While we were writing up the clean energy stock piece last night we got to thinking about why retail investors buy these stocks in the first place. This cohort has clearly been an important piece of the sector’s marginal bid for quite a while; it’s hard to imagine most institutional investors paying such lofty valuations. We also pondered the demographic that might be in the mix here and concluded clean energy is the sort of industry younger investors would embrace.
But then we had another, more disturbing, thought: do retail investors actually think the proceeds of their stock purchases go directly to the company and help clean up the planet? We fashioned a 2-sentence question and have been asking a small group of non-finance friends the following:
- Let’s say you buy $1,000 of Amazon stock tomorrow morning.
- How much of that money does Amazon actually receive?
So far no one has said “none” and the answers actually tend to be about $900. We emailed a good friend who is a CNBC on-air talent with a large Twitter following and asked his opinion of what percent of retail thinks their investment goes right to the company. His response was “a significant minority”, with perhaps the Reddit community more tuned into how markets actually work given the GameStop kerfuffle. The irony here, of course, is that GME couldn’t even tap equity markets to take advantage of the recent short squeeze (see link below).
Feel free to try this question on your non-finance professional friends and family… And be prepared to answer the inevitable “then why does a company even bother being public then?”
We don’t want to make too much of this insight, but since 1) the marginal trade always sets asset prices and 2) disruptive technology companies are more likely to have retail investor sponsorship, there does seem to be something important here.
Three ideas about this:
#1. Company leadership matters a lot to retail investors and it needs to be highly visible. The old saying that “people buy from people” still applies in the 21st century. Social media allows CEOs and founders who can communicate a clear and appealing vision the platform to spread it near and far. And since some portion of the retail investing public thinks that CEO actually gets new capital when they buy a stock, the stronger the manager the higher the stock price.
#2. Companies that focus on industries or issues that appeal to individual investors can have a longer runway to profitability than those whose business is less well known or understood. Just think of every micro bubble in the market right now – space, electric vehicles, autonomous driving, legal marijuana, etc. All of them are things retail investors think they understand. Who doesn’t want to check out Mars or try out an AV? Back in 2000 – 2002 a lot of dot com companies went bust because they ran out of cash. The visionary CEOs of today were around then and know to raise a lot of capital early and spend it more carefully. Retail interest in their companies helps keep stock prices high enough to do that for a long time.
#3. One can extend the idea that retail investors treat their capital as a “vote” about topics they care about to the sudden surge in online currencies. Some portion of the population still mistrusts the banking system and sees blockchain-based money as a good alternative. Don’t give your money to Jamie Dimon, they might well reason, put it into a pool with other like-minded individuals who want to create a world where central banks don’t control the money supply.
Now, even if many retail investors don’t know where their money actually goes they do still 1) want a positive return at some point and 2) cannot single-handedly keep a worthless stock elevated forever. The paradigm we’re describing today is not a repudiation of the laws of market gravity. They are more like acknowledging that black holes exist, and what happens in them is different from what we witness elsewhere in the investment universe.
Summary: it’s easy to dismiss retail investors as “dumb capital”, but like it or not they can and do set stock prices over the near and medium term in a range of disruptive technologies. Playing in any of these names means you share your portfolio P&L with them. Our bottom line is much of public market disruptive tech is essentially unshortable. You don’t have to be long, but betting against people who think their 10 share buy order is going to change the world is both risky and not actually a fundamentally based investment position.