Retail investors are back. Many thought they were burnt so badly by the crash that it would be a new generation before they would come back to equities. But in the months since Gulf War 2, private investors have returned to the web to begin rebuilding their portfolios.
At the extreme end of private investor activity, stocks threads on internet bulletin boards (BBs) are a rowdy arena for letting off steam. The discussion is often around stocks investors have lost their shirts on. Take Thus Group, for example, the UK internet darling turned demon. A Thus BB thread is the retail investor’s ideal playground. And just like Thus, the retail investor is making a strong comeback.
Current market theory has a huge hole in it because it fails to address a large part of the valuation dynamic. Unlike many professionals, private investors earn a special dividend in terms of the pleasure they get from equity investing. Strange as this sounds, this can be measured like any other form of return – in pounds and pence, dollars and cents.
Investing is fun, and because it’s fun people pay to do it. No-one likes losing, but losing has never kept casinos empty. The internet has magnified this extra dimension, and while retail investors may have lost heavily the last time they flocked to the web, they’re now straggling back. And many feel surer of their own abilities than those of the professionals tarred by the raging pension scandals in the UK or the investment banking conflicts in the US.
As we saw during the last big wave, private investment in equities has been forever transformed by the helping hand of new technology connectivity. There simply is no comparison between the facilities available to retail investors today with the practically non-existent resources obtainable before the web. Private investors now move the markets every day and they have a forum to meet and a conduit of information only recently available to even the most connected professionals.
Spectrum of opinion
As CEO of ADVFN, the UK’s biggest private investor web site, I am told by professionals that they refer to our bulletin boards to find out the true state of companies’ affairs. Our boards are not moderated and the postings are untrammeled. They represent an army of informed individuals and willing informants, and the game is up for secrets; there are just too many eyes and ears and too many web sites and too many keyboards to keep information locked up for long.
This connectivity begets fast communication for an infinitesimal price. It has leveled the playing field to such a great extent that anyone anywhere can assume a role of authority on any subject. Often the subjects of the pronouncements are publicly listed companies. It is a terrifying thought to many that at any moment someone might start to say whatever they please about their company to a rapt audience of thousands.
In this new world of narrowcast as opposed to broadcast, there seems no way to control the message, and without control there must be an inevitable decline into a damaging anarchy of libel and defamation.
However, in practice this does not seem to be the case. With such a large crowd of people, an ecosystem develops, and like all ecologies, a balance is struck. Crazy companies attract crazy posters, liquid companies attract comments from active traders, old economy stocks attract value investor analysis, and everybody enjoys a good joke thread.
It’s an extremely robust environment when hundreds of thousands of people are discussing shares into which they have put their money or which they might have sold short. It is a wrongheaded thought to imagine that it is in any way possible, let alone easy, to fool anyone with such broad oversight. The wild talk often seen on BBs is usually just a reflection of trading. It is also symmetrical that the prospect of a share can be judged by the quality of its following.
Once again the mass of such postings (on ADVFN, up to 10,000 unique posts a day) represents a spectrum of opinion. Unlike in some newspapers, there is no lone, unchallenged tipster to affect buying or selling, only a wave of sentiment.
These posters and readers are not sheep to be shorn; they are bright, risk tolerant investors. You only have to look at the free BBs to see that many of the most popular threads of the moment pertain to the day’s biggest movers. Time after time you can read detailed analysis of why today’s hot company is undervalued and pegged to rise, only to find out the posting is from weeks before.
Conversely, when companies crash, postings turn nasty, but again private investors are as likely to rally to the cause of a failing company as they are to tear its reputation to shreds. Interestingly, the sign of imminent corporate catastrophe is when ADVFN starts receiving legal letters from companies about supposed defamation. This is an almost sure sign of imminent bankruptcy. Perhaps it’s because these directors have nothing better to do other than surf the net while awaiting their fate.
As yet we have never had a complaint from a significant and stable listed company. Perhaps it’s because they realize that they will only benefit from a vigorous debate about their prospects.
Shock tactics
It seems it’s companies themselves that are more in shock after the long crash of 2000 than private investors. As ADVFN provides data to IR web sites, we often call around companies to see if they want to take the plunge and offer real-time prices. Many small firms respond that they are too small or can’t afford to spend any money on their web presence. However many come out straight and say that they can’t bear to look at their stock price, let alone host it. They find it either too depressing or embarrassing. One even suggested it didn’t need a real-time feed as its share price never moved.
Of course it takes a strong stomach to display a crushed share price. But perhaps a company in that position might think about reminding retail investors how ‘cheap’ they now are, because the appetite for risk among small investors is undimmed.
Proof of this is to be seen on the list of highest daily risers, where time after time it is the most speculative shares, which are the almost exclusive preserve of the private investor, that are racing up in value. That is not to say they don’t bounce downward, too, but the pandemonium still continues, driven on by the private investors’ hunger for excitement as well as capital gains. Retail investors are hungry for naked, undiversified exposure to risk. This is not because they’re stupid; it is because they enjoy it.
This appetite will never go away because high risk will always be equated to high return, at least in the minds of retail investors.
This alone is enough reason for a small company to embrace retail investors. While often decried as unsophisticated, they remain the most solid platform of investment for small caps. A single institution with a sizeable holding in a company can break it by deciding for no pertinent reason to sell. It can flatten a small cap simply because it wants to move out of one sector and into another. Meanwhile, private investors represent a diversified portfolio of support; they are not swayed so easily and cannot dump huge blocks of stock onto the market without reason.
Perhaps the disdain the City and Wall Street show for private investors is a hangover from the past, when the little guys were only bound to learn the news the next day or later, when the real state of affairs for listed companies was only accessible to the inner circle of those in the know.
Connections
Now times have changed and retail investors are connected. En masse they represent a force bigger than any one institution. Clear proof came when Marks & Spencer hit hard times. At one point no single major institution held M&S stock and it fell to the private investor to own the company. The rise that followed is proof enough to suggest that the private investor, armed with his new connectivity, is now a fair match for the professional.
So while many listed companies wilt at the idea of engaging the masses, the question is, who’s losing out? It certainly makes for a quieter life to stay out of the eye of the new breed of online private investors, but to do so is to eschew a large pool of capital. These individuals, who have earned every penny, exercise that capital with great care. They don’t invest it lightly and they are not easily shaken. It seems a wasted opportunity to recoil from them, when increasingly they can be easily addressed in one single place: the world-wide web.
It is to the web that retail investors are increasingly coming. It is almost inconceivable to imagine that it could be otherwise. In the same way that the internet is quickly entwining itself into every aspect of our lives, connectivity, which is already the heart of the market, will reach out to connect more and more of its participants.
It is clearly the case that the retail investor and the internet should be embraced by any listed company wanting its stock price to reflect fair value. The alternative of lying low doesn’t seem to have much of a future.
