Panel discussion style question: The "retail" investor in todays market

[svosavvy]

This is a free for all question that I probably would have posted on Seeking Alpha 15 years ago when it was a free and open community.  The good old days back when you could list the books you have read like credentials.  I am attempting to wrap my mind around an idea.  What is the role of the "retail" investor in today's market.  The term "retail" is a poor one imo.  It can refer to anyone who is not a bank, trading/clearing house, "institution", etc that is operating within the market.

"Retail" can mean 1. mustachians or any other Joe blow investing in their retirement funds.  Or it can mean 2. meme stock Wall Street bets type activity or 3. anything in between.  The latter (2,3) used to be referred to as the "weak hands" back when my hair wasn't so gray.  What I am seeing from various places on the google machine is a pretty clear indication that in 2011 retail participation in daily volume was around 11%.  (In 2009 that fell to 2% which is obviously an outlier and barely needs mentioning).  We have seen that double to 22% in 2021 and now I am having trouble laying my finger on the current number.  I am seeing 22% and north of 30% from some.  My favorite guess is "The Retail Investor Report" auth_Einhorn & Fisch.08/2023 which pegs it at 25%.  A nice round number for my dull brain. 

Spoiler alert, here is the meat of the question in this ramble:  The gray hairs who write books often mention in your garden variety notable downturn getting stock tips from their taxi cab drivers and waiters.  This imo is code for "retail participation" not the healthy kind but the second kind.  Markets move on liquidity like armies march on their stomach imo.  Liquidity enters the market stocks go up.  Liquidity leaves the market stocks go down.  Trim tabs reports have always been helpful for this but I am too cheap to ever buy those.  Do we see event/s that disenfranchises and/or forcefully remove this new class of retail investors from the market.  Another way: what happens if retail takes their football and goes home?

I am not all doom and gloom I still believe in "the way" (long term s&p 500 bull) though as mentioned in previous recent posts I am pulled out of VOO and into ultra short term corporates 30% (JPST), 40% money market (VMFXX). Untouched Long/cash equivalents  positions include:preferred stock position 5% (JPM.J), cd ladders in place since last year 20%.  5% directional sso/sds daily plays for mental esoteria high information diet brain cancer inducing tire squealing smoky burnout positraction donuts because that brings me odd pleasure.  Anyone calling this market timing would be fair in their assessment.  From where I am at in my stage of life I see temporarily sitting on the sidelines as capital preservation.  Ultimately, I will return to s&p index fund exposure at some point as I see it is the best way to create long term value and have been the beneficiary for decades now. 

All that being said: I am of the mind that globalization like we have seen the last 25 years has created mountains of wealth and prosperity.  It has also created mountains of debt and is most likely unsustainable in its current form and requires change.  I have seen what I believe is a "meaningful" (understatement) sea change in this mind set which I find perilous.  I think ultimately at some point we will return to something resembling what we had after we have worked our way through ripping it apart and putting it back together.  We are obviously not in Kansas anymore so please save political/idealogical diarrhea for another post unless it is actually really funny b/c I love a good joke.  As usual I am a non credentialed layperson, for entertainment purposes only. 

[GilesMM]

I’m not sure but I think your question is “all things being equal, what happens if some investors sell their stock?”  I think the answer is “stock prices fall if demand is reduced”.

[Telecaster]

Another way: what happens if retail takes their football and goes home?

Short term: Market does down (probably).  Long term:  Essentially nothing.   

[Financial.Velociraptor]

I'm on a couple discord feeds that have a small but vocal technical analysis cohort.  The holy grail seems to be average VOLUME WEIGHTED average price as the 'correct' way to read the tea leaves.

Point two: the folks in your groups 2/3 (the weak hands) make up an an increasingly larger part of daily volume.  But not because they control trillions.  They control a few billion and churn it relentlessly.  You could make an argument zero cost commissions are driving some irrational behavior.

If the WH stop selling the same shares back and forth to each other at essentially the same price, the numerator and denominator in the calc for AVWAP both go down.  But the end result on what "the price" is for the day might be little changed.  That is, just because the WH are active in the market doesn't mean they are moving the averages.  Clearly they move the price of Game Stop and some eventually doomed to fail movie theaters.  But they are trivial to the Mag Seven. 

Takeaway: if the wall street bets people take their ball and go home, i say "good riddance!"

Takeaway 2: Keep your position size small if you play on the 'pink sheets'.

[MustacheAndaHalf]

I believe it was John D Rockefeller who said when his shoe shine boy started giving him stock tips, he knew it was time to sell.  There are people with decades of experience and no experience, both called retail investors.  I think what you're describing isn't the existence of retail investors, but rather "irrational exuberance" or "the madness of crowds" reaching peak enthusiasm in stock investing.

