Help! My Teenage Son Is A Stock Speculator
Oakland, California. June 30th, 2020. 11:35pm.
Me to 16-year old son: “Hey, turn off your phone, it’s time for bed.”
Son: “Uh, ok. Wait, I need to put in my limit orders first.”
Me: “Your what?”
Son: “Limit orders. If any of my core positions drop in price I try to buy more on the dip. I update the orders on my phone every night before I go to bed.”
Me: “Uhm, err, it’s just that I thought I heard The Office theme song coming from your room?”
Son: “You did. I can watch The Office and put in limit orders at the same time. Hashtag multitasking.”
Generation Robinhood?
If you're a skeptic this conversation neatly summarizes the stock market action we’ve witnessed since this summer. Newbie traders, flush with cash, confidence and time have driven the market higher in a speculative frenzy. But is that really the full story?
Before tackling this question I must first admit that the exchange above wasn’t a total shock to me. In the summer of 2018 I noticed a year’s worth of babysitting money stuffed in a box under my son’s bed. Since he’s has three older siblings, all perpetually short of cash, I knew this was a dangerous situation. My first suggestion to him was obvious - put the money in a bank account.
He understood that this was a safer way to hold his savings but was unimpressed by the account fees and ultra-low interest rates. In his Gen Z mind money in the bank paid virtually nothing and was difficult to use, so why bother? I then suggested that he open a brokerage account. I figured putting the money in the market would help him learn about investing while saving me the inevitable stress of mediating a fight once his siblings discovered his cash and began raiding it.
Ulterior Motives
Of course, as all teenagers know with certainty, parents always have ulterior motives and here I admit to a selfish one. Having worked for two decades as a portfolio manager, I assumed he would seek my counsel on how to invest the money. I envisaged us together, sitting in the somber surrounds of my office studying annual reports, while I opined on the importance of finding companies with high-quality repeatable cash flows and management you can trust.
We got about halfway through the first of those talks when he cut me off and said he'd already put 50% of his portfolio in Facebook. When he spent most of our next session complaining about the "loser" emerging market ETF he bought on my suggestion, I decided to let him fend for himself. And that was mostly it for the next eighteen months, until this summer.
The morning after our “limit order” conversation I checked his brokerage account. Staring at the transactions I felt a strange mix of pride and humiliation. Pride because there were indeed a string of successful distressed purchases - Southwest bought at $33, Uber at $34 and Facebook at $159. (Current prices for those are - roughly - $47, $50, and $280). And humiliation because over this same period I was meekly hiding in the safety of cash.
I’ve read comments suggesting retail traders who bought stocks during the crash were lucky, or naive. Maybe. Yet in trading this way he was doing exactly what investors with spare cash and long-time horizons should do - get paid for providing liquidity in a stressed environment. In The Rise of Carry, a book I co-authored earlier this year, we describe how too much of this liquidity provision now comes from levered traders, whose fragile positions cause them to do the opposite - withdraw from the market during crises. I’m not saying we should rely on an army of Robinhood traders to save us when stocks crash, but simply that the returns they earned for providing liquidity during a very bad time was fair compensation.
A Shift In Strategy
To be a teenagers’s parent is to be constantly several steps behind what is happening in their lives. You know, like asking about a relationship when it turns out they were friend-zoned weeks ago, or dropping slang that “no one says anymore” into a conversation. And so it proved with investing. By the time I began describing his investment style as “buying long-term holdings on the dip” his strategy had already changed. Stocks like Nestle and Honeywell that “never moved” were replaced by companies in sectors that definitely did - cannabis, online gambling and, of course, electric vehicles.
Again, at first glance this fits the narrative we’ve all heard - impatient retail traders looking for stocks that “only go up”. Yet the logic was there. It wasn’t that Nestle or Honeywell were bad companies, he explained, it’s just that they weren’t involved in anything new. Having spent the better part of his day on Zoom since March and, let’s face it, having himself felt the dopamine rush of trading profits, he reckoned online gambling and online sports were growth sectors. He also bought cannabis stocks —and here I’m hoping it was less to do with experience and more with his proclaimed view that legalization around the world was inevitable.
Rephrasing all this in language I might use for my finance students, in an economic recession the premium on growth goes up. It’s perfectly reasonable to pay more for something that is scarce and it perfectly reasonable to spend time looking to uncover more scarce growth opportunities.
And, Yeah, SPACS Too...
Which brings us to the other, inevitable, element of his portfolio - SPACs. Since I’m admitting here to some parenting laxness, I’ll also admit that until this summer I hadn't heard of SPACs either. Boy has that changed. I now endure an almost daily ritual of him entering my office and announcing how his SPACs are beating the market and mocking me for still not owning Fisker. (Parenting aside: is being insufferable sufficient reason for grounding a child?)
So, yes, this does remind me of the IPO frenzy of 1999 and the cynic in me wonders if SPACs are providing a bail out mechanism whereby private equity and venture funds unload holdings to unwitting retail investors, enriching SPAC sponsors along the way. On the other hand, the number of listed US companies has been steadily shrinking over the last few decades and if SPACs end up being a cheaper way than traditional IPOs of bringing more companies in growthier sectors to the public markets that doesn’t seem all bad.
Many SPACs are structured in ways that hugely advantage their sponsors, incentivizing them to get a deal done, regardless of the quality. But those flaws are well publicized and beginning to change. After reading about these issues my son even did an English term paper outlining the pros and cons of SPACs as a tool for companies to raise capital. (As if high school teachers haven’t suffered enough this year). My point is that if a 16-year old neophyte investor can educate himself on the risks of SPACs, why should we assume all investors in them are all being fooled?
Lambs To The Slaughter?
One thing I’m certain about is that the boom in retail trading has been turbocharged by the elimination of retail commissions. My son did a total of 9 trades across 2018 and 2019. The total so far in 2020? 165. When your typical trade is hundreds of dollars, even a few dollars commission is a big deal. Want proof? Ask the TD Ameritrade customer service rep who had the misfortune of dealing with a torrent of emails from my son when he was charged a $6 commission for buying Air New Zealand shares. He was in the wrong - the shares were ADRs and thus subject to commission. But the very idea of being charged to trade so infuriated him, that he eventually browbeat them into refunding the $6.
The explosion of retail trading should have been very good for professional investors, who historically have done well trading against retail flow. That has not worked so far in 2020 when retail traders have trounced the pros, but I’m sure there are still plenty of portfolio managers lining up to take the other side of their trades. A few years ago I would have been one of them, armed with models and data to demonstrate why I’d eventually prevail. Now as the parent of a retail trader my perspective has changed and my emotions are mixed. May the best investor win.
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