? The broker dealers like Robinhood who make money off our cash and from directing trades to market makers. As well as people like myself who make fees from investments….its very important to know your fees and to make sure you are getting appropriate value for the fees you pay. A recent study by Oxford University suggests that after fees, Private Equity funds performed only as well as the public markets.
The house is also you long term investors. Those of you who buy and hold good companies or funds and strategies representing the growth and progress of democracy.
It’s against the law for me assure future performance. But if anything can be assured based on history the long-term investors are those who benefit the most from the stock market.
Market crashes and volatility do present an opportunity to enhance the performance of long-term investments so I believe it’s important to earmark a portion of your emergency fund for such opportunities but being careful not to get caught in the Euphoria when the time comes.
Discernment and patience are critical to building wealth.
Wealthcare Advisory Partners