Let Them Have Risk

It is atypical for market stories to seep out into the broader news cycle and popular culture.  Most who are not involved in financial markets probably only go as far as seeing what the DOW or S&P 500 indexes did on a particular day.  They might go check their 401k every now and again.  Many people in my generation shied away from active investment due to heavier debt loads and the bad taste in their mouth left by the Great Recession.  Like everything else in our society, 2020 turned that theme upside down. 

A new class of risk loving investors has leveraged stimulus checks and additional time at home to get involved in the markets.  The added benefit of deeply reduced transaction costs and mobile access give small investors the best opportunity they’ve had to participate at their scale.  Increased enthusiasm amongst this class coupled with expansions in information sharing online have created an even more unique environment.  Needless to say, some of the activity has been weird.  A younger, less wealthy class are willing to take outsized risk, invest their money where they feel emotionally attached and conduct analysis in an unorthodox manner. 

There are also social and cultural themes channeling themselves in this group.  It seems no coincidence that they are called the Robin Hood traders (after their platform of choice).  Many are less than enthusiastic to see that our wealthiest citizens have become much more affluent during a period where many are out of work.  There is a fair amount of disdain for the Hedge Fund, family office, Bezos class.  One strange exception is Elon Musk.  Despite rising to become the world’s richest man, he is still viewed as a man of the people and even an underdog story. 

I think that this bifurcation has taken these traders back to their childhood when big bank executives took on excessive risk only to go freely.  Meanwhile,  many of these people’s parents lost jobs, houses and college savings.  Many people saw that an economic elite lives under different rules in our country.  Instead of criminal investigations, Bank CEOs were taken in front of Congress for a strong talking to.  Now this is happening again.  Many have been sent home from their jobs or college (or high school).  They see that the Walton family will be wealthier and better positioned once the mom and pops are crushed by the boot of government. 

The culmination of these forces is exploding out of the financial markets in early 2021.  If you typically watch CNBC for business news, you have only heard discussion of the activist underdog trader.  A band of online traders are now taking aim at the group they disdain for their wealth and their separate rules (Elon cheers from Twitter).  Personally, I wish that I could see other news and stories but I have to admit it is fascinating.  The Robin Hood traders are not shown in the same sympathetic light as their namesake figure.  No, somehow the narrative is that these relatively small time traders are the villains. 

The professionals have their platform on TV to cry foul and call out for reform from the SEC (and live intervention from NASDAQ, NYSE).  Those who make their living seeking market abnormalities at high risk now clamor for rule changes under the guise of “safety.” The entirety of the air time has been dedicated to a bunch of sore losers and CNBC gives no balance to the story.  I may have missed something but I did not see anyone invited into the conversation to represent the online alliance.  If there wasn’t Chamath Palihapitiya getting in on air on behalf of these Merry Men (credit Jim Cramer), no one would have given their case for trading.  I find a stark comparison to the days of having Icahn and Ackman come to blows over their competing interests. 

I don’t think that you can have a completely unregulated market. There are good arguments to be had for protecting traders from risk but professionals should not be the only ones allowed to act. In my opinion, what we have here is a completely irrational market and you can’t force people to act rationally. Both sides of these trades are taking tremendous amounts of risk, the only difference is concentration and scale. The other difference is where each respective side’s power and influence resides- one on cable the other on the internet.

You can certainly argue the validity of valuation on these companies but that is not a reason to shut someone out.  I’m not sure we want to get into the business of having regulators say high or how fast a security can move.  We have guardrails in place in the form of circuit breakers but people are only going to pick up where they left off. The other argument of manipulation doesn’t smell good either.  There is no difference in the people who go on TV only to talk their book and make a free sales pitch on the air.  The new class of traders have online audiences where they share information and state their thesis.  Under both circumstances, no one is obligated to take action on information they hear on the business channel or on an Internet forum.

Again, the current state of the market is awash with irrationality.  Neither side of these trades deserves protection from regulators or the court system.  Pain is already occurring on the short end but eventually it will come for these irrational bulls.  If you take part in a short side trade that is already greater than its outstanding shares, you deserve pain if it blows up.  If you choose to be stubborn and not acknowledge that a group of people are trying to buy you out of a short position, you deserve pain if it blows up.  If you choose to make decisions by reading an anonymous chat board and don’t research, you also deserve pain if it blows up.  None of these behaviors are indicative of prudent capital management. 

Unfortunately, the pain will be felt disproportionately by those who have the most to lose- in terms of percent of assets.  The institutional investors have far greater capital resources and far more diversified portfolios.  For that reason, and several others I was hoping their whining would fall on deaf ears.  Their lesson may come from clients wishing to cash out after being wrecked by amateurs or losing credibility in the investment community.  It will be fun for the Robin Hood traders to see the billionaires squirm, if only for a minute.

I think that these people should keep looking for opportunities where big money is being pushed too far.  The whole point of actively investing is finding ways to outperform the broader market.  Traders and investors should continue to take risk but not get swept up in the pandemonium akin to financial revolution.  Many of these smaller traders must now learn the difference between gains and greed. 

We should not lock these traders out of the markets.  We should treat these people like adults who are capable of managing their capital.  Regulators should not give in to an institutional class that calls for change during the game because they’re getting hammered.  Who amongst the hedge fund managers would slam on the brakes when they’re stomping out weaker investors? When you go to a sports book- and these people are gambling- you don’t get to ask for a refund because you didn’t know the QB was injured. 

Big guys- you lost and got pain for being overextended. Little guys- you captured an incredible amount of attention by taking on risk and getting a victory. Let’s leave it at that and not manipulate the system. Let people be free to make decisions for themselves and don’t cast out small investors because you don’t agree with their choices. Don’t tell these people they’re too dumb to invest in a free market. Don’t bend to a class of investors that had it gone the other way, wouldn’t miss a second of sleep over these people.