In May, a Reddit poster hit WallStreetBets for sure Tip for Scorpio Tankers Inc. The oil shipper, which traded one-fifth of the value of its assets, was a screaming buy, with rising storage rates, insiders rising and returning after a short negative time.
There is a possibility to see “100% returns next year”, said the user.
Eight months later, the reward: a loss of 17%.
Another WallStreetBets poster was similarly breathless in their brilliant idea. short Tesla Inc. in 2018. The result: a loss of 1,330%, not including loan fees, assuming they stayed with it.
Choosing stocks is difficult. Almost no one has an advantage and it is not a sign of shame when a call fails to expand.
But in all the hagiography offered to Reddit merchants who connected to GameStop Corp. before it rises to the sky, it is worth remembering that a large enough sample of predictions will always give a few winners. Evidence of the genius’s investment elsewhere is hard to find.
These warning stories about stockpiling are documented in research covering this era of WallStreetBets. A new the newspaper finds that, on average, when retailers on Robinhood Markets buy a stock, it does not perform better in the next three to 20 days.
In fact, it tends to do something worse.
“The obvious lack of skills of Robinhood investors in the aggregate is consistent with commission-free investors 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 buzz stocks on WallStreetBets saw an increase in activity on Robinhood a few days later, a sign that there were probably many overlaps between the two communities.
To isolate investment skills, academics have adjusted 2020 returns for recent price changes and risk factors, such as valuations and the size of a company. The result: when you eliminate the possibility that these traders simply follow market trends, they do not end up choosing their future winners.
The results do not mean that retail investors in all brokerages are inappropriate. In fact, the four researchers found that the group’s increased acquisition of a company’s shares generally predicted higher returns. The problem for The contingent of Robinhood is that they usually pile up on a stock almost a week after most of their colleagues.
“Although retailers as a whole seem to invest in the same types of securities that are popular with Robinhood investors, we find that the larger measure of retail leads to Robinhood trading by a few days, which may help explain the difference in performance. “, Said the authors wrote.
The research only covers the first eight months of last year, as Robinhood stopped publishing the number of users holding each stock in August.
To be fair to Robinhood, it seems that the model is not limited to their platform. Another The paper showed that smartphones generally make people more likely to buy risky assets and track past returns – in part because apps allow them to trade in the evening without thinking too much.
Bragging rights
As the GameStop Rally returns to Earth, new research may provide a test for amateurs whose the rights of praise in the last week have reached fever.
However, many of them would challenge its conclusions, given how much of this new generation of investment seems to have made a fortune while earning hedge funds – largely empowered by zero-commission trading platforms.
When the markets were hit by Covid in about six months until July 2020, a portfolio that includes the most popular shares of the Robinhood app returned an annual percentage of 105%, according to Wolfe Research.
GameStop Corp., the baby poster of retail speculation, is still over 238% higher this year even after its recent sinking. Discard Sundial Growers Inc. and AMC Entertainment Holdings Inc., and the Robinhood crowd seems to have several incredibly successful 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 made a profit on these platforms, it may not matter too much if it was just a matter of choosing the winners or following the market momentum.
The success of retailers in general has been documented by various academics in different periods and methods. In a Paper last year, Ivo Welch, a professor at the University of California, Los Angeles, showed a portfolio of Robinhood common holdings exceeds market benchmarks and a model with quantum factors in the two years to mid-2020.
Welch’s work has focused on widely held shares of users, rather than those who have seen an increase in shopping on the platform. The newspaper recently focused clearly on whether several acquisitions from the Robinhood crowd actually led to superior performance – or not.
“Our evidence suggests that zero-commission investors as a whole behave like noise traders, with Robinhood’s changes unrelated to future returns,” the academics wrote.