Is It 1999 Or 2007? Retail Investors Flood The Market

Summary

  • Just like we saw in 1999 and 2008, "day trading" has had a resurgence from "message boards" on AOL to live blogs and video feeds on social media.
  • These "newbie" retail investors are not trading based on fundamentals, earnings, estimates, products or market values, but rather talking up stocks driven by pure momentum.
  • The problem with margin is that when you are wrong, you can lose more than 100% of your investment.

Is it 1999 or 2007? Retail investors flood the market as speculation grows rampant with a palpable exuberance and belief of no downside risk. What could go wrong?

Do you remember this commercial?

The Etrade commercial aired during Super Bowl XLI in 2007. The following year, the financial crisis set in, markets plunged, and investors lost 50%, or more, of their wealth.

However, this wasn't the first time it happened.

The same thing happened in late 1999. This commercial was aired 2 months shy of the beginning of the "Dot.com" bust as investors once again believed "investing was as easy as 1-2-3."

Why this trip down memory lane? (Other than the fact the commercials are hilarious to watch.) Because this is typical of the exuberance seen at the peaks of bull market cycles.

So, what are the signs we are seeing today.

  • Retail investors are chasing bankrupt companies like Hertz (HTZ) and Chesapeake Energy (CHK)
  • Hertz, a company in bankruptcy, is issuing stock with a disclaimer the shares are likely worthless.
  • Investors chasing companies with extremely poor fundamentals.
  • Investing tips coming from individuals with no experience.

Investing is simple. Just pick some letters out of a Srabble bag, buy it, and it goes up.

It's so easy a "baby can do it."

Or in this case, it is like "stealing from the rich to give to the poor."

Retail Investors Go Robinhood

As Barron's recently noted:

"Free trading app Robinhood has added more than three million retail accounts in 2020, and now has over 13 million. The median age of its retail customer is 31. The Covid-19 lockdowns and the plunge in markets in March persuaded millions of new investors to open accounts. Some of the action appears to be from people who would otherwise be gambling or betting on sports-both of which

This article was written by

Lance Roberts profile picture
29.75K Followers
Unique, unbiased and contrarian real investment advice

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

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