The far-reaching implications of the amateur trading wave

by
Claudio Grass
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Part I of II by Claudio Grass, Hünenberg See, Switzerland

2020 certainly was a year of a lot of “firsts”, most them extremely destructive to the economy, to our societies and to our everyday lives. However, there were a few positive developments too, among them being the fact that it was the year that ordinary people discovered and entered financial markets.

Until last year, the world of trading and investing had long been closed to the average citizen, taxpayer, and saver. Wall Street was always seen as an exclusive club. Investing itself, as a concept, was widely seen as something only those at the top of the socioeconomic pyramid could engage in, and even then, never directly. Bankers, brokers, and other “gatekeepers” made sure that this very profitable arena would remain their own playground and that nobody would dare “cut out the middleman”.

They achieved this by presenting markets and financial planning at large as extremely complicated and very intimidating, by using unnecessarily convoluted jargon and by sharing horror stories of mythical losses suffered by anyone who tried to “DIY” investing. However, most importantly, they achieved it by promoting themselves as irreplaceable, pretending that their insights and experience was the equivalent of a crystal ball that nobody else had access to. They could “beat the market” and clients should trust them blindly, because they knew precisely what was best for them and always had their best interests at heart.

Of course, most of this is nonsensical. A quick look at performances of different strategies and returns over the last decades proves as much. Nobody has a crystal ball and no-one can consistently “beat the market”. The exorbitant fees and the ludicrous costs that retail investors have paid over the years, especially those with smaller accounts, just for the privilege of investing in a company and being able to put their cash to work, were almost never justified by the level of service and the actual returns they achieved. And that doesn’t even include the countless scandals, the corruption and the rule breaking and bending that has cost so many retail investors their entire life savings. From reckless investment decisions to insider trading, from collusion to plain and outright fraud, the gatekeepers of yesteryear certainly have a very tainted record and one that definitely does not support their claim that they always put their clients’ interests first.

Sea change 

The explosion in popularity of easy-to-use online trading platforms, mobile apps and discount brokers affected an unprecedented, seismic shift in the way people accessed and participated in financial markets. Practical, financial and even psychological barriers were lifted and anyone who wanted to buy a stock or any other investment vehicle could simply go ahead and do that, by themselves, instantly and at an extremely low cost.

Eventually, this massive “democratization” of investing spread across income levels and even those with very little to spare could enter the arena. The popularization of the various trading apps also encouraged, and often incentivized, a lot of speculation, a lot of “group think” and very dangerous trading practices, as countless amateurs rushed into a world they didn’t understand. Excessively risky trades and easy access to complex instruments led to considerable losses, even entirely wiped out accounts, as so many newly minted “investors” experimented with leveraged products and complicated vehicles without doing even basic research beforehand.

These were the negative consequences of opening up the markets to ordinary people, and as with any other activity that people can engage in freely and at their own risk, there are some that will take on a lot more of that risk than other. Obvious as that may sound, and as could have been expected, it was precisely this downside that the media, politicians and institutional figures focused on. They all issued dire warnings of the extreme dangers of letting people decide what they want to do with their own money. They painted all small retail investors with the same brush, cherry-picking some of the outlier cases of steep losses to prove that people simply cannot be trusted to know what is best for them.

Granted, having more freedom and more choices definitely demands a greater degree of personal responsibility too, and there will always be a few who will be unable to cope with it. Especially when it comes to the investing world, there are two sides to every trade and there are winners and losers at any given moment; that’s the name of the game. And while experience, a relevant education and specific expertise obviously make a big difference, no-one is immune to market downturns, poor and biased decisions or just merely bad luck. There are many professional investors and seasoned traders who suffered often catastrophic losses in a single trade, despite all their knowledge and their skills.

Overall, the media coverage of this phenomenon was focused on the sensational angle, as it always tends to be, on all the negative individual experiences and the foolish risks that some amateurs took and paid the price for them. The astounding degree of financial liberation that came as a direct result of this shift was, however, largely ignored.

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In the upcoming second part, we’ll look at the impact of this trend on silver and we’ll examine how it allowed ordinary people to come together and move the needle not just on stock or metal prices, but arguably on a higher economic and sociopolitical level too.   

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This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland.

This work is licensed under a Creative Commons Attribution 4.0 International License. Therefore please feel free to share!

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