Retail investors in the US are shaping up to be better stock pickers than the professionals during the COVID‐19 rebound this year.
These mum and dad investors have generated returns that are twice that of hedge funds, according to Reuters.
I believe everyday ASX investors in Australia are also beating the pros at their own game. As reported in July, retail investors here have rushed to buy embattled ASX stocks during the COVID market meltdown.
It appears that US retail investors have done the same – turning the idiom "fools rush in where angels fear to tread" on its head!
I'll tell you why this is significant later in this piece.
Stocks most popular with retail investors in 2020
Online trading platforms showed that the US stocks most popular with retail investors have performed much better than the overall market.
These stocks include the likes of the Amazon.com, Inc. (NASDAQ: AMZN) share price and Tesla Inc (NASDAQ: TSLA).
Reuters said that a basket of 58 US stocks popular with retail investors have surged 80% this year.
This compares to a 14.5% rise in the S&P 500 Index (INDEXSP: .INX) and a 40% return from hedge funds run by some of the brightest minds in the financial sector.
In Australia, our equivalent to Amazon and Tesla is the Afterpay Ltd (ASX: APT) share price. I suspect retail investors have been snapping up the stock more so than fund managers.
2020 is the year for "fools"
Perversely, it may be the lack of so-called "sophistication" that allowed retail investors to race ahead of the pros. These amateurs don't believe in diversification and have a portfolio that's concentrated in a few stocks that have led the rebound.
They were also less worried about controlling and managing risks. On the other hand, professionals have been cautious about pumping capital into a falling market earlier this year.
Retail investors beating pros to starting line
You can blame central banks for this. Retail investors have thrown caution into the wind when their savings are attracting close to zero returns. Other safe investment options are also underperforming when interest rates are at rock bottom and central bankers are flooding financial markets with cash.
This leaves retail investors few options and they are the ones diving head first into equities when the pros were still working out how deep the waters were.
Double, double toil and trouble
Some are drawing comparisons with the dotcom crash of 2000 as retail investors don't seem to mind buying stocks that experts think are overpriced.
The "hot" US retail stocks of 2020 are trading on negative price-earnings multiples on average because many don't make a profit, added Reuters.
"Of course it's a bubble," Mark Taylor, a sales trader at Mirabaud Securities, told Reuters.
"But money is free, liquidity is high, it's never been easier to trade for retail punters, there's no savings rate or bond yield and everyone wants the bubble to pop."
Retail investors in winners circle
Sceptics waiting for the day of reckoning may need to exercise patience. The rebound in global economic growth as vaccines become available means that share markets are likely to keep rallying in 2021.
This is likely to force fund managers and other professionals left behind by retail investors to play catch-up quick.
Otherwise, they risk underperforming for a second year running and face uncomfortable questions from irate clients.
