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 inundate 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 recovery 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 capable of, including mistaking the stock drops after bankruptcy filings as buy signals in penny stocks. Egged on by Twitter impresarios whose main expertise 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.
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November 23 - 30, 2020