US Retail Investor Pain: What Next For US Investors?
Another big early 2022 question is what do retail investors do now?
As anyone even half paying attention the last two years can tell you, retail investors were a huge part of the market's performance.
Every day investors flooded into markets during pandemic lockdowns and then never stopped opening brokerage accounts, flooding into certain companies and, most memorably, ganging up against the short positions of certain hedge funds.
The GameStop drama began this time last year and produced the most iconic vignettes of all with RoaringKitty, Reddit Ape hordes, Diamond Hands, Melvin Capital and, most especially, the delights of "Chicken Tendies" all getting honorable mentions.
It is a legitimate question and a very uncertain one.
There are some rather unfortunate signs:
First, a lot of the sectors, assets and companies favored by retail investors have done terribly.
As we showed you last week, the ARK Innovation ETF (ARKK) has completely crashed back to earth. You could say the same thing about thing about GameStop or AMC or a hundred other assets.
There are a ton of retail favorite charts that, unfortunately, look like this:
Further, Warren Buffett, as always, is playing the world's most successful tortoise to the new generation of exhausted hares.
Cathie Wood is only the most recent in a long line of "innovative" whiz kids who have eventually succumbed to the world's finest value investor.
Here is the Chairman of Berkshire Hathaway's legendary 2000 letter. The ethos and the investing is similar to now and might be worth a re-read.
More factually, Berkshire Hathaway's performance has now eclipsed Wood' ARKK:
Add it all up and it is very likely that a lot of retail favorites are down and down severely.
One of the aspects that seem forgotten in all the attention on the current market selloff is that, as the above charts make clear, a lot of these assets have been underperforming for quite some time. In some cases for many months or maybe even as long as a year.
We are not so sure about the veracity of this chart (or how it is even calculated) but it feels right and comes via Morgan Stanley.
It shows how the "P/L" or profit/loss of retail investors has been struggling for a long time even as the market continued to rise.
The question now, however, is what do these same investors do now?!
Put another way, the current market downturn may not look that bad at the index level (10-20% down depending) and it may also seem very recent but this might not be the case for a lot of the newest, most inexperienced and risk taking of retail investors.
Many of these individuals could be in far, far more distress than the 10-20% declines in major indices and markets. And they could now be confronted by a very nasty choice:
sell and lock in their losses
or hold on and possibly continue to underperform markets
The latter is because they bought "hot" assets that were, in actual fact, highly overvalued or highly speculative or, even worse, outright frauds.
This outcome would be very tough to consider. The chart above represents a lot of hard earned savings gone up in smoke.
It would also, sadly, be very typical.
There is a very regrettable history of retail investors being last to the party and also being used and abused by a nasty combination of a rapacious investing industry and the capriciousness of financial markets.
What they do now will be critical for their own long term wealth as well as, potentially, the direction of the markets. A ton of retail investors fleeing for the exits could make this downturn dramatically worse.
Hopefully there will be more painful lessons than painful outcomes.
In a way, we are optimistic that this turn could make a meaningful break in terms of investing risk taking. Hopefully people will remain keen on markets but less keen on trying to get rich quick.
It it happens, this transformation could also underline the utility of what we are trying to do with our company.
We founded Pebble to be, in many ways, an anti Robinhood:
A place that carefully keeps investors away from high fees, speculative trash and, most especially, get rich schemes and the lure of the casino aspect of public markets.
So, while we find the current realities more than just unfortunate, we take heart and hope that it will mean a harsh but necessary pivot away from the craps table of buying what some stranger is recommending on an anonymous internet forum and towards the tried and true low fee passive approach but with the Pebble kick of being able to customise your portfolio to your own circumstances.
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