‘Optimism has huge risks’: Why new investors, excited by GameStop’s rollercoaster ride, should rethink their rose-colored glasses
Stocks traded slightly lower Monday, but ended last week mostly at record highs. On Sunday, Federal Reserve Chairman Jerome Powell said the economy is positioned for a strong second half in 2021.
They are two confidence-boosting data points for the market as the economy keeps digging out of the hole created by the COVID-19 pandemic.
Guess who could have already provided you with such a rosy view?
The new crop of retail investors, a new survey suggests. Many of those investors jumped into the market during the pandemic, and participated in the Reddit-fueled rollercoaster ride of GameStop Corp.
The people who cut their trading and investing chops last year were markedly more optimistic about the stock market than investors who began playing the market before 2020, according to the Charles Schwab Corp. SCHW,
Some 72% of new investors were optimistic about the future of the stock market, compared to 63% of their more experienced counterparts; 57% say the market will increase in value this year, versus 44% of investors starting earlier.
“ The Charles Schwab survey adds more data to the profile of the emerging retail investor, and their investing attitudes. ”
The question is: How much money will they end up making — or losing — on that view?
Shares of GameStop fell Monday, a sixth straight loss, after Ascendiant Capital analyst Edward Woo turned bearish on the videogame retailer, citing a “hazy” 2021 outlook despite strong new consoles launches.
Woo cut his rating to sell after being at hold since June 2019. He also lowered his stock price target to $10 — far below Monday’s closing price of $145 — from $12, which makes him the most bearish of the seven analysts surveyed by FactSet.
But this does show one thing. “Optimism has huge risks to it,” said Albert Kyle, a finance professor at the University of Maryland’s Robert H. Smith School of Business.
“Because the last person who becomes optimistic and jumps in the stock market is the one who gets clobbered by the inevitable decline that will occur when people become pessimistic again.”
These new investors more frequently say they’ll spend more time this year managing their portfolios. Yet they’re more likely to have a buy-and-hold approach in 2021, compared to their 2020 start, the Schwab survey noted.
After retail investors gained prominence in 2020 and became the center of the GameStop GME,
The new investors polled in the survey were more likely to say they were financially harmed in the pandemic (39% versus 28%), experiencing a layoff, furlough or cut hours. Their median age was 35 years old. Just over one-half of the new investors (54%) said the top reason to invest was to increase their emergency savings.
“ Just over one-half of the new investors (54%) said the top reason to invest was to increase their emergency savings. ”
That complements February research from the FINRA Investor Education Foundation, the educational arm of the nonprofit organization regulating the brokerage industry. It found that two-thirds of new investors starting in 2020 were under age 45 and one-third had account balances lower than $500.
However, rookie investors displayed the most tender stomach when it came to risk, the FINRA Foundation survey said.
Some 40% reported a “willingness to take substantial or above-average financial risks” and 42% of longer-term investors agreed.
More so-called “experienced entrants” (51%), who already had a taxable trading account before 2020 and then opened another that year, said they had such a willingness.
Kyle, the University of Maryland professor, said it’s hard to glean the full takeaway from the Schwab survey because the poll participants might already be inclined to trade in the market, and therefore have a rosy view of it.
“ New investors who cut their trading teeth during the market’s recent recovery might be confusing luck with skill. ”
The “more naïve a trader” is more likely their expectations informed by the market’s latest activity, he said.
After a March 2020 plunge on the news of lockdowns and mushrooming COVID-19 cases, the stock market has clawed its way to new heights. So new investors who cut their trading teeth during this time might be confusing luck with skill, contributing to their rosy outlook, he said.
The COVID-related turmoil and GameStop saga certainly helped drive interest in the market. Individual investors accounted for 20% of daily trading volumes, up from 10% a year earlier, one analyst told MarketWatch.
To be sure, retail investors are hardly alone with an upbeat view. As financial stimulus funds keep injecting households with cash and vaccination rates climb, Goldman Sachs GS,
During 2021’s start, none of the analysts polled by MarketWatch foresaw another market drop this year.
But here’s the difference, according to Kyle: Major market players might have already “priced in” that growth and, besides, they devote massive sums and resources to gauge the best times to buy and sell. “Retail investors are playing the game of momentum trading,” he said.
Kyle advocates more caution among these new investors. Institutional investors tend to gain (or lose) far greater sums, but even a few thousand dollars could be a much greater share of a young, retail investor’s wealth.
GameStop may still be up almost 3,000% from a year ago, but that just highlights the inherent risk for new retail investors — and everyone else. “You are playing against professionals who are far more skilled than you are,” he said.
