In May, a Reddit poster hit WallStreetBets with something safe advice on Scorpio Tankers Inc. The oil carrier, which was quoted at one-fifth of the value of its assets, was a screaming purchase with an increase in storage rates, taking advantage of the privileged and backing the oil after it had briefly refused.
There is a chance to see “100% returns next year,” the user said.
Eight months later, the reward: a 17% loss.
Another WallStreetBets poster had no encouragement for his brilliant idea short Tesla Inc. in 2018. The result: a loss of 1.330%, not including loan fees, assuming they stayed.
Collecting stock is difficult. Hardly anyone has an advantage, and it’s no shame when a call fails to come out.
But in all the hagiography given to Reddit marketers who joined GameStop Corp. before you shoot into the sky, it’s worth remembering that a large enough sample of predictions will always yield a few winners. It’s hard to find evidence of investing genius elsewhere.
It is these cautionary tales about stock selection that are documented in research on this era of WallStreetBets. A new one the document finds that, on average, when Robinhood Markets retailers buy shares, it will not perform better in the next three to 20 days.
In fact, it tends to get a little worse.
“The obvious lack of skill of Robinhood investors in aggregate terms is consistent with investors without commissions behaving like uninformed noise operators,” wrote Gregory W. Eaton and Brian S. Roseman of Oklahoma State University and T. Clifton Green and Yanbin Wu of Emory University.
The authors also found that buzz stocks on WallStreetBets see an increase in activity at Robinhood a few days later, a sign that there are probably many overlaps between the two communities.
To isolate investment capacity, academics adjusted 2020 returns for recent price changes and risk factors such as a firm’s valuations and size. The result: when you eliminate the possibility that these traders are simply chasing market trends, they don’t actually end up choosing future winners.
The results do not mean that retail investors in all brokerages are poorly selected. In fact, all four scholars found that the increase in the purchase of shares in a company by the group generally predicted higher future returns. The problem for the Robinhood’s contingent is that they usually build up in a stock almost a week after most of their peers.
“While retailers as a whole seem to invest in the same types of stocks that are popular with Robinhood investors, we find that the broader measure of retail trading leads to Robinhood trading over several days, which can help explain the difference in performance, ”the authors said. he wrote.
The investigation covers only the first eight months of last year because Robinhood failed to disclose the number of users each stock had in August.
To be fair to Robinhood, it seems likely that the pattern isn’t limited to its platform. Another The paper has shown that smartphones in general make people more likely to buy risky assets and chase past returns, in part because apps allow them to trade in the evening without thinking too much about it.
The rights to brag
As the GameStop rally returns to Earth, new research may offer intestinal control to fans the rights to brag during the past week came to fever.
Still, many of them would be skeptical of their findings, given how many of this new generation of investors appear to have minted fortunes while earning hedge funds, largely boosted by zero commission trading platforms.
When Covid attacked the markets for about six months until July 2020, a portfolio comprising the most popular shares in the Robinhood app earned 105% annualized, according to Wolfe Research.
GameStop Corp., the retail speculation poster, is still up 238% more this year, even after its recent crash. Launch Sundial Growers Inc. and AMC Entertainment Holdings Inc., and the Robinhood crowd would seem to have several incredible success stories.
The phenomenon remains relatively young, so firm conclusions about stock selection skills or others of those involved may be premature. And for speculators who have made profits on these platforms, it may not matter much whether it is about choosing the winners or following the market momentum.
Several scholars have documented the success of retailers in general in different periods and methods. In a last year, Ivo Welch, a professor at the University of California, Los Angeles, showed a portfolio of regular Robinhood holdings surpassing market benchmarks and a factor model in the two years to mid-2020 .
Welch’s work focused on shares widely owned by users, rather than people who saw an increase in buying on the platform. The recent paper focused fully on whether more purchases from the Robinhood crowd led to superior performance or not.
“Our evidence suggests that zero-commission aggregate investors behave like noise traders, with changes in Robinhood ownership that are unrelated to future returns,” the academics wrote.