In May, a Reddit poster hit WallStreetBets with a sure thing tip about Scorpio Tankers Inc. The oil provider, trading at a fifth of the value of its assets, was a screaming buy with storage rates soaring, insiders going up and oil slipping back after briefly turning negative.
There is an opportunity to see “100% returns within the next year,” the user said.
Eight months later the payoff is: a loss of 17%.
Another WallStreetBets poster was also out of breath about their clever idea short Tesla Inc. in 2018. The result: a loss of 1,330%, excluding loan charges, assuming they’re tied to it.
Choosing stocks is difficult. Hardly anyone has a head start, and it’s not a sign of shame if a call doesn’t work.
But in all the hagiography donated to Reddit merchants who join GameStop Corp. before it skyrocketed, it’s worth remembering that a large enough number of predictions will always bring in a few winners. Evidence that genius has been invested elsewhere is hard to come by.
It is these cautionary stock-picking stories that are documented in research spanning this era of WallStreetBets. A new paper finds that when retailers buy a stock on Robinhood Markets, it does not perform better for the next three to 20 days.
In fact, it tends to do a little worse.
“The apparent lack of skill of Robinhood investors in aggregate is consistent with the fact that no-commission investors are behaving like uninformed noise traders,” wrote Gregory W. Eaton and Brian S. Roseman of Oklahoma State University and T. Clifton Green and Yanbin Wu from Emory University.
The authors also found that buzzed stocks on WallStreetBets see a spike in activity on Robinhood a few days later, a sign that there is likely a lot of overlap between the two communities.
To isolate investment skills, academics adjusted returns for 2020 to reflect recent price movements and risk factors such as valuations and the size of a company. The result: If you take away the possibility that these traders are just chasing market trends, they don’t end up picking future winners.
The results do not mean that retail investors are choosing bad stocks at all brokers. In fact, the four scientists found that a larger share purchase of a company by the group generally predicted higher future returns. The problem for the Robinhood contingent is that they usually pile on stock almost a week after most of their peers.
“While retailers seem to invest in aggregate in the same types of securities that are popular among Robinhood investors, we see the broader measure of retailing ahead of Robinhood trading by several days, which may help explain the difference in performance,” the authors said. . wrote.
The survey only covers the first eight months of last year, as Robinhood stopped publishing the number of users who owned each stock in August.
To be fair to Robinhood, it seems likely that the pattern isn’t limited to their platform. Another The paper has shown that smartphones in general are more likely to make people more likely to buy risky assets and chase past returns – in part because apps allow them to trade at night without too much thought.
To brag
With the GameStop rally returning to Earth, the new research may provide a good feel for amateurs of whom Bragging about the past week reached a fever.
Still, many of them would question the conclusions as many of this new investor generation seem to have made fortunes while surpassing hedge funds – largely backed by no-commission trading platforms.
When the markets were held by Covid in the roughly six months to July 2020, a portfolio of the most popular stocks in the Robinhood app delivered a return of 105% year-on-year, according to Wolfe Research.
GameStop Corp., the poster child of retail speculation, is still up more than 238% this year, even after its recent plunge. Discard Sundial Growers Inc. and AMC Entertainment Holdings Inc. inside and the Robinhood crowd seems to have several stories of incredible success.
The phenomenon remains relatively young, so firm conclusions about the stock selection skills of those affected may be premature. And to the speculators who have made a profit on these platforms, it might not matter much whether it was picking winners or following the momentum of the market.
The success of retailers in general has been documented by different academics in different time frames and methods. In a paper last year, Ivo Welch, a professor at the University of California, Los Angeles, showed a portfolio of joint Robinhood holdings that beat the market benchmarks and a quantitative factor model in the two years to mid-2020.
Welch’s work focused on stocks that are largely owned by users, rather than stocks that are increasingly buying on the platform. The recent paper focused entirely on whether more purchases from the Robinhood crowd actually led to superior performance – or not.
“Our evidence suggests that no-commission investors are behaving like noise traders in aggregate, with changes in Robinhood ownership unrelated to future returns,” the academics wrote.