Busting Financial Myths: "The Ignorant Retail Investor"

If you Google "ignorant retail traders," you'll find mentions on the Financial Times, Seeking Alpha, Wired, Berkshire Money Management, The Street, and even The South China Morning Post.

It's as if the whole world has agreed on the existence of a dominant "ignorant retail investor" archetype that trades based on emotion, loses money, and needs to be protected.

What is a "Retail Investor," Anyway?

There are two kinds of investors: Institutional and retail. An institutional investor trades large amounts of assets, qualifying them for better treatment and lower fees. They typically invest other people's money.

A retail investor, on the other hand, invests their own money, through brokerage firms like Robinhood or savings accounts like 401(k)s. In other words, retail investors are normal folk, not people whose job it is to move around money.

The Implication

Given the two broad categories of investors — retail and institutional — the wholesale categorization of retail as ignorant implies that institutional investors are the opposite: Wise, enlightened, and immune to poor financial decisions. As we'll see, this couldn't be further from the truth.

The articles and hit pieces that popularize the idea of "ignorant retail investors" obviously aren't being written by the retail side.

Unfortunately, some normal, middle-class people fall for the charade, without realizing that they are the ones whose investor rights are threatened by the misleading implication of "ignorant retail."

Retail Investor Wins

In spite of the mockery of "dumb money" retail investors, we've seen retail out-perform time and time again.

For instance, as CNBC notes, Robinhood traders almost perfectly timed the market bottom in March, seen as their total holdings picked up significantly while stocks hit their lows.

Retail investors bought stocks "at a discount," while institutions sold them at a loss. In this Robinhood data tracker by Apteo, we can see that Robinhood traders picked up strong stocks with consistently high returns during the crash, like Coca-Cola ($KO).

Moreover, Goldman Sachs notes that popular stocks among the retail crowd are outperforming the top stocks of hedge funds.

Institutional Investor Fails

At the same time that Robinhood users correctly called the market bottom, institutional investors incorrectly predicted that stocks would re-test their lows.

ig·no·rant ◦ lacking knowledge or awareness

Essentially, ignorant institutional investors lacked knowledge of how the markets would move and lost billions, which smart retail investors picked up.

Veteran US investor Carl Icahn "lost $US1.8 billion when he sold his Hertz shareholding" and Warren Buffett dumped all his aviation stocks, near the market bottom, at the same time that Robinhood investors picked them up, ready for the rebound.

A Bloomberg Opinion piece decrying retail resorts to recalling the institutional investor glory days... from over two decades ago:

"Some 25 years ago, the top hedge funds were making triple-digit returns and retail investors weren’t making much at all."

Besides publicly-listed equities, institutional investors have too many eye-popping startup investment failures to count.

From SoftBank's mistimed $130 million Bitcoin bet to their whopping $18 billion "Vision Fund" loss, institutions are far from the impeccable investors they're portrayed to be.