The retail investing coup: Is this the future of investing?

THERE has been a revolution. I am not talking about the coup in Myanmar. I'm talking about the Reddit retail army that has revolted against Wall Street and taken down some of the big hot shot hedge funds that manage tens of billions of dollars.

GameStop (the flagship meme stock and a favourite short among hedge funds) went from US$19 to US$470 in a matter of days. It has also fallen just as rapidly to below US$100. As at Feb 4, the stock stood at US$53.50. In the process, these Main Street amateur investors were able to band together to inflict heavy losses on professional Wall Street hedge funds

This has spawned a whole new lexicon of investing terms like meme stocks and stonks. Free trading apps like Robinhood and online communities like Reddit's WallStreetBets have now entered common vernacular. And when the likes of Elon Musk or Chamath Palihapitiya - the new generation of revolutionary leaders - tweet about a new "stonk", millions literally follow and drive prices higher. Prices of certain stocks, such as GameStop, AMC, Tesla and even Bitcoin, have seen wild swings and added volatility to markets.

"Stonks" is an intentional misspelling of stocks that originated with an Internet meme that poked fun at amateur or bad financial decisions. Meme stocks or stonks are heavily influenced by people online. The most famous online channel is a Reddit community called WallStreetBets which now has millions of followers acting together to group-buy and sell stocks.

While stonks and meme stocks have been around for a couple of years, recent attention was likely driven in part by the confluence of Covid lockdowns, access to free trading apps like Robinhood, the entry of a new generation of Millennial investors who have not experienced an investment cycle, and the massive wealth disparity and income inequality that are leading to greater discontent and mistrust in society.

What has captured the imagination of most people is that a relatively obscure group of amateur investors beat the experts at their own game. They induced what's known as a short squeeze by forcing hedge funds to buy more of the stocks the Reddit army was pushing. These hedge funds have realised billions in losses and driven up the meme stock prices higher.

A greater controversy arose when Robinhood and other trading platforms prevented investors from buying many meme stocks during the most volatile and heavily traded period last week, resulting in the stocks falling rapidly.

Retail investors' anger was further fuelled when information that emerged that Robinhood is actually backed by the biggest hedge funds in the industry. It felt like Wall Street was colluding, or at least influencing, Robinhood by changing the rules in the middle of the game and playing to unfair advantages - effectively pulling the carpet from under the feet of the retail investors they were created to serve.

The underlying social discourse of Main Street versus Wall Street and the visual imagery of the righteous masses banding together to mete out justice to the evil wolves of Wall Street, who are shorting and bankrupting innocent companies, clearly capture the imagination.

There is something more important at play here, and that is the increasing opportunity for retail investors to perform as well or better than institutional investors who are the "experts" at investing. In the past, retail investors were derided as dumb money but they are turning the tables on the pros these days.

Education and improved financial literacy are crucial factors in this and are the underpinnings of improved outcomes for retail investors. This is precisely the reason why financial education is a key mission of Endowus too and why improving literacy will lead to better outcomes here in Singapore.

It is also why this David vs Goliath narrative resonates with us as we engage in a mortal combat for the soul of the wealth business, where large incumbent and traditional players have a stranglehold on the distribution of wealth products and services, and take a huge cut in the process when it should be going to the retail investors.

While the romantic notion of the individual overcoming institutional evil, like the eponymous Robinhood, is captivating, there are clear risks and downsides to the recent trends.

The new trend of retail investors seeking a quick buck reflects a trading mentality that does not "own" stocks in companies that grow in value, but uses trading as a get-rich-quick scheme. It's interesting that the community name is "WallStreetBets" - "betting" and not "investing".

The increased propensity to use options as a lottery ticket to achieve that quick gain is testament to such behaviour. It is also questionable whether the people inciting such mass retail hysteria truly have the best interests of retail investors at heart.

Some investors may have gained but many more have lost money as the bubble quickly deflates for stocks that are not supported by underlying fundamentals.

In fact, even before these recent events, retail investors were silently winning. In general, they made the right behavioural choices by remaining invested in markets and not trading during the volatile market period in March 2020.

Despite a 30 per cent fall in markets, they did not panic and sell. Many kept going in regular savings plans that have now provided handsome returns, whereas many so-called professional investors panicked and traded in and out of markets and did not do well. It is clear that improving financial literacy changes investment behaviour which leads to better returns over time.

Even before proving their mettle during the most recent bear markets in 2018 and 2020, there was a long-term trend in which retail investors have convincingly won, and that is seen in the huge trend towards passive investing and low-cost investing.

By accessing passive index funds, retail investors have powered a sea change in the way the market operates and the long-term, compounded returns have boosted their wealth. This proves that trading is not the only way to make money, and lower costs are also critically important to success.

The discipline of remaining invested in the market and achieving compound returns over long periods serves investors well. It is clear that if retail investors can stay the course and invest in the right way, they can achieve good outcomes using time-tested methods such as asset allocation and diversification.

The strongest weapon is not trying to outsmart or squeeze the "competition"; it's having a consistent, evidence-based investment plan that generates good long-term outcomes.

It may not be as sexy or as newsworthy, but it's actually how the professionals really do it and, more importantly, it works. It's definitely a coup to be able to beat the pros at their own game.

• The writer is founding partner and Chief Investment Officer of Endowus.com, the first fee-only digital wealth advisor for CPF, SRS and cash. He can be contacted at sam.rhee@endowus.com

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