“But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street—a community in which quality control is not prized—will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.”

Warren Buffett, Letter to Berkshire Hathaway Shareholders, 2000. For a longer version of this extract, see the following article.


There are many coronavirus variations on ‘This Time It’s Different’, but something is happening in stock markets on a scale never seen before. Call it Robinhood traders, the corona generation, YOLO (You Only Live Once), TINA (There is No Alternative) or simply retail investors, but trading by individuals has hit global equity markets in massive numbers. Some daily moves are called a battle between the smart professional sellers and the dumb retail buyers, but since the 23 March bottom, the dumb money has been right. So far.

Professional versus amateur

Most macro articles coming into the Firstlinks’ mailbox recently from professional investors carry warnings about the disconnect between an economy in recession and a booming stock market. We have published many such as herehere and here.

Experienced market experts who have been through numerous investment cycles consider the market's recovery seriously overdone. It's called 'the most-hated rally' because many people have underestimated it. Magellan’s CIO, Hamish Douglass, was quoted in The Weekend Australian on 13 June 2020:

“Those who know are scratching their heads wondering what is happening while the uneducated are grading on guesses ... Uneducated investors are getting excited. The optimism is based on no fundamental facts ... I don’t think a V-shaped recovery is likely, or a depression, and we are likely just to muddle through.”

Douglass has increased his cash holding from 6% to 17% during the pandemic, and his former partner and now Portfolio Manager of MFF Capital Investment (MFF), Chris Mackay, was holding cash at 46% of his portfolio at the end of May.

A leading US financial industry newsletter, SA Macro View Daily, in which articles are written by fund managers and other experts, led its Friday edition last week with these three warnings:

GH Fig 1 Macro View Daily headlines

In a Firstlinks survey in late April 2020, two-thirds of responses said a new low is coming. Our audience is older and wealthier than at other newsletters, implying SMSF trustees, retirees and advisers were not in a buying mood.

All of which suggests that the rapid rise in the market was at least influenced by another player and perhaps less-experienced retail investors were not the bunnies this time. It's newbies versus fundies.

Evidence of increased participation by retail

Bestselling author and Barefoot Investor, Scott Pape, has a large retail following, and he recently started his newsletter by saying:

“Something weird was happening at Barefoot. While the headlines were full of people hoarding toilet paper, we were seeing a huge spike in people asking me how they could buy … shares?”

In this article on 13 May 2020, Gemma Dale of online broker nabtrade wrote about retail investors:

“Far from avoiding the market as a consequence, nabtrade has experienced a 300% increase in share trading volumes and a 500% increase in new investor applications.”

In May 2020, the Australian Securities & Investments Commission (ASIC) took the unusual step of issuing a report on retail investor trading during COVID-19. It includes:

“The average daily securities market turnover by retail brokers increased from $1.6 billion in the benchmark period (Ed. 22 August 2019 to 21 February 2020) to $3.3 billion in the focus period (Ed. 24 February 2020 to 3 April 2020). Retail trading as a proportion of total trading increased marginally, from 10.62% to 11.88% … Retail brokers were net buyers of securities over the focus period, buying $53.4 billion and selling $48.4 billion.

The rate of creation of new accounts (as indicated by their identifiers) is roughly 3.4 times higher during the focus period (compared to the benchmark period). In the focus period, new accounts represented 21.36% of all active accounts.” (my bolding).

In the US, financial market commentary hotly debates the new impact of retail investors. One estimate is that since the coronavirus hit, 10 million new accounts have been opened at fee-free brokers, many by millennials and younger people who are bored at home during the lockup and unable to watch their usual sports and bet on the outcomes. As the market has recovered quickly, social media sites are filled with stories of people making large amounts of money and FOMO has struck.

The question is … are there now enough of them to drive the market?

What are Robinhood, Reddit and TikTok?

For most retirees and professional fund managers following traditional media, this new phenomenon of ‘uneducated’ investors punting around looks misguided. What do these newbies think they are doing in our sophisticated market? What do they know about intrinsic value? The answer is, they don’t know much, and they don’t care.

These new Robinhood traders are having a ‘bro down’ party in the rising market, as satirised in the following variation from an episode of South Park.

