Fly-by-night traders, a downward spiral in wealth creation

Low to zero commission fees, buy/sell at the click of a button, easy access to trading platforms, all major markets inclusive — a win-win situation for consumers and service providers, don’t you think? COVID-19 had in recent months cause a total or partial lock-down in many cities or even countries, resulting in boredom for many people coped up in the confines of their four walls.

And what do people do to cope with boredom? They turned to whatever entertainment they could find on the internet. Forget Netflix, online gaming or even pornography — “Investment” happened to be one of the activities that people turn to, and this has created a new breed of fresh “investors”/speculators/traders (whatever we call it) as compared to pre-COVID days.

Source: qz.com Data: Nasdaq

Another group of people who had entered the fray are those who have lost their jobs as a result of the pandemic. It is worrying that all of a sudden, we see a larger number who have themselves self-declared as full-time traders or self-sufficing with whatever funds they had in reserve. And I daresay, this funds may not be funds which they can afford to lose in this current climate.

How the retail trading boom is shaking up the US stock market (Jun 23 2020, Quartz)

…. millions of new retail traders. Brokerages Charles Schwab, Interactive Brokers, and TD Ameritrade added more than 1 million new accounts in the first quarter, a 4% increase from the previous period. A year ago that increase was about 1%. Robinhood, a popular brokerage app, said last month that it has added 3 million customer accounts this year, bringing its total to more than 13 million…

The rise in retail investors is evidenced by the number of new accounts created and daily average trades by the different trading platforms. It is comforting to see that more people are stepping up to take a greater interest in investing, but only to a certain extent. Reading the daily news however, quickly drain that positiveness.

Worrying headlines include:

Retail Traders Flout Legal Logic by Buying Up Bankrupt Stocks (Jun 9 2020, Bloomberg)

• Hertz, which climbed 95% since it filed bankruptcy on May 22
• J.C. Penney, up 167% since May 15
• Whiting Petroleum, up 835% since April 1
• Pier 1 Imports Inc. more than doubled in the last two trading sessions, though it’s still down 97% since filing for bankruptcy on Feb. 17
• Chesapeake Energy Corp. jumped 182% on Jun 8
• GNC Holdings Inc. rose 106% on Jun 8

This brings me the thoughts that sometimes, markets are irrational because people are irrational. It is not uncommon for stocks who have taken a deep dive to experience some kind of rebound, but to put good money on stocks like these make me shrugged. Retail “investors” do not realise that the big names they are buying into may not get anything back in bankruptcy court processes.

Singapore Retail Investors Use Cheap Cash to Load Up on Stocks (Apr 5 2020, Bloomberg)

Record low interest rates are tempting some retail investors in Singapore to load up on debt to buy shares, just as the coronavirus outbreak creates the most volatile markets since the global financial crisis. There are also some suggestions retail investors may be using their homes as collateral to borrow money.

Earlier this year, 31-year-old insurance agent got advances on three separate credit cards to the tune of S$150,000 ($105,000). With the money, he opened a share-financing account at a local bank and pledged the lot as collateral. He was granted leverage of around 3.5 times, a S$500,000 kitty he’s plowing into the stock market.

Some of the shares he bought include Oversea-Chinese Banking Corp., which slumped 21% last quarter, Singapore Telecommunications Ltd., down 25%, and Mapletree Industrial Trust, which declined 6.5%.

Between the beginning of April versus today, Oversea-Chinese Banking Corp., is up 6.9%, Singapore Telecommunications Ltd., down 4.3%, and Mapletree Industrial Trust, which rise 35%. It is a bet that could have went either way, but for now, the said investor is safely sitting on some gains. At the same time, interest is still piling up on the borrowed cash. Leverage is indeed a double-edged sword.

Other worrying observations include:

Blind Herd mentality

In the past decade or earlier, information on trading and sharing of trade ideas was scarce as compared to today. However, over-dependence and overloading of hearsay on social media platforms is creating a different dimension on the term “herd mentality”.

Source: Yahoo Finance, Genius Brands International, Inc. (GNUS)

Genius Brands International, Inc. is a content and brand management company that creates and licenses multimedia content for toddlers to tweens worldwide. At one point, the stock price leaped from $4+ to $11+ in a day. People were buying into the hot stock with the intention to make a quick profit. It is not unusual that many were caught in the fray and ended up with shares of higher price then intended. Though it is still too early to conclude, the same people ended up being “bagholders” for now. The other consequence is that people are not cutting their losses early, but continue averaging down on the stock, which I termed it as revenge buying.

Trading the Unknown-unknowns

Another issue I witnessed were people who were trading instruments which they did not have high level of understanding on leveraged derivatives such FOREX, options and futures. Remember the 20-Year-Old that died by suicide after seeing A $730,000 negative balance on his Robinhood account?

Left unchecked, there could be many other poor souls lurking in the darkness on their own, like the one above. I hear their cries and empathise with them but at the same time, excruciating hard to sympathise. Easy money might have been the lure, but would it not be better off to carry out due diligence or even study into where you place your hard-earned money too? People can spend quite a bit of time on the simplest things — fixed deposits interest rates across the banks, maximising cashback or miles etc. but dump their life savings into trading.

Trading without basic understanding of investment terms

It is important to comprehend some of the corporate actions undertaken by companies when they happen. Let’s take the example of a stock split or reverse split. A stock split increases the number of shares in a company without a dilution. A stock split causes the market price of individual shares to decrease but no change in the total market capitalization of the company. Contrary, a reverse split does the opposite by consolidating the number of existing shares of stock into fewer, proportionally more valuable, shares. The market price of individual shares thus increases, all else remain status quo.

I have witnessed people getting excited over sharp rises in prices pre-market and getting ready to “lock in their profits” upon market open or diving into depression on the plunge in prices.

I personally don’t trade. By chancing upon human behaviour and learning from others, it is definitely more fruitful and cheaper an experience than committing it first-hand. While the current markets presents opportunities for speculative trades, my own thoughts lean towards investment over a longer horizon of years. With more Singaporeans becoming increasingly financial literate, I believe there are many others who share the same thoughts with me.

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