Recently, the market is filled with noises around the power of individual investors such as WallStreetBets (WSB) on Reddit. This market phenomenon triggers a recent inquiry from SEC on Robinhood, pay for order flow, wall street hedge fund, and many other activities that might set new regulations in motion. I think WSB movement is very much like the political movement behind Trump’s rise. The wide adoption of large social platforms (ie. Facebook, Twitter, Reddit) with anywhere anytime mobile access gives unprecedented power to individuals and allows moments to be created that can traditionally only be accomplished by a large organization such as a political party or a company.
As an investor, what does this mean?
- Expect increase volatility. Given how fully priced the market is, I would expect an increase in volatility since movements can be created and destroyed much faster than before. Risk management becomes more important in 2021. While the impact of WSB is only around a few stocks, the implication is system wide since there is significant capital behind each wild swing. For Gamestop (GME) stock only, it is about $10B – $20B of leveraged capital through call and put. The force that created the boom might be the same force that creates bust.
- Further diversification. If individual investors feel that wall street is rigged, more capital would flow to alternative assets such as physical gold or silver, and emerging crypto trading and assets. We have covered both topics in our blogs before. But given the physical squeeze around silver delivery, it might be worthwhile to buy some real physical gold and silver in addition to gold and silver stocks. 1% in crypto is a good idea since it is one of these balancers that have a very limited correlation with traditional assets such as stocks, bonds and real estate, or even gold.
- Be mindful of disruption in our traditional thinking. Regardless of whether we follow Moore’s law or Wright’s law, what we are seeing is an illustration of the technology’s power and acceleration within the society. I would recommend people read up on ARK’s approach to disruptive investing (you can view their big ideas report 2021 here) and Jeff Booth’s book “Price of Tomorrow” which illustrated how technology is driving a deflationary trend. If you have any interesting books, please kindly recommend them. I think it is pretty hard for a human to grasp the doubling effects of technology since it does not happen in nature much. Because of that, we need to constantly remind ourselves on how to properly evaluate a technology-enabled stock that can grow at an much faster pace (ie. Amazon). Sometimes a growth stock is a value stock, if the growth is real and you are willing to let time be your friend.