GH Fig 2 4 point plan southpark

South Park’s ‘Go Fund Yourself’ episode satirised Silicon Valley’s boy’s club. Now memes are doing the same to day-traders. SOUTH PARK/COMEDY CENTRAL

In case the meaning of this 4 Point Plan written in 'bro speak' is vague, here goes:

  1. 'Download Robin Hood' refers to the US stock market trading app (should be Robinhood) which has experienced incredible growth since the virus hit. It is free to trade and while in theory all users must be over 18, social media suggests older people are giving access to their friends and children.
  2. 'Deposit stimulus' means the special payments made to unemployed people to support them during the crisis, suggesting the 'found money' is used to day-trade the market. In Australia, there is anecdotal evidence that the same is happening with JobKeeper and early access to super. Some people have more 'found money' than ever before. 
  3. 'Buy stonks' is a deliberate misspelling of stocks, but it’s more than that. It captures the impetus on chat sites such as Reddit where thousands of people read a tip which might sound ridiculous, but the consensus and comradery give it meaning. For example, someone makes a case for buying airlines when none of them are flying, based on the argument that Trump will save them, then followers jump aboard and airline shares rise rapidly. The fact that Warren Buffett just sold out gives the story even more gleeful momentum.
  4. 'Bro down' is a meeting of people, usually males, with some common bond, in this case, ramping up stories on social media of which stocks to buy and then boasting about it.

The result is a bunch of new players making money day-trading and laughing at the world of fund managers and experts. Sure, they are inexperienced, but they work on the theory that stocks only go up, and if it’s a terrible stock that just fell 50%, then that’s even better. It has so much potential.

It sounds crazy to anyone taught to value a company based on the net present value of its expected future cash flows, but in this world, none of that matters. The new traders drove up the price of Hertz after it declared bankruptcy with massive debts and no revenue, and the share price rose so rapidly that Hertz planned a new capital raising.

Where are these communities hanging out?

TikTok is a massive global success story with a billion members who post short dance moves, lip sync routines, cooking sessions or whatever. It’s also dominated by young people and millennials, and Robinhood advertises heavily to this market. The chat function on TikTok includes stories of quick daily market gains with videos on ‘How to Trade’ and 'Financial Advice', some of which are agonisingly naive.

Reddit is a large collection of online public forums where people share information and comment on posts by other people. It has become a global feedback site on almost any subject and the Robinhood site on Reddit has 300,000 members. A popular Reddit Australian site is ASX_bets with about 8,300 members. Reddit claims to be the number one resource for traders under 30, who can legitimately collude with extreme comradery.

And what of Robinhood? This is now a serious business. It has increased its user base by millions each month since March and embarked on a new share issue valuing the company at US$8 billion. It is privately held, and the app is not available in Australia. Robinhood makes money by selling data to high-frequency traders, which may translate into other activity by large players.

What do the online conversations look like?

It’s a virtuous circle while the music plays. Unless you follow the right people on Robinhood, Reddit, Twitter and TikTok, it’s hard to know what’s happening. Let’s screenshot some of the conversations to give a flavour, but take these as anecdotes rather than facts.

A former Goldman Sachs Partner, Joseph Mauro, reported that his 10-year-old son can no longer play the hit game Fortnite during the day because his friends are on Robinhood:

GH Fig 3 Joseph Mauro tweet

Hedge fund manager and writer of the well-known Felder Report, Jesse Felder, tweeted:

GH Fig 5 Jesse Felder tweet

Here are some extracts from the Robinhood user pages on Reddit as new players reach out for advice, such as:

GH Fig 6 Robinhood user pages on Reddit 1
GH Fig 7 Robinhood user pages on Reddit 2
GH Fig 8 Robinhood user pages on Reddit 3
GH Fig 9 Robinhood user pages on Reddit 4

Even when there is a market sell-off, we see claims that Robinhood traders caused it (although this comment is probably ironic):

GH Fig 9 1 Michael Olenick tweet

Their spiritual leader, Dave Portnoy

Dave Portnoy is the founder of a successful sports betting business called Barstool Sports. At the time when the pandemic hit, he had only bought one share in his life. Following the cancellation of most sports events, he turned to day-trading, doing live broadcasts about his portfolio to his 1.5 million Twitter followers as Davey Day Trader Global (#DDTG). He’s a big-time influencer. His handle is @stoolpresidente but watch the foul language. He tells how he is "just printing money", and "With the volatility, it is kind of like watching a sports game."

Portnoy’s techniques feed directly into the needs of his audience for instant success, big ideas and brashness, with strategies that make professionals wince. At a time when few fund managers wanted to touch airlines and cruise companies, he saw the selloff as an opportunity, and thousands followed him into these stocks.

