The Aftermath: Where Does the Retail Investor Go From Here?
Last week, I wrote about the retail investor boom, which came on the heels of the pandemic and the first round of stimulus checks, and the David vs. Goliath battle against Wall Street and Hedge Fund managers. Rather than waste time recapping, if you would like to read the prelude to this week’s blog, click here.
In the days that followed that article, some pretty flat-out unbelievable things took place. Hours after writing that post, Robinhood, the most popular ‘smart phone broker’, restricted trades on GameStop. Not in the way you would think, however. One would assume that Robinhood said “look in the best interests of our customers, the jig is up, the price is too high, this is artificial, and we are going to halt trading. No buys, no sells.” Whether you agree with that or not, (personally I don’t, put the pitch forks down Reddit), it is plausible that they would take this course of action. However, Robinhood made one of the most unprecedented moves in market history, and only allow people to sell, effectively killing the stock price of GameStop, as well as several other dying technology or retail chains. And while you are probably thinking, “wow that seems illegal”, the even crazier part of the situation is one of the Hedge Funds involved in the initial short, who stood to lose billions, Citadel LLC, is also owned by Ken Griffin, founder of Citadel Securities, who Robinhood uses to route over half of their orders. Essentially, when you make a trade with Robinhood, they send the trade to a clearing house to place the trade, and since Robinhood doesn’t own the shares themselves, the CEO, Vlad Tenev, has placed the blame for the halts on the clearing houses. So essentially, it hasn’t taken rocket scientists to piece the puzzle together and come to the conclusion that Robinhood intentionally crashed the market in order to help their hedge fund buddies at Citadel.
So What Should Retail Investors Do Now?
Hopefully, this experience has helped those of you reading this that participated in the Reddit frenzy realize how volatile and dangerous the markets can be, along with hopefully not wiping out all of your excess liquidity. We should all realize that there is a fundamental fact we face each time we set out in the market; there is a difference between investing and speculating. Aside from the obvious corruption that occurred, the laws of investing are concrete. Investing is the core belief that you can get a return on capital, with a satisfactory level of risk. Speculating throws this by the wayside, in hopes of a quick (sometimes long term) buck, regardless of risk. While the fundamental approach that has always been thought of as the most efficient means of investing hasn’t applied as well to some of todays’ growth companies, we still need to take a step back, and first and foremost think “if this company was in my town, would I give it money because I truly believe it can be successful?” While this is a very basic and slowed down way of thinking, the market isn’t anymore complex than you make it. We often try to overthink things, without realizing the market is still supply and demand driven. You may overthink it and be right, but if no one else can get to that same conclusion and help your investment grow and be successful by participating, you were still wrong. A good read on this is Misbehaving: The Making of Behavioral Economics, by Richard Thaler.
The obvious reason we are in business is to take care of these matters for people, building solid portfolios that stand the test of time, and allow us to reach our financial goals, so you don’t have to speculate or worry. Now more than ever, the importance of an excellent investment advisor is showing through, because the market is just one small piece of the big picture. Going forward, be very wary of any market trends you may come across on an online forum, and definitely never chase the market.
-Colin Feller, President