The Capital Note

From Marks to Sharks: The Rise of the Retail Investor

(Carlo Allegri/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: retail investors calling the shots, sidewalk robots, DNA’s day in court, pay toilets, and the bombing of Wall Street. To sign up for the Capital Note, follow this link.

Retail Investors — On Fire, But Not Yet Burnt (For the Most Part)
The Financial Times has published an in depth look by Katie Martin and Robin Wrigglesworth at the rise of the retail investor (a type delightfully defined by Jason Zweig in his The Devil’s Financial Dictionary as “anyone who invests relatively small sums of money without earning fees or other revenues to do so”). The traditional view has been that increasing retail interest in stocks signifies a market top (the famous story of old Joe Kennedy’s shoeshine boy and all that) and the traditional view makes a lot of sense.

I remember being asked by a friend (not a shoeshine boy, but not someone who had previously not taken much interest in stocks) whether he should buy some dot-com share at the height of that bubble.

I had never heard of the company in question. I asked him what it did. He replied that he had no idea, but that he had heard “good things.” Checking the name out on my Bloomberg terminal later, I saw the stock was on a tear, and I called my friend to tell him that, but warned him that not knowing what a company did was not perhaps the soundest starting point for an investment decision. He bought it anyway. I do not know whether he got out in time. A year later that was not a tactful question to ask.

But on to 2021, and Martin and Wrigglesworth:

2021 has proven to be a breakthrough year for the amateur traders. Credit Suisse estimates that at times this year they have accounted for a third of all US stock market trading. Having demonstrated an ability to move markets, retail traders are now a community of market participants that savvy investors want to understand and plug in to their own trading models. The flows are now large enough to count [retail trading now accounts for almost as much volume as mutual funds and hedge funds combined].

“The can of worms is open,” says Eric Liu, head of research at Vanda Research, which has turned its attention to tracking the behaviour of amateur investors. “If you break free of this belief that fundamentals matter to markets, then you look to this.” Hedge funds, sovereign wealth funds, banks and other market professionals are poring over this kind of data, he says.

Can of worms!

Fundamentals do matter — and will continue to matter — the question is, how much do they matter to the price of a stock at any given moment. As I have noted before the idea that there is a “correct” price (or price range) for a stock (or anything else for that matter) has a faintly pre-modern feel to it. A stock is “worth” what someone will pay for it at the instant a trade is done. Ten minutes later it may be worth something entirely different. My own preference when looking at stocks is to start with cash flow and return on capital employed, but to think that such considerations cannot be swept away, sometimes for a very long time, by, say, a fad, a theme, or the sheer weight of buying (or selling) is to be asking for underperformance.

Martin and Wrigglesworth quote Alain Bokobza, head of global asset allocation at Société Générale:

Rather than criticising retail investors and their behavioural patterns, it is better to slot them into the money equation.

That, to me, is clearly correct, but how big should that slot be?

Many in the industry point out that the market-moving power of amateur traders is more than a fleeting fad focused on a narrow set of stocks. Vanda’s Liu compares it to the transformative shift away from active money managers into passive investing that followed the 2008 financial crisis. “We are on a moving train,” he says. “In the past year, we have yet to see a major thematic move that’s not been sponsored by retail.”

For other participants seeking to divine retail traders’ next steps, Liu’s analysis suggests that the amateurs are drawn “from one hot theme to the next”. Last spring, for instance, they hopped on to the so-called “reopening trade”, buying shares in airlines such as Delta and cruise ship operators such as Carnival in the expectation — or hope — that lockdown conditions would lift quickly. At times they accounted for a half or more of all trading in these stocks . . .

A Deutsche Bank survey found that almost half of US retail investors were completely new to the markets in the past year. They are young, mostly under 34. And they are aggressive: much more willing than those more experienced in stock markets to borrow to fund their bets, to make heavy use of options to fire up wagers on stocks, and to use social media as a research tool to find trading ideas.

One question to ponder is what they are researching? I doubt it is cash flows, but, again, that may not matter for now. And the motivation for many of these investors is not what it was (in theory) for older generations:

In this and other ways, it is clear that the new generation of retail investors is different. In the 1990s — the last big moment for amateur speculation that ended with the dotcom boom and bust — the mean retail investor was 50 years old and had around $47,000 to play with. . . . Now, he or she is younger, around 31, and has less to invest — between $1,000 and $5,000, and the mindset is new.

“The motto of the Reddit crowd is YOLO. ‘You only live once’ is not a motto for saving for retirement,” says Jordi Visser, chief investment officer at Weiss Multi-Strategy Advisers, a hedge fund. “I don’t think enough people take to heart what these words mean. This millennial crowd wants to invest in the long shots, not save.”

