Bloomberg Businessweek - USA (2020-11-23)

F I N A N C E

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Edited by

Pat Regnier

Professional money managers aren’t beating the market.

The novice trader next door might be

At a time of peak complexity in markets—when a

pandemic rages, a recession seethes, and new-wave

experiments are conducted in fiscal and monetary

policy—it’s not the quants or the mutual fund man-

agers or the proprietary traders or any other Wall

Street constituency who are figuring out the situa-

tion first. It’s the amateurs.

A basket of the stocks that newbie traders love

most soared 62% for the year through Nov. 17,

according to Goldman Sachs, which created the

list. That beat the usually bulletproof S&P 500

by 50 percentage points and almost doubled the

return on a list of hedge fund favorites. Thanks to

bets on cruise operators, airlines, and electric cars,

screenshots of six-figure brokerage accounts inun-

date Twitter. In the age of behavioral economics,

the financial world is obsessed with diagnosing the

biases and talents that explain investing success.

In that context, two theories are usually offered

to explain how retail investors came to rule 2020.

The first is that individual investors, unlike

the pros, don’t have to worry about their careers.

Unencumbered by risk controls and unconcerned

with how their decisions would look to others,

quarantined amateurs flush with time were simply

freer than their suited counterparts to invest at the

March bottom. They correctly surmised that a recov-

ery would rescue the companies that bore the brunt

of the plunge. They “bought low” and reaped rewards

equal to their daring.

The second theory is that they had a stroke

of tremendous fortune. Believing a $5 price tag

made a stock cheap and $1 a share must be the

bargain of the century, newbie day traders made

virtually every error amateur investors are capa-

ble of, including mistaking the stock drops after

bankruptcy filings as buy signals in penny stocks.

Egged on by Twitter impresarios whose main exper-

tise is aggregating followers, everyone got saved

when the Federal Reserve’s rescue efforts and a

bit of happenstance caused virtually every one of

the decisions to pay off.

Ask the day traders, and they’ll say they know

what they’re doing. Assailed by the pros for believ-

ing stocks only go up, they point out that in a year

when 60% of sessions have been positive, closing

your eyes and buying has been exactly the right

investment model. Already, 240 days have gone by

BloombergBusinessweek November23, 2020

This Market Is for Noobs

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