For those with a long memory and an interest in the world of investing, the technology bubble in the late 1990s was a remarkable time, with the stocks untethering completely from fundamentals as animal spirits ran high. The excitement, and advances in technology, allowed individual investors to participate in the mania with the emergence of day trading; buying and selling stocks intra-day, often with the use of margin, to profit from the rapid movement in security prices. It was a lucrative time for many but disastrous for others, particularly so after the market peaked in March of 2000.
A confluence of events has driven a notable resurgence of such activity over the last few months. The collapse in the equity markets in March was seen by a lot of people who had not participated in the more-than-decade long bull market, as an opportunity. With huge numbers of people stuck at home with time to kill, and in many cases funded by stimulus checks, online brokerage accounts have exploded in number. User-friendly platforms and commission-free trading has allowed online trading to become affordable, accessible, and for many, entertaining. Schwab, Ameritrade and E-Trade have added over 1.7m new accounts this year; Fidelity Investments saw over a million new accounts opened between March and May; and the popular, sleekly-designed mobile trading app Robinhood added over three million new accounts in just the first four months of the year.
Interestingly, it appears that a lot of trading activity has taken place in the riskier areas of the market. Companies that have fallen the most, and therefore may look like the greatest bargains, are generally those that are more highly levered, cyclical and at risk of going out of business. Even companies that have filed for Chapter 11 bankruptcy have seen resurgent stock prices such as car rental company, Hertz. Despite its largest shareholder, Wall Street titan Carl Icahn, selling all of his equity at $0.72 per share, the stock rallied to over $5 as some speculators, perhaps unaware of the large debts that were owed and the workings of bankruptcy law, gambled on a turnaround. The Securities and Exchange Commission even had to step in to essentially prevent the company taking advantage of the stock price by offering $500m of potentially worthless stock, that was destined to end up in the hands of novice investors. A similar phoenix from the flames trade has occurred in other bankrupt or nearly bankrupt companies such as Chesapeake Energy and JC Penny. We highly doubt there will be any remaining equity value in these names and are concerned that retail investors might see well-known or recognized brands as safe investments.
Numerous recent news articles have exemplified the risks of day trading, which can often resemble gambling more than investing; a 20 year old student who committed suicide having been allowed to borrow a million dollars on margin, then seemingly losing the bulk of it trading complicated stock options; and a retiree who lost his life savings in just two weeks in leveraged exchange-traded notes.
Broadening equity ownership and encouraging young people to own and invest in the market is undoubtedly a positive thing. It will hopefully counter some of the anti-capitalist cries of late and wide-spread concerns that the system is rigged in favor of Wall Street and the rich. But timeless investing principles should be remembered. Diversification is a key tenet of successful, long-term investing. Knowing and understanding what you own are also crucial in avoiding many of the pitfalls that have beset amateur investors. These are the principles which have guided our investment process through various market cycles over the years and they will continue to guide us as we navigate through the current volatile times in the market.