To be frank, my recollection is that plenty of those who participated in the dot-com bubble were rolling the dice, hoping for the big win, rather than providing for their retirement. That said, the fact that the increased participation of younger investors this time round means less thought of retirement is hardly surprising, and nor is the fact that playing (at least in absolute terms), often for zero commissions, for lower stakes increases the “gamification” of investing, something that worries regulators and legislators more than it should. (I should stress that that is not an argument for easing regulatory safeguards on share trading, and that it may well be an argument for “health warnings” rather clearer than the usual incomprehensible — at least to the layman — boilerplate.) There may also need to be tighter restrictions on margin trading:

Access to leverage — in the form of “margin” loans from brokerages or financial derivatives like options — is also freer than ever before. US margin debt soared to a record $799bn in January.

As I mentioned in that earlier Capital Letter:

John Kenneth . . . Galbraith was frequently wrong, but not when he wrote this:

“Even the most circumspect friend of the market would concede that the volume of brokers’ loans — of loans collateraled by the securities purchased on margin — is a good index of the volume of speculation.”

That said, gambling, (even if more genteel verbs – speculating — may be used) has always been part of the stock market, and always will be. There are utilitarian arguments to defend that, but libertarian ones too: There ought to be a limit to the extent to which the state should intervene to protect adults from themselves.

If I had to guess, this surge will ebb, certainly after a crash, but also when people have more things to do with their day, not least showing up at the workplace.

Nevertheless, I doubt if things will return to quite what they were.

As Martin and Wrigglesworth write:

Retail investors can now easily trade on the bus, at home, or over university lunch breaks on sleekly-designed smartphone apps, while the dotcom boom happened in the pre-broadband era and almost a decade before the birth of the iPhone . . .

The power of social media brings all these factors to the boil. Whether it is Reddit’s WallStreetBets forum, Twitter, WhatsApp messaging groups, live trading sessions streamed and discussed on sites like Discord or Twitch — primarily used by video gamers — social media is adding vim to the trend.

While there were internet forums and newsletters in the 1990s, the current social media environment is radically more powerful, investors and analysts say. For many, there is no way to recork the retail trading genie, and the mainstream investment industry simply has to adapt.

It will, but by less, I reckon, than seems likely at the height of a bubble.

Meanwhile, GameStop rose by about a quarter yesterday, closing at $246.90, up from Monday’s close of just over $194.

Old fogies however will have been interested by this report from Bloomberg earlier yesterday, about a security that ranks above the GameStop stock on the company’s balance sheet.

GameStop does have some corporate debt outstanding: A $216 million bond with a 10% coupon that was issued in June and matures in March 2023, and a $73 million security with a 6.75% coupon from 2016 that comes due in less than a week. Obviously, there’s little doubt that the latter obligation will be paid on time and in full.

GameStop’s two-year bond, on the other hand, tells an interesting story — one that strikes a much more cautious tone about the likelihood that Chewy Inc. founder and activist investor Ryan Cohen can revitalize the video-game retailer through a digital transformation. For all the whipsawing of the company’s stock price over the past two months, its debt has been relatively stoic, suggesting a rocket-ship-like turnaround is still anything but certain. The bonds last traded on March 5 at 103.5 cents on the dollar to yield 6.34%, or about 620 basis points above comparable Treasuries. That price is actually a bit lower than it was on Jan. 13 when the stock was still trading at about $30 a share.

The bond is not that liquid (Allianz SE and Toronto-Dominion Bank, which combined own about $63.3 million of the $216 million in outstanding debt, according to publicly available data compiled by Bloomberg) and, nor does it offer the potential for capital appreciation offered by a stonk that is going to the moon, so it is less likely to attract the madding crowd than GameStop’s equity.

If GameStop’s outlook is truly as bright as Reddit’s day traders would suggest, there’s ample room for the bonds to rally. The debt is rated B- by S&P Global Ratings and B2 by Moody’s Investors Service, yielding 6.34%. A Bloomberg Barclays index of single-B rated securities, which includes these GameStop bonds and has a longer average maturity of almost six years, yields 4.77%.

Bloomberg’s Brian Chappatta concludes:

All this is to say that while #Gamestonk is still doing its thing, it might just be worth watching GameStop’s bonds for a read on the company’s fundamental outlook, devoid of day traders.

“Day traders” is not quite the right term. Today’s phenomenon is different. As Martin and Wrigglesworth make clear, GameStop investors can be in for the long haul, but still . . .

Around the Web
Sidewalk robots


As small robots proliferate on sidewalks and city streets, so does legislation that grants them generous access rights and even classifies them, in the case of Pennsylvania, as “pedestrians.”

Why it matters: Fears of a dystopian urban world where people dodge heavy, fast-moving droids are colliding with the aims of robot developers large and small — including Amazon and FedEx — to deploy delivery fleets . . .


Everyone gets a DNA in court

AFTER THREE BITTER years and tens of millions of dollars in legal fees, the epic battle over who owns one of the most common methods for editing the DNA in any living thing is finally drawing to a close. On Monday, the US Court of Appeals for the Federal Circuit issued a decisive ruling on the rights to Crispr-Cas9 gene editing—awarding crucial intellectual property spoils to scientists at the Broad Institute of Cambridge, Massachusetts.

