(Bloomberg) – In May, a Reddit poster hit WallStreetBets with a definite hint about Scorpio Tankers Inc. The oil carrier, trading at one-fifth the value of its assets, was a resounding purchase with rising storage fees, insiders leveraging up and oil recovery after a brief negative return.
There is an opportunity to see “100% returns next year,” said the user.
Eight months later, the reward: a 17% loss.
Another WallStreetBets post was equally breathless about his brilliant idea of selling Tesla Inc. in 2018. The result: a loss of 1,330%, not including loan fees, assuming they stayed with it.
Choosing stocks is difficult. Almost nobody has an advantage and it is no shame when a call fails.
But in all the hagiography given to Reddit traders who have clung to GameStop Corp. before it skyrockets, it’s worth remembering that a large enough sample of predictions will always yield some winners. It is difficult to find evidence of genius in investing elsewhere.
It is these cautionary tales about stock selection that are documented in surveys that cover this era of WallStreetBets. A new newspaper found that, on average, when retail traders at Robinhood Markets buy a stock, it will not perform better in the next three to 20 days.
In fact, it tends to be a little worse.
“The obvious lack of skill of Robinhood investors in the aggregate is consistent with non-commission investors behaving like uninformed noise traders,” wrote Gregory W. Eaton and Brian S. Roseman of Oklahoma State University and T. Clifton Green and Yanbin Wu of Emory University.
The authors also found that actions with buzz on WallStreetBets saw a spike in activity at Robinhood a few days later, a sign that there is likely to be a lot of overlap between the two communities.
To isolate investment skill, academics adjusted their 2020 returns to recent price movements and risk factors, such as valuations and the size of a company. Result: when you rule out the possibility that these operators are simply chasing market trends, they don’t end up choosing future winners.
The results do not mean that retail investors in all brokerages are poor stock pickers. In fact, the four scholars found that an increase in the group’s stock purchase by a group generally predicted higher future returns. The problem for Robinhood’s contingent is that they usually stack up in stock almost a week after the bulk of their peers.
“Although retail traders together appear to be investing in the same types of securities that are popular with Robinhood investors, we found that the broader measure of retail trade leads to Robinhood trading in several days, which can help explain the difference performance, ”the authors wrote.
The survey covers only the first eight months of last year because Robinhood stopped disclosing the number of users with each action in August.
To be fair to Robinhood, it seems that the standard is not limited to their platform. Another study showed that smartphones in general make people more likely to buy risky assets and pursue previous returns – partly because apps allow them to trade at night without thinking too much.
Bragging rights
As the GameStop rally returns to Earth, the new research may offer an intestinal check for amateurs whose bragging rights over the past week have peaked.
Still, many of them would disagree with his conclusions, given how many in this new generation of investors seem to have made fortunes while outnumbering hedge funds – largely strengthened by zero-commission trading platforms.
When the markets were attacked by Covid in about six months until July 2020, a portfolio comprising the most popular stocks on the Robinhood app had an annualized return of 105%, according to Wolfe Research.
GameStop Corp., the poster boy for retail speculation, is still more than 238% bigger this year, even after its recent fall. Play Sundial Growers Inc. and AMC Entertainment Holdings Inc., and the Robinhood crowd seems to have several incredible success stories.
The phenomenon remains relatively young, therefore, firm conclusions about the skills of stock selection or not of those involved may be premature. And for speculators who reaped profits on these platforms, it may not matter much whether it was to choose winners or to follow the market momentum.
The success of retail merchants in general has been documented by several scholars in different timeframes and methods. In an article last year, Ivo Welch, a professor at the University of California, Los Angeles, showed a portfolio of common Robinhood holdings that surpassed market benchmarks and a quantum factor model in the two years through mid-2020.
Welch’s work focused on actions largely owned by users, rather than those that saw an increase in purchases on the platform. The recent newspaper focused directly on whether more purchases from Robinhood’s crowd actually led to superior performance – or not.
“Our evidence suggests that investors with zero commission together behave like noise traders, with changes in Robinhood’s ownership unrelated to future returns,” wrote the academics.
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