Retail investors have returned to individual equities this year, chasing returns following the market’s rebound from mid-March lows, a report from Richardson GMP says.
The firm’s weekly market report compared the performance-chasing since the market sell-off in February and March to the tech boom in the late 1990s.
“Valuations for many companies that are destined to change the world are no longer relevant,” the report said. “The names have changed, how they will change the world has changed, but the similarity remains.”
GMP pointed to estimates that retail investors represent about one-quarter of market trading volume this year, up from one-tenth in 2019. After ETF growth likely suppressed market trading volume in the previous decade, trading volume has risen this year as retail investors return to individual stocks.
The report pointed to Tesla (up more than 300% this year) and Shopify (valued at 1,400 times 2020 earnings). It attributed some of the retail trading activity to physical distancing.
“In a world where boredom is much more prevalent, ‘playing the market’ with some mad money could be a nice distraction,” Richardson GMP said.
“This is certainly contributing to the activity. However, the bigger attraction is likely the gains that are being made in many pockets of the market. This changing behaviour is helping feed those gains, which then feeds that behaviour, bringing back some memories of the late 1990s.”
The rapid recovery in equities creates a moment ripe for fear of missing out and overconfidence. The report warned against performance chasing as past performance is often relied on too heavily.
Most funds can’t replicate their top performance for several years in a row. The best Canadian fund managers over the past 10 years all spent at least three years within that decade generating below-average results, the report said. Investors prone to chasing performance likely would have bailed on those funds when they were down.
Last week S&P Dow Jones Indices released a persistence scorecard to demonstrate that “regardless of asset class or style focus, few Canadian fund managers have consistently outperformed their peers.”
The Richardson GMP report didn’t bet that we’re headed for another tech bubble.
“We are not suggesting either way that investors dabble or avoid some of these high flyers,” the report said. “Maybe the world is changing this time, or the trend goes on much longer, or, just maybe, that tree does grow to the sky. The point is to be mindful of the amount of capital exposed relative to your portfolio.”