Retail Investors Are Long Confidence And Short Experience

In a “market mania,” retail investors are generally “long confidence” and “short experience” as the bubble inflates. While we often believe each “time” is different, it rarely is. It is only the outcomes that are inevitably the same.

I recently penned an article about Charles Mackay’s book “Extraordinary Popular Delusions And The Madness Of Crowds.” As noted, that book was an early study in crowd psychology. To wit:

“Essential is the understanding of the role psychology plays in the formation and expansion of financial manias. From the 1711 ‘South Sea Bubble’ to the 2000 ‘Dot.com crash,’ all bubbles formed from a similar ‘panic’ by investors to chase ongoing speculation.”

A recent UBS survey revealed some fascinating insights about retail traders and the current speculation level in the market.

 

Seen This Before

William Bernstein, who updated Mackay’s work, suggests that:

“Bubbles are characterized by extreme predictions, tend to dominate conversations and induce people to leave their jobs. The warnings of bubble skeptics get invariably met with scorn and derision.”

The number of individuals searching “google” for how to “trade stocks has spiked since the pandemic lows.

Long confidence short experience, Retail Investors Are Long Confidence And Short Experience

For anyone who has lived through two “real” bear markets, the imagery of people trying to learn how to “daytrade” their way to riches is familiar. From E*Trade commercials to “day trading companies,” people were leaving their jobs to trade stocks. Kind of like this couple:

Such is just one example of many internet commentaries driving investors to “trade” stocks. Not surprisingly, we have seen a surge in securities’ daily trading volumes since the beginning of the pandemic.

Long confidence short experience, Retail Investors Are Long Confidence And Short Experience

Importantly, these investors are not just buying equities but are using some of the risky vehicles to “leverage” the returns. As shown, option trading volumes have swelled.

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