How retail investors seized on covid sell-off

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Lex Hall: 2020 marked, among other things, a surge in the number of retailer investors entering the market. How do they trade, what do they buy, and do they indeed affect the market? I'm Lex Hall for Morningstar on the sidelines of the Morningstar Individual Investor Conference and with me to discuss that is nabtrade's Gemma Dale.

Gemma, welcome to Morningstar.

Gemma Dale: Thank you.

Hall: Now, you reported a spike in people jumping into the market in March and April. Was it simply because of the COVID sell-off?

Dale: I would think, yeah. It was a very dramatic and almost instantaneous response to the market falling away. So, we saw Google search of how to buy stocks absolutely skyrocket in March, suddenly this thing that maybe people checked once a couple of times a week. Huge numbers of people suddenly interested in buying shares. And the fairly obvious catalyst was shares falling. The headlines that used to terrify people, you know, stocks—billions of dollars wiped off the share market. The opposite happens now. People see it as the opportunity to buy shares at a discount, buy things more cheaply than they've been able to buy them before, and we've had plenty of investors waiting for that opportunity. Clearly, there were plenty of (non)-investors waiting for that opportunity, too.

Hall: You talked in your presentation about information and I was fascinated to find out how people got their information? Did Gemma, the hairdresser, suddenly just think, ‘oh, the stock markets plunged, I must get on?’ How did people get their information to know how to jump in?

Dale: Look, I think Google's got a lot to do with it. So, there are headlines, obviously, in the mainstream press talking about the cataclysmic fall in the share markets, sharpest fall on record, that kind of stuff. And when you see that, had you seen that 20 or 30 years ago, you wouldn't have had a lot of other sources to go and get more information. Now, people Google. They go and look at other sources and they will see commentators and pundits going, I think, the market has gone too far. I think the fall is being too steep, you know, you can now buy Qantas at the price it was 10 years ago. And people who were interested in buying shares go, maybe this sounds like an opportunity.

The other thing is that the industry—so, professional investors for decades have been saying that retail investors don't respond very well emotionally to a fall in markets that they haven't learned like a true professional to buy at the dip. When prices come off, they are at a discount, you should buy good-quality companies at that time and then hold them for the long term. People have been listening to that. Clearly, they've been listening for a long time and going, wait a second, now I can buy this amazing thing at a good price and I am very sure that at the end of COVID, we will all have a vaccine, we'll go back to normal and this company will be around and it will be making money then and I will be very glad I bought it.

Hall: We will talk about that actually. That's one point I wanted to pick you up on. But before that, is it also because of TINA, there is no alternative, low interest rates and the other thing you mentioned in your presentation, the lack of sports betting?

Dale: So, they're probably very separate things. The sports betting one is really interesting, and it's certainly been a hypothesis from regulators and pundits who were very concerned that when all the sports obviously had to cease activity, anyone who was an active sports bettor was suddenly looking around to continue their punting and the share market became a great place to do that. One of the reasons that that became such a big story is, there is a guy in the US called Dave Portnoy who started Barstool Sports, a sport betting company, and when the market collapsed for sports betting, immediately turned to the share market, reinvented himself as Davey Day Trader, true story, Davey Day Trader and all of his sports betting people, all of the guys who followed him, generally young men, went, well, this is fascinating and I'll pile into the market. So, it seemed to be a phenomenon in the U.S. We haven't seen it here so much. There didn't seem to be any obvious correlation between sports betting types and sudden new entrants to market punting all sorts of crazy stuff. So, we'll talk a bit later about what people were buying and it's definitely not sports betting type stuff.

In terms of TINA, that's a different thing and it tends to affect retirees and people saving to buy a house mostly. So, if you're saving to buy a house and you're getting next to nothing on your cash, that's really depressing, and you might consider taking more risk in order to accelerate your savings growth. And for retirees, you are losing money after tax and after inflation with rates at such incredibly low levels. So, this issue about TINA is a real—it's a genuine concern for a lot of people. It has the exact intention that central banks want to have, which is if we cut cash rates to 0, then you're forced into investing in some capacity and might stimulate the economy. And so, a lot of people have been forced to invest because the alternative is just unacceptable, they can't survive on that. Whether or not the share market fall was a catalyst for more TINA-type activity, I don't know. It's been around for a while. The cutting of cash rates to near zero will obviously accelerate that. But this is a group of people who were keen to invest anyway. So, I think it's an element, but I don't think it's a major driver.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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