DO ‘DAY-TRADERS’ REALLY INFLUENCE THE MARKET?
In essence, all the ‘market’ is, is a collective of people. If the collective is big enough, it will influence the whole. Day traders are exactly this, a group of individuals trading the market, often in their personal capacity. However, what happens when sudden surges and dives of the market are nothing more than disruptions. Are these disruptions enough to boom or crash a stock market or company completely? Do Asset Managers jump on these short-term instabilities or do they enter the market based on fundamental values that can be measured? These are all relevant questions to be asking, especially in the world we are living in today. Investing has little to do with being driven by emotions and everything to do with calculated strategy.
We all know the old saying of “If it was that easy, everyone would do it.”, technology makes it easier for the every-day person to trade. This is great for some, a Robin Hood expedition so to say. However, does everyone participating in a particular trade know what is actually being done and why, or are they simply following a crowd and believing for the best? Day-traders have their place in the market too, just like all the other fish in the sea. However, some day-traders may have an agenda which is not pure of heart.
Gamification apps are created to make it seem easy to make a buck, but what is actually happening in the background? Often, Whale Investors, are investors that manipulate the market causing jumps and crashes. This is done by one-or-two large investors triggering buying frenzy’s, rallying the price of a stock extremely high and then executing a sudden bulk sell-off at the top. The whale, causing the buying and selling, makes a lot of money and at the bottom of the crash, who lost the most money? – The rest of the little fish that got the timing wrong.
At the moment, we are seeing a large amount of flocking to stocks happening on the markets. There is no real intrinsic value supporting this, simply large amounts of day-traders being swung by hear-say, opinions and algorithms. This can be dangerous. Applications are now available to download where an investor can mimic a day-traders stock positions and moves. This amplifies the volume of trades being placed by that one day-trader, giving their influence over the market a greater kick. When this happens especially on smaller companies, it is not always based on fundamental evaluations. In this case, value is merely perceived by a fad, with no reputable source or evidence of actual business growth or earnings. This drives up the volumes of trade, which in turns translates to driving up the price of that stock. This is often followed by a massive sell-out and crash of that company stock.
The questions have been asked: “Do we think this is a game being played that simply has a reset button? Do traders realise that they are playing with a person’s company or their own economy?… Can we plead ignorance or do people simply not care?”
A key example of where this took place was in America with Hertz. The stock was down-and-out, a high level of day-traders came along and piled into the stock. This pushed the stock up by a few hundred percent with no fundamental reason for why they are investing. Manipulating the numbers to sell-out again, leaving the stock at worse than they found it, all in the name of making a dollar. Similarly, in China, retail day-traders have a big influence on the market. In South Africa this has been happening with Sasol as well. This all blurs the real value that a company should be trading at. Yes, day-traders can experience huge wins, but equally so, can experience massive losses should the timing of the buy-or-sell not be perfect.
You may have been looking at your portfolios in recent months, wondering why your portfolio has not followed these same trends, jumping in and out of stocks violently. The reason is because this is not responsible investing. Professional investment institutions have a fiduciary duty to consistently deliver and protect capital over the long haul. We have been given an investment mandate in which we must honour. If everyone abandons calculative investments decisions made from fundamental principles and choses to rather follow the ebbs-and-flows of the market, the world will truly go mad.
When Markets are as volatile as they have been from March 2020 onward, wisdom says to wait patiently to enter and exit the market in a way that is not being dictated to by noise. Yes, when stocks crash it provides great opportunity to enter in at lower prices, below actual intrinsic value of the stock. Buying-in at these lower prices can allow organic company growth and return on investment to take place. During these COVID-19 times, livelihood was threatened and many turned to the stock markets for help. An increased number of inexperienced day-traders have entered the market. Although the crisis itself has impacted the market due to economic conditions, the large and sudden swings that have no fundamental explanation, are the evidence of the emotions we see today playing out through some stock prices. Things will normalise a bit more in the market as inexperienced day-traders go back to work after COVID-19, securing their livelihoods again. Also, as the flow of cash from what the Fed released earlier this year is stably reabsorbed back into the stock market, we can expect to see the start of some kind of ‘normal’ again.
For more details please speak to a Fairtee consultant or contact us on clientservices@fairtreeinvest.com
– Wessel Grobler and Kheara Lugg