GH Fig 10 Dave Portnoy tweet

Here is a video of Portnoy at "the most successful trading desk in the world".

Ox2 Cju Yi bigger
Dave Portnoy@stoolpresidente

I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.

Embedded video
1,039 people are talking about this



On 26 May 2020, Portnoy posted a video about the JETS fund which gives exposure to industrial stocks such as airlines. Daily turnover increased for US$50 million to about US$200 million and the price increased 18% in the next two weeks.

In Australia, brokers claim the Buy Now Pay Later stocks such as Afterpay and Zip have benefited from new traders adding to demand, knowing from their own use that these businesses are serious disrupters. Strong retail interest is reported in travel stocks such as Webjet and Flight Centre. During the heavy market fall for most of March, while professionals sought out traditional strong balance sheets, new players ran with beaten up stocks such as Kogan and The Reject Shop which have since rallied strongly.

Can this retail activity really have an impact?

Australia’s largest retail broker, CommSec, manages only about 5% of market turnover, despite holding well over one million accounts. Overall, ASIC estimates that about 90% of trading is done by institutional brokers. However, other reports such as by broker Bell Potter suggest retail influence is higher. Its Coppo Report recently showed retail brokers as net buyers of $4.6 billion from 23 March to 5 June while institutional brokers were net sellers of $6.3 billion. 

GH Fig 11 SPASX200 index retail vs institutional brokers

Source: Bell Potter, Bloomberg, The Australian Financial Review

Two factors suggest retail influence is larger than their market share implies:

  1. Share prices are set by the marginal traders. For most stocks, the amount of turnover each day is a small fraction of the total market capitalisation. Prices can move on modest volumes, especially in small-cap stocks with poor liquidity. A collection of retail buyers or sellers following the recommendation of an influencer could move the prices of some stocks significantly. Millions of small amounts add up, especially when supported by a vocal social media presence.
  2. High Frequency Traders (HFT) are watching the sentiment in places like Reddit, Robinhood and TikTok and either trading ahead of retail or taking it as a guide. Then algorithms and quants that follow market momentum may kick in added support. Robinhood sells its data to HFTs. CNBC commentator Jim Crater recently suggested Wall Street veterans have started buying popular Robinhood stocks early in the day, as the online broker publishes the quantities held by its clients.

Several studies have tried to calculate whether this new group is making money, but the conclusions are complicated. Barclays reported no relationship between the aggregate holdings of stocks by Robinhood traders and the returns on those stocks. Soc Gen said these traders tend to hold both the best-quality stocks (familiar names such as Amazon, Facebook and Google) as well as the poor-quality names they are better known for. It's more likely the new traders are simply following a rising trend and doing well from it. 

How will it end?

Anyone who has spent more than five minutes in stock markets thinks this will end badly, especially when leverage is involved. Although it’s possible to make money in a falling market (say, using bear ETFs or put options) most new players are using a few thousand dollars and going long favoured stocks. In the next severe fall, a valuable lesson will be learned. Dave Portnoy’s estimated worth is over US$100 million after selling his sports betting business, so it won’t worry him to drop the odd million.

We also know there is a major FOMO at play here, where friends on social media boast of their gains and others hate to miss out. This will evaporate when losses become the norm. 

The old adage was to sell when the taxi driver starts talking about his favourite stocks. Now the contrarian indicator is millions of overconfident and inexperienced gamblers who have only seen a rising market.

Also consider what has inspired this new generation of market speculators. The US Federal Reserve will do ‘whatever it takes’ to hold up the market. It is even taking the crazy step of buying corporate bonds. The money-printing machine knows no limits to supporting asset prices.

And going into the November presidential election, one of the candidates will set his campaign on making sure the stock market does not fall.

GH Fig 12 Donald Trump tweet

Regardless of what you think of Donald Trump (and there is much to dislike), tens of millions of Americans support him and his Make America Great Again rhetoric. He will do all he can to ramp up the economy for at least the rest of the year. Anyone ruling him out for another term hasn’t seen Joe Biden without a teleprompter.

Eventually, most of the bros will move on when the stonks fall. Given Mr Portnoy is a gambler, let's finish with the words from the Kenny Rogers song:

You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
You never count your money
When you're sittin' at the table
There'll be time enough for countin'
When the dealin's done