Personally, I found books by Larry Swedroe convincing.  Years ago, I had a "small/value tilt", where I had slightly more allocation to small-cap stocks with value characteristics, but mostly stuck to the total stock market.  The problem was that small/value can trail the market for decades, then recover over a few years.  If it ever breaks down, it might take 40-60 years to know for sure.  I read Larry Swedroe's "Your Complete Guide To Factor-Based Investing", and found the momentum factor more compelling: it has beaten the market in 4 of 5 years, but that 5th year will make you question keeping it.  If momentum ever fails, it will be clear within a few years.  I prefer that failure case, and that consistency.

[ChpBstrd]

the folks in your groups 2/3 (the weak hands) make up an an increasingly larger part of daily volume.  But not because they control trillions.  They control a few billion and churn it relentlessly.  You could make an argument zero cost commissions are driving some irrational behavior.

I definitely agree with this. @svosavvy would you have been more reluctant to cash out your VOO if you had to go to a broker's office downtown and pay a $1500 commission? I'll answer for you: Of course that would have inhibited this trading behavior. You would have thought to yourself, "I can't afford to trade like this every few months" and you'd have been right. In hindsight, you'd have been much better off if you had been inhibited this way.

If the WH stop selling the same shares back and forth to each other at essentially the same price, the numerator and denominator in the calc for AVWAP both go down.  But the end result on what "the price" is for the day might be little changed.  That is, just because the WH are active in the market doesn't mean they are moving the averages.  Clearly they move the price of Game Stop and some eventually doomed to fail movie theaters.  But they are trivial to the Mag Seven. 

First, I had trouble reading "WH" as "weak hands" instead of "White House" because in both cases it seems likely that shares are being traded based on information others in the group are swapping. {funny political joke}

Yet it's interesting that hopeless meme stocks like AMC and GME have not yet gone down to their original prices or anything in line with their fundamentals. Even as they've diluted more and more shares to the social media sheep investor class, that has only served as a catalyst because now they're better capitalized and have the cash to burn for the next few months of losses.

I suspect an equilibrium was reached because (a) these companies are so obviously hopeless that it attracts a lot of short sellers, which raises the short interest rate shareholders can earn plus increases the odds of another squeeze, and (b) these companies are so volatile and have such liquid options markets that there are large gambling premiums available. So the owners of these shares have a plausible way to earn income and this possibility contributes to the value of the shares more so than the company's nonexistent discounted future cash flows.

[svosavvy]

the folks in your groups 2/3 (the weak hands) make up an an increasingly larger part of daily volume.  But not because they control trillions.  They control a few billion and churn it relentlessly.  You could make an argument zero cost commissions are driving some irrational behavior.

I definitely agree with this. @svosavvy would you have been more reluctant to cash out your VOO if you had to go to a broker's office downtown and pay a $1500 commission? I'll answer for you: Of course that would have inhibited this trading behavior. You would have thought to yourself, "I can't afford to trade like this every few months" and you'd have been right. In hindsight, you'd have been much better off if you had been inhibited this way.

If the WH stop selling the same shares back and forth to each other at essentially the same price, the numerator and denominator in the calc for AVWAP both go down.  But the end result on what "the price" is for the day might be little changed.  That is, just because the WH are active in the market doesn't mean they are moving the averages.  Clearly they move the price of Game Stop and some eventually doomed to fail movie theaters.  But they are trivial to the Mag Seven. 

First, I had trouble reading "WH" as "weak hands" instead of "White House" because in both cases it seems likely that shares are being traded based on information others in the group are swapping. {funny political joke}

Yet it's interesting that hopeless meme stocks like AMC and GME have not yet gone down to their original prices or anything in line with their fundamentals. Even as they've diluted more and more shares to the social media sheep investor class, that has only served as a catalyst because now they're better capitalized and have the cash to burn for the next few months of losses.

I suspect an equilibrium was reached because (a) these companies are so obviously hopeless that it attracts a lot of short sellers, which raises the short interest rate shareholders can earn plus increases the odds of another squeeze, and (b) these companies are so volatile and have such liquid options markets that there are large gambling premiums available. So the owners of these shares have a plausible way to earn income and this possibility contributes to the value of the shares more so than the company's nonexistent discounted future cash flows.

Just wanted to do a quick follow up here.  The market is up. That's great news for the ride or die crowd and I think that's great.  Everybody should do it.  Im still hanging out on the sidelines.  Does it hurt?  Sure, I'll own that.  Do I need to eat some humble pie, sure.  I'm perfectly happy in capital preservation mode until I feel it is time for me to re enter the S&P.  Feels like a bit of a dig what you are saying here.  If I am reading this right it would appear that I am being accused of churning my legacy VOO position and if there had just been some barrier to overcome (high commission, daddy knows best advisor/manager)  I would have escaped "ruin".  Just not the case.  I feel that along the way I have vociferously advocated that others not do what I do as I have a high economic pain threshold. 

