Risky Stocks Go Parabolic

A Year For Retail Investors

This was an interesting year because typically individual investors have very poor returns, but in 2020 their favorites trounced the index. Retail investors barely make money on average. The concept of even matching the market is foreign to them. Few usually beat the S&P 500 which is similar to the performance of hedge funds. 

As you can see from the chart below, the basket of their favorites is up 85.9% year to date which has beaten the S&P 500’s gains of 14.21%. There has been no contest. Obviously, some retail investors don’t own these stocks and some have blown up their accounts using options.

(Click on image to enlarge)

One thing is certain. This has been their best run since the 1990s. Back in the late 1990s, momentum investing was popular. Growth stocks would explode higher just because they were part of the future (the internet). In normal markets, showing a profit is important but not in the late 1990s and not this year. Retail investors are actually moving the market with their actions. Plus, value fund managers are out of business.

Growth managers run the show now. The managers who have done the best in the past few years have taken the most risks on firms with high sales growth and cared the least about valuations. Individuals chasing performance have put their money with them. It’s a virtuous cycle that pushes up the stocks with the best stories that appeal to retail investors and growth managers.

Fuel Cell Stocks Win

One of the best examples of this retail fueled bubble is fuel cell stocks. Ironically, fuel cells don’t fuel anything as the technology isn’t mature enough to work. It’s probably 10 years away from showing any meaningful sign of progress. Quite frankly, the electric vehicle revolution hasn’t even happened yet. Many don’t get what would make people think a less economical form of transportation will work. People see the potential for electric car sales and assume fuel cells will work too. That’s a major error.  

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