- A wave of retail investors has flooded the stock market with speculative bets and unexpected picks. Wall Street is struggling to make sense of the trend.
- Industry icon Leon Cooperman said the trend would “end in tears.” Burton Malkiel, the author of “A Random Walk Down Wall Street,” called the younger investors’ strategies “simply disastrous.”
- The new generation of day traders sees it differently. Vishu Namburi, a college student, leveraged surging interest into an online community that’s grown to more than 14,000 traders.
- Meanwhile, Jacob Ramme started trading as a hobby just before the coronavirus rattled markets. While he says he’s notched healthy gains, Ramme also thinks the early learning experiences have saved him money in the long run.
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As the stock market attempted to claw back from multiyear lows spurred by the coronavirus outbreak, retail investors flooded the market with speculative bets and improbable picks.
They bought struggling airline and cruise stocks in droves. They rushed into shares of tiny biotechs offering faint hopes of a COVID-19 vaccine. They even piled into shares of Hertz, a bankrupt company whose stock is viewed as worthless in the long run.
The behavior of these day traders — many of them first-timers looking to benefit from heightened market volatility — was emboldened by the recent rise of fee-free investing. At this point, almost anyone with a smartphone and a bank account can get in the investing game.
All these day-trading efforts wound up culminating in strong returns that put hedge funds and mutual funds to shame. Perhaps unsurprisingly, the old guard didn’t respond kindly.
The billionaire hedge funder Leon Cooperman said the trend “will end in tears.” Burton Malkiel, the chief investment officer at Wealthfront and author of “A Random Walk Down Wall Street,” called their risky strategies “simply disastrous.” “Mad Money” host Jim Cramer said the “neophytes” would soon “be making the same mistakes I did when I got in this business.”
But for the next generation of casual day traders, making rookie mistakes is part of the experience, and even accepted. And the online response to the revolution has been immense.
Robinhood — a discount brokerage particularly popular with new investors — added more than 3 million new accounts in the first quarter alone. Posts on investing forums have regularly topped Reddit’s “popular” page and featured hordes of commenters asking for trading strategies and hot picks.
The success of some retail investors can be tied to their outsize use of options contracts. The derivatives give buyers the right, but not the obligation, to buy or sell stocks at specific prices within a specific amount of time.
In times of relative market stability, options can supercharge equity positions, though the downside becomes pronounced as well. These traders have been fortunate that the market has enjoyed a sharp, largely unabated recovery off recent lows — a rally catalyzed by unprecedented monetary easing.
Since the coronavirus pandemic sent volatility spiking starting in February, new traders have increasingly used options to ratchet up the stakes. In the first quarter alone, Robinhood users traded nearly 12.4 million options contracts, according to Piper Sandler research. That nearly equaled the 13 million stock trades executed on the platform over the same period.
So which kinds of Generation Z investors are using extremely risky tools during an unprecedented economic downturn? We spoke with two of them at length to find out what makes them tick — and how they’re feeling about the day-trader groundswell.
Coronavirus stock The 20-year-old wealth manager running a 14,000-person platform
Vishu Namburi, 20, started making mistakes — and learning from them — at a young age. The Indiana University student began trading penny stocks at 10 after his dad showed him a Scottrade account. A more seasoned investor would’ve cautioned against trading high-risk stocks, but hefty commission fees ended up capsizing Namburi’s humble portfolio.
Instead of turning away from trading, he pivoted.
Penny-stock trading evolved to a focus on growth companies. Near the end of his high-school career, Namburi opened a Robinhood account and soon after began dabbling in options. The then-teenager made his biggest gamble yet by studying historic earnings volatility for specific names and moves priced into the options market: He bet on Netflix shares to plummet after it reported earnings in July 2018, causing his options to skyrocket in value.
But Namburi wasn’t done. He then bought call options, expecting the streaming giant’s stock to rebound the following day. It did. In 24 hours, he’d turned $5,000 into $25,000.
It didn’t take long for Namburi to burn $10,000 of his profits on another options stake — but he doesn’t regret it.
“I used that as a learning process to know when to secure profits on trades and to make sure when you have a specific investment thesis when you go into a trade,” Namburi told Business Insider in an interview. “Make sure you have your exits, and don’t let your emotions take over your trade.”
