For the older generation, there might be signs of doom, but for the younger lot, there's hope for a turnaround - as well as a desire to cash in while the others wait.
The pandemic has wreaked havoc. Hundreds of thousands have died. The global economy has tanked. Millions have lost jobs. Companies have filed for bankruptcy and trillions of dollars have fled risky assets. But the millennials are rushing in to buy beaten-down stocks.
And they are using mobile apps that have made it easier for them to pick individual companies without costing them a cent even if they have as little as $1.
One app, Robinhood, has become all the rage in the United States.
A man on Twitter said his 20-year-old soldier-son based in Turkey bragged about raking in big gains in a day.
My 20yo son, stationed on an airbase in Turkey, just called to tell me about all the guys on the base going around bragging about how much money they’ve made buying “one-dollar stocks” on Robinhood.— Jesse Felder (@jessefelder) June 9, 2020
Much to the annoyance of professional stock traders, the stories about how retail investors are multiplying their investments have flooded the internet.
Old hands at Wall Street advise caution, looking back at past trends when similar rallies have crushed hopes and lives. Herd immunity won’t work here, they say. But will millennials listen?
It’s all in the name
The story of Robinhood is...well, like the Robin Hood story. A little after the Occupy Wall Street Movement, two former Stanford students, Baiju Bhatt and Vlad Tenev, thought to give small investors a way to dabble in the stocks.
“Having worked in finance for a few years, we had the realisation that capital markets were ones that were not letting a lot of people be a part of them, and the $10 trade commission was a major [reason],” Bhatt told a conference in 2018.
Unlike the big brokerages, Robinhood banks on the younger generation. Both Bhatt and Tenev themselves were born in the mid-80s.
Its employees don’t wear suits to work. The company’s website is as lively as its name. Bhatt has long hair and has mostly been seen wearing t-shirts. In pictures, employees can be seen working on wooden chairs against a backdrop of murals where monkeys don spacesuits.
It’s a classic case of when Silicon Valley meets Wall Street - and it seems to be doing well. Since its launch in 2015, Robinhood has gained 13 million users. As many as 3 million have joined the app only in the last couple of months.
$10,000 invested in Hertz the day after it filed for bankruptcy is now worth about $125,000— Hipster (@Hipster_Trader) June 8, 2020
The company earns interest from the money people keep in their app accounts, or charges for additional trading limits. But it is only available to US residents at the moment.
“Choose how much you want to invest, and we’ll convert from dollars to parts of a whole share,” the company says on its website.
Retail investors, who are categorised as individuals like you and me, unlike big-buck pension funds, have become the driving force in the recent rally behind the US stock market. An indicator of their involvement is the high trade volume, which is many times the 2019 level for some stocks.
But why are retail investors flocking to the market now, especially when anti-racism protests and a pandemic have rocked the US?
The simple explanation is that share prices have come down and millennials are having a field day.
Value seeking - the millennial way
Robinhood users have picked stocks from companies hit hard by the pandemic, such as those in the travel industry.
Most feverish interest has been in firms such as the American Airlines, Hertz, Delta, Spirit and Norwegian Cruise Line.
They might not make sense to the experienced hands but these stocks have given returns in a few weeks that are many times more than the average S&P performance.
What’s worrying analysts is that few companies such as Hertz, J. C Penny and Whiting Petroleum have filed for bankruptcies, and yet Robinhood users have bought their stocks.
This is akin to poking fun at experienced traders who have dumped shares in these failing firms.
Billionaire investor Carl Icahn sold his stake in Hertz, the car rental company that filed for bankruptcy last month. He incurred an estimated loss of $1.8 billion.
Hertz’s model, which depends on those flying in and out of airports, has been hurt badly during the pandemic. But that didn’t bother Robinhood users who doubled their holding of Hertz stock in subsequent days, driving up the price of share 800 percent.
Similarly, while Warren Buffet’s Berkshire Hathaway has dumped airline shares, retail investors have come in to pick them up - in droves.
The US Global Jets exchange-traded fund, which allows investors to pool resources and buy the airline stocks, saw a phenomenal rise in investments.
The funds' assets, which were $34.6 million on March 3, jumped to $615 million on April 30, representing a rise of 1600 percent. The fund invests in stocks like American Airlines and Delta Airlines.
Some analysts have labelled this retail investment as “dumb money” chasing after a “zombie rally”.
It does seem that some of these Robinhood traders have spare time on their hands to dabble in stocks after having lost their jobs, and there have even been reports that stimulus checks are fueling the rally. But at the same time, the younger generation is more hopeful about a swift recovery.
“There’s been a lot more perhaps optimism among retail traders around the turnaround than there has been from professionals. This continues to show that,” said JJ Kinahan, the chief market strategist at TD Ameritrade, told Bloomberg.