To attempt to stay on topic: this market moves a lot (goes w/o saying).  The retail investor is playing an increasing role through a couple factors that bear mentioning.  1. More than fair tax rules regarding long term capital gains for middle class households 2. lowered barriers for trade activity (commissions).  On balance more "healthy" retail participation is a good thing imo.

What I was initially trying to parse out here are 1. Is there a potential situation on "Main Street" that could cause retail to be unable to continue to add capital to markets in the same manner than it has.  2. If #1 did happen what are the knock on effects to the other participants (institutional, etc) that generally have capital risk exposure protocols.  "Well gee whiz stocks go down, duh." answers really don't get it done for me personally here.  The retail leg of the stool is bearing more weight than it has in the past and am trying to get a feel for its structural rigor. 

It really may be nothing, but, there is the barely audible sound of alarm bells in my mind around this.  I am attempting to find out if it is noise or signal.   If it's noise then great I can move on.  I personally have had and continue to have a lot of respect for what the folks in this community have to say.  Thanks for your time.

[ChpBstrd]

Im still hanging out on the sidelines.  Does it hurt?  Sure, I'll own that.  Do I need to eat some humble pie, sure.  I'm perfectly happy in capital preservation mode until I feel it is time for me to re enter the S&P.  Feels like a bit of a dig what you are saying here.  If I am reading this right it would appear that I am being accused of churning my legacy VOO position and if there had just been some barrier to overcome (high commission, daddy knows best advisor/manager)  I would have escaped "ruin".  Just not the case.  I feel that along the way I have vociferously advocated that others not do what I do as I have a high economic pain threshold. 

Sorry if it felt like a dig. You’re aware of the results of this market timing experience and you’re also aware it could have gone the other way. No reminder from the peanut gallery is needed.

My point was more oriented towards Velociraptor’s note that zero commissions could be leading people to make more frequent trades based on news, social media sentiment, gambling impulses, etc. Even if an investor has good, rational reasons as you feel you do, high commissions and face-to-face brokers would still inhibit acting on those insights.

Each step away from buy-and-HODL increases the risk of a misstep. So the more any investor jumps around, the more opportunities to lose money they expose themselves to. Hence the study about how a brokerage’s top-performing customers were the dead ones.

What I was initially trying to parse out here are 1. Is there a potential situation on "Main Street" that could cause retail to be unable to continue to add capital to markets in the same manner than it has.  2. If #1 did happen what are the knock on effects to the other participants (institutional, etc) that generally have capital risk exposure protocols.  "Well gee whiz stocks go down, duh." answers really don't get it done for me personally here.  The retail leg of the stool is bearing more weight than it has in the past and am trying to get a feel for its structural rigor. 

Seems to me like the increase in retail trading and ownership would mean that stock prices are more tied to the unemployment rate, and perhaps also the Personal Savings Rate. A sharp rise in unemployment would cut off millions of people’s weekly 401k contributions, remove some of the incomes that support day traders, and create net outflows among retail investors as stocks are sold to pay bills.

The consequence might be bolder and longer lasting downturns than existed in the era of lower retail participation. After the GFC, for example, the S&P500’s PE ratio did not rise above 20 again until 2014.

So the game you are playing (and which I have played before) is to attempt sitting out of the market to wait for the recession which will cause retail demand for stocks to dry up, which will create a buying opportunity unless the government again starts handing out helicopter money. Today’s solid real yields reduce the pain of sitting on the sidelines, but there is still an opportunity cost if you get the timing wrong (as I have always done!).

It really may be nothing, but, there is the barely audible sound of alarm bells in my mind around this.  I am attempting to find out if it is noise or signal.

The trend of increased retail participation in the stock market has been going up for decades. It does not seem to have been a factor in reducing long term returns since the 80’s, though it might have contributed to the volatility of the past 3-4 decades. To me, it seems like improved central banking practices (Fed independence, inflation targeting, QE/QT, and improved communication and metric tracking for examples) are bigger factors.

So I don’t see retail participation as a potentially acute issue like tariffs, governance, inflation, etc. I hear lots of alarm bells, and I have always heard lots of alarm bells. The alarm bells are always present for anyone aware of the news, statistics, metrics, issues, etc. So I guess what I’m saying is that this is NOT an issue on my radar. To react to it at this moment would be like anticipating the Big One hitting California in the next few months, or expecting global warming to sink New Orleans and Tampa by EOY, or suddenly deciding that demographic graying is going to sink markets.

To worry about retail participation, I’d need reason to believe some threshold has been crossed or that the trend is accelerating in an unsustainable way.

[Fru-Gal]

Great answer, @ChpBstrd !