He didn’t just apply the lesson to his trading activity. Knowing how interested he and his peers were in options trading, Namburi and a friend created an online educational community called Eagle Investors. The group started in 2019 as an online messaging platform for discussing fresh trade ideas.
Read more: An investment chief who doubled 3 of her firm’s ETFs within 3 years told us the most overlooked technological innovation on her radar — and shared the 3 stocks she’s been snapping up since the pandemic started
Today it’s an investing community more than 14,000 strong that brings in about $100,000 in annual revenue, according to Namburi. Entrants pay for different levels of membership and discuss everything from daily watch lists to complex options spreads.
“We’re seeing a lot more younger kids come in with their Robinhood accounts saying, ‘I’m 18. How, how do I trade?'” Namburi said. “What we’re emphasizing with them is making sure they have proper portfolio allocation, not replacing all their trades with one [you-only-live-once] trade … because a lot of these people don’t understand what they’re trading.”
Developing a massive online community didn’t keep Namburi from making plays of his own. The rising college junior is hot off managing his parents’ retirement savings through the coronavirus sell-off. He said he hedged their portfolios against a downturn in January with inverse exchange-traded funds, just as coronavirus headlines began cropping up in the US.
Once the Federal Reserve stepped in with unprecedented market relief, he flipped. Namburi noticed new optimism in the investing community and positioned his parents’ savings to ride the market’s rally through May.
Namburi is now staying away from personal trading until he finishes a summer internship at a buy-side investment firm. But he may not have much time for it when he’s done. Namburi dreams to eventually turn Eagle Investors into a multimillion-dollar company, and he had been gearing up to push the server’s membership above 50,000. The coronavirus pandemic and retail-investor influx only accelerated his plans.
“A lot of these people have free time on their hands,” he said. “They wanted to dabble in trading, whether they were using their stimulus checks to open up a Robinhood account. We were able to get a lot more traders.”
Namburi added: “I think we were able to take advantage of that and hopefully we continue to grow.”
Coronavirus stock The recent college graduate hobbyist
For Jacob Ramme, it’s the online multiplayer game “League of Legends” that’s “toxic,” not options trading.
The 22-year-old college graduate was first exposed to options on the subreddit WallStreetBets. He was one of more than 1.4 million people to watch the “GUH” video, named after the squealing noise uttered by a forum member when his $2,000 in leveraged Apple options registered a $60,000 loss.
WallStreetBets members have since immortalized the onomatopoeic phrase and used it to celebrate similarly massive deficits. But where most saw a bet gone wrong, Ramme wanted in.
“When I saw that video, that was like, ‘Holy s—, what the hell is going on here?'” he told Business Insider. “But I also saw the opposite side of the coin where if you can lose that much money, the truth is you can make that much money too. So how does this work?”
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Ramme was already setting money aside for long-term savings and paying off his student loans. The stock market offered “the simple answer” for a “person who likes numbers” to pad their bank account, he said. The software engineer began investing in equities during fall 2019. He moved on to options trading in the winter.
Namburi and Ramme both highlighted the humility and education that’s come from their early start in investing. They recognized that in an industry generally dominated by older figures, they could leverage their youth and technological savvy for a head start.
But where Namburi studied fundamental analysis, Ramme prefers a more sentiment-driven approach. He acknowledged he largely trades on the emotions of the market, primarily using SPDR S&P 500 ETF (SPY) options to track the investing community’s emotions instead of individual names.
It’s decidedly the more speculative strategy of the two, but Ramme feels many of its benefits aren’t immediately quantifiable.
“When you’re trading on those emotions, you’re thinking you’re beating someone,” he said. “You should just humble yourself a little bit to the fact that, hey, I’m doing good right now. There are a lot of things influencing why I’m doing well.”
He added: “I’m not going to pretend like I understand every single reason why. I think in the long run it saved me money just because I’ve learned from my mistakes.”
Ramme said he was down between $1,500 and $2,000 in June before a few big options plays swung his losses into a profit of a few thousand dollars. He knows his latest hobby is “dangerous,” but he’s glad to be taking risks while he’s young, he said.
“Don’t get me wrong. I have my retirement accounts somewhere else. Don’t worry,” Ramme said. “This is just something I find somewhat exciting.”
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