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Retail Investors Are Long Confidence And Short Experience



  • In a "market mania," retail investors are generally "long confidence" and "short experience" as the bubble inflates.
  • We have seen a surge in securities' daily trading volumes since the beginning of the pandemic.
  • Many young investors will eventually gain a lot of experience by giving most of their money away to those with experience.

In a "market mania," retail investors are generally "long confidence" and "short experience" as the bubble inflates. While we often believe each "time" is different, it rarely is. It is only the outcomes that are inevitably the same.

I recently penned an article about Charles Mackay's book "Extraordinary Popular Delusions And The Madness Of Crowds." As noted, that book was an early study in crowd psychology. To wit:

"Essential is the understanding of the role psychology plays in the formation and expansion of financial manias. From the 1711 'South Sea Bubble' to the 2000 'Dot.com crash,' all bubbles formed from a similar 'panic' by investors to chase ongoing speculation."

A recent UBS survey revealed some fascinating insights about retail traders and the current speculation level in the market.

Seen This Before

William Bernstein, who updated Mackay's work, suggests that:

"Bubbles are characterized by extreme predictions, tend to dominate conversations and induce people to leave their jobs. The warnings of bubble skeptics get invariably met with scorn and derision."

The number of individuals searching "google" for "how to trade stocks" has spiked since the pandemic lows.

For anyone who has lived through two "real" bear markets, the imagery of people trying to learn how to "daytrade" their way to riches is familiar. From E*Trade commercials to "day trading companies," people were leaving their jobs to trade stocks. Kind of like this couple:

Such is just one example of many internet commentaries driving investors to "trade" stocks. Not surprisingly, we have seen a surge in securities' daily trading volumes since the beginning of the pandemic.

Importantly, these investors are not just buying equities but are using some of the risky vehicles to "leverage" the returns. As shown, option trading volumes have swelled.

None of this is new, different, or unique.

The same

This article was written by

Lance Roberts profile picture

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.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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Comments (24)

Tim.barnes9 profile picture
I see quite a few healthy things going on too. Rotation with the market holding up relatively well.

Retail investors participating is healthy.

Areas that did well recently are not now - gold, tech for example. And those areas not having done well recently now are - oil and value.

My take is we have a healthy market with a mountain of money still on the sidelines.

And I also believe the fear around rates rising is overblown. Japan are net buyers again and the fed will likely hit the long end.
@Tim.barnes9 , That's a bullish view.
An investor is one who employs capital to obtain a share of the interest on debt securities, or a share of net free cash flow from a business, either through appreciation of the shares or through receipt of dividends. A speculator is one who employs capital to obtain capital gains from price action.
@AllStreets , An investor endures pain over the long term during a bear market.
No retail investor will ever lose as much as Warren Buffet lost selling airlines and buying...nothing during Covid. While he has been busy lecturing everybody on “patience” and calling Bitcoin “rat poison”, the dumb money has been lapping everyone with tech and BTC.

I hate to say this because it isn’t quite accurate, but these whiny articles (“waaa retail investors”) are almost always an inverse buy signal...the whinier they are the more it shows the bears lacking confidence.
@ActLikeYouGotSomeSense Retail exuberance has peaked just before nearly every major downturn. Retail investors greed/fear are almost perfect signals to do the opposite - more so than articles on SA I would imagine

I agree with that, but re-opening the economy is the “macro story” and there aren’t many people who think earnings won’t improve. When people just start whining about “retail investors” as their only critique of the bull run, they are out of arguments and can only be saved by a pandemic or some tragedy that knocks the “bull case” off of being the dominant narrative.

(Edit: putting this more concisely, if re-opening the economy is going to lead to higher earnings, then the “exuberance” is extremely “rational” and it is the bears who are grasping at a pretext to try to prove causation from correlation (i.e., the market doesn’t tank BECAUSE retail investors are confident.)
Duggard profile picture
Experienced investors know when to add or reduce risk, know when to rotate, know the difference between a trade and an investment, and when to take a loss or book a profit.
This author knows only to be bearish as he as been for the past decade. Really?
@Duggard , Knows when to rotate?
six-oh profile picture
I bet the author yells at the kids to get off of his lawn.

Seriously though that tiktok video is hilarious and the sincerity of the people in it is priceless. This video could definitely become the meme of the Second Great Financial Crisis. Lol.

Lol. I suspect that it is just the medium itself (TikTok) that makes this a “what’s wrong with the kids these days” moment. I mean, the guy describes “momentum trading” fairly accurately but with no detail and there are semi-retired finance pros who use momentum trading as their strategy, just trading into inverse ETFs and shorting once the bull momentum stops which is usually a technical thing.

My suspicion is the guy could say the sun rises in the east but because he has a backwards baseball cap the usual sneering Boomers will turn out to sneer. Guy has probably made piles of money on Bitcoin, too.

Once your brain atrophies that much it’s time to retire.
Phil in OKC profile picture
Howdy Lance, I have been following you for quite awhile because I relate to your opinion opinion about the "Long Confidence and Short Experience" of many retail investors. I consider myself an inexperienced (now retired deep value income investor) since 2012. My question concerns this (often read in SA articles) statement from your article: "Why this trip down memory lane? . . . Because this is typical of the exuberance seen at the peaks of bull market cycles."

This bull market has been running, let's say, since 2012, give or take a few years. How do you know we are at the peak, and how long until we reach that peak and enter a bear market? Thanks.

As you know, your current concerns have been voiced since this bull market began. How many times can writers "cry wolf" before they are totally ignored by
It all depends on appetite for risk tolerance, the quality of the security, and ability to create realistic portfolios and build in stop- losses. Historically, the stock market has done very well in the last 30 years, and the best moments for massive profit have come when everyone is selling and getting out. Investing is like gardening...it requires weekly and sometimes daily tending.
Xempler profile picture
Tomorrow is promised to no one
thirdcamper profile picture
Nice summary of sound principles and worrisome trends.
"Retail Investors Are Long Confidence And Short Experience"

Institutional Investors mange their own career risk, hug benchmarks
and shirk accountability.

Personally I have seen an institutional investor lose their strategy positioning nerve at precisely the worst time to fold, even with their decades of experience and then you have LTCM.

Most retail investors don't play with OPM in such a way to skew good outcomes to themselves regardless of how their managed funds perform.
@Diego Montalbon, raconteur , When the margin calls come a calling and the trader has no more money he gets sold out whether he likes it or not.

Warren Buffett says: "Unlike the Lord, the market does not forgive those who know not what they do."
@greedyfellow , That's a good saying there by Buffett.
Buyandhold 2012 profile picture
Don't knock retail investors.

After all, even most professional money managers fail to outperform their benchmarks.

And the retail investor does have an advantage. With less money they can be more nimble.

Warren Buffett once said that with only one million dollars invested in the stock market, he could perform much better than with one hundred billion dollars in the stock market.
Crayfishkaliari profile picture
@Buyandhold 2012 its not about being retail its about having no experience
And when it's all over and we hit a long term cycle bottom, 80-90% of the market rally participants, chock full of investing "experience", will spend days counting their new found wealth never to enter the fray again. They have now become "experienced " in the ways of the bedevilling methods of Wall Street.
@nestor7 , Will they have an empty tank at the next market bottom?
Crayfishkaliari profile picture
@nestor7 they bedeviled themselves
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