The fight for Crispr-Cas9—which divided the research community and triggered an uncomfortable discussion about science for personal profit versus public good—has dramatically shaped how biology research turns into real-world products. But its long-term legacy is not what happened in the courtroom, but what took place in the labs: A wealth of innovation that is now threatening to make Cas9 obsolete.

This latest legal decision, which upholds a 2017 ruling by the US Patent and Trademark Office, was an expected one, given how rarely such rulings are overturned. And it more or less seals defeat for researchers at the University of California Berkeley, who also have claims to invention of the world-remaking technology.


For all the ferocity that fueled the fight from its outset, Monday’s decision was met with muted interest from inside the halls of science to the crowded trading floors of Wall Street. That’s because a lot has changed since the first gene editing pioneers filed the original Crispr-Cas9 patents. In 2012, Cas9 was the entire Crispr universe. That little enzyme powered all the promise of Crispr gene editing, and the stakes for owning it couldn’t have been higher. Scientists didn’t yet know that biology would prove to be more creative than patent lawyers. They still had no notion of the vast constellations of constructs and enzymes that could be engineered, evolved in a lab, or harvested from the wild to replace Cas9 . . .

Pay Toilets and the New York Times

The Grumpy Economist:

Nicholas Kristof in Sunday’s New York Times asks a pressing — often quite pressing — question. Why are there no public toilets in America? He is right. He calls for a federal infrastructure plan to fix the problem: “Sure, we need investments to rebuild bridges, highways and, yes, electrical grids, but perhaps America’s most disgraceful infrastructure failing is its lack of public toilets.”

Now, put on your economist hat. Or even put on your reporter hat. Ask the question why are there no public toilets in America?

I hope that didn’t take too long. Answer: Because it’s illegal to charge for toilets. There were once abundant public toilets in America, as there are in many other countries. And you pay a small fee to use them. A small fee that everyone in Nicholas’ stories would have been delighted to pay.

This answer is not hard to find, and indicative of the spirit at the New York Times that neither Kristof nor anyone else involved thought to find out. My first google search was “pay toilets illegal.” The first three results gave the answer.  Aaron Gordon tell the story nicely. It’s a classic of 1960s activists demanding that bathrooms be declared free, bemoaning inequities in who needs to use toilets more, and the inevitable result. (Interestingly, many pay toilets were introduced by railroads, who first tried to give them only to customers and employees, but then learned they could make money allowing everyone to use them.) Also  Sophie House at Bloomberg City LabMarginal Revolution covering the same.

But you have to ask the question!

The absence of pay toilets is in fact a delightful encapsulation of so much that is wrong with American economic policy these days. Activists decide free toilets are a human right, and successfully campaign to ban pay toilets. For a while, existing toilets are free. Within months, upkeep is ignored, attendants disappear, and the toilets become disgusting, dysfunctional and dangerous. Within a few years there are no toilets at all. Fast forward, and we have a resurgence of medieval diseases that come from people relieving themselves al fresco. Now let’s talk about rent control . . .

Random Walk
The bombing of Wall Street


If you go downtown in Manhattan to what used to be the offices of J. P. Morgan & Company, at the corner of Wall and Broad streets, you will find the sculpture called Fearless Girl standing there. She bravely faces the Stock Exchange across the way while at her back, along the wall of the empty former Morgan building, the smooth surface is pocked here and there with small limestone scars.

These are in fact scars from the Wall Street bombing of September 16th, 1920, which was, until the devastation at Oklahoma City seventy-five years later, the most deadly terrorist attack in American history. The country seemed to recover surprisingly quickly, not having to relive video of the horror dozens of times on cable. The day after the explosion, the Stock Exchange and curbside trading nervously resumed, “[l]ike a strong man who sticks to the line after binding up his wounds and sewing on his wound stripes,” reported the New York Sun. New Yorkers came by the thousands to the bomb scene that day to show their defiance and exorcise their fears. An event honoring “Constitution Day,” the 133rd anniversary of the document’s adoption, had been previously scheduled for that day in the area near the George Washington statue, which was surprisingly undamaged by the blast. The small celebration swelled into one of the largest gatherings in Wall Street’s history. The crowd sang “The Star-Spangled Banner” and listened to speakers defy the nameless radicals responsible for the bomb.

Twenty-four hours before, just after noon on September 16, 1920, a horse cart filled with dynamite and sash weights had exploded in front of the Assay Office, near the intersection of Wall and Broad, killing thirty people instantly and injuring about 300 others. (Eventually, some forty would die.) Across the street, Morgan already had its street level windows caged against the threat of bombs, but these made little difference that day after the wagon lumbered west on its cobbled journey into place . . .

— A.S.

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