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Retail Investor Frenzy

January 13, 2022 | Posted in: Insights, Investing

I recently authored several posts regarding the very high level of investor optimism as measured by record flows into equity mutual funds, record stock buybacks by companies, and a record portfolio weighting in stocks for the average investor. (Both individual and institutional) Perhaps an even better indicator of enthusiasm is the level of direct purchases of stocks by retail investors in brokerage accounts and similar platforms.

More than 10 million brokerage accounts were opened in 2020 which seemed extraordinary at the time but Schwab by itself opened just under 5 million accounts in the first half of 2021. Similarly, Robinhood’s user base increased from 10 million in 2019 to 13 million in 2020 and 22.5 million late in 2021. Final figures for the year will not be available for some time, but it is abundantly clear that there are huge numbers of new participants in the stock market. And, recall that these figures do not include indirect exposure to stocks through mutual funds, retirement accounts, and so on.

The following chart depicts daily net purchases of stocks by retail investors. (The purple bars)

Note that purchases rose from just a trickle at the end of 2019 to daily inflows of $1 to $2 billion following the brief bear market associated with the onset of the pandemic. The solid black line represents stock prices and it is clear that rising prices did not deter purchases and may have even accelerated them. In fact, if you look closely at the chart, you will note that virtually every decline in the market is associated with a buying surge, also known as “buy the dip.”
The following chart depicts the level of NYSE margin debt:

While debt used to purchase securities has generally risen over time, it basically went vertical in the middle of 2020. So, not only are retail investors scarfing down stocks, they are using borrowed money to finance their purchases. A survey conducted in the middle of 2021 found that 80% of Gen Z and 60% of Millennials used borrowed money to invest. The net effect of both purchases and market appreciation is that household holdings of equities increased about five-fold since the Great Financial Crisis and roughly doubled from the onset of the pandemic.

The way in which market observers interpret all of this seems to be a generational thing. Us old fogies are very worried that this is a speculative bubble that will end badly. On the other hand, this may truly represent a paradigm shift and we just don’t get it. Financial writer Morgan Housel has written eloquently about the fact that highly experienced individuals are unlikely to recognize major changes in the world because they have been very successful with one mindset. I certainly do not have the answer but have been constantly surprised and stimulated by the incredible financial machinations of the past two years. While vexing and periodically frustrating, the financial world is certainly fascinating!