We used to ride ATVs under the bridge where I grew up. My uncles and I would build a racetrack and run them hard. One thing I quickly figured out was to watch the path ahead of me and the other riders who might stop suddenly or crash. Right now, this is a bit of how it feels as a professional investment manager watching these individual investors move the market.
Individual investors, whom analysts call retail investors, are investing as if they were playing video games. There is a shaky truce in the Iran war, but the U.S. continues blockading Iran’s ports, and as I write this, Iran has fired on three cargo ships. Yet, looking at the U.S. stock markets, which are at or near all-time highs, you’d think investors have already moved on from the war. This is not normal.
According to the Wall Street Journal, four of the five biggest daily gains in the S&P 500 this year have happened during the Iran war. Interestingly, as I write this, I have had two strangely opposite headline notifications pop up on my computer screen: the first was that Iran attacked three ships, and just a few minutes later, a notification saying the Dow Jones and S&P 500 are both near record highs. Individual investors are seemingly unaffected by daily news
There are a lot more individual investors trading than at any time in history. Individuals are making nearly 4 million stock trades per day, which is 24% more than a year ago. That is a lot more money moving around the market, directed by less-informed investors. Trading apps have made it so easy to invest that it feels like an ongoing video game that you can play while you work, except there is a chance to “win” some money if things go your way.
Is it because these individual investors are excited about strong stock fundamentals? Maybe, but we have very little of that information right now. Earnings season is going well, but through April 20th, only 49 of the S&P’s 500 companies have reported results. The market is going higher before we know how well the other 451 companies are doing.
I think these individual investors are guessing on stocks because they don’t want to miss out on a market win. It is like “fear of missing out” for investing. Every professional investment manager, including me, is staying near neutral with a “wait and see” perspective to see where to shift. These individual investors have none of that. They are more “grip it and rip it.”
I say that because investors should hold tight to a central holding unless they have an edge, but right now, we have no edge. There is no informational edge because no one knows what Trump or Iran will do. There is no analytical edge because there isn’t enough information to analyze.
It seems like a case of herd mentality. Many of these individual investors are in their 30s and early 40s and seem to have little patience. They want to buy the dip so badly that they aren’t even waiting for it. They see a negative headline, pull out their phone, and tap “buy” in their stock app. It’s just too easy.
I remember how the market changed when smartphones came out. Investors started watching the markets during the day instead of just on the nightly news, and it made many of them freak out, call their financial advisors, and sell on emotions. I had to start paying attention to the knee-jerk reactions of the American people. This feels something like that. Individual investors are doing the same thing, but with much more risk and money. Now they don’t have to call an advisor; they can do their own trades. Some win, but most lose badly. This is just another thing financial advisors must account for in making investment decisions.
Once, when we were riding ATVs, I went too fast, and one of my cousins stopped in front of me. I was too close to stop, hit her rear fender, and flipped the four-wheeler. She shouldn’t have stopped, and I should have been watching better. I hope investors, both professional and amateur, are paying attention to each other.
Have a blessed week.
Richard Baker
This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
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