Day traders make hay in retail investing
New generation of day traders looks to profit from COVID-19 stock crash
For the past five months, Jayden Smit has been working two jobs.
In the evenings, the Prince Edward County, Ont., teen works part time at a grocery store, where he’s lucky if he pulls in $1,000 per month stocking shelves and cleaning the store.
His day job, on the other hand, is proving to be much more lucrative — as a bonus, he can do it from the comfort of his living room couch.
Smit, 19, is one of thousands of Canadians who started investing for the first time earlier this year, when major stock indexes declined between 30 and 40 per cent as governments around the world imposed social distancing measures to combat the spread of COVID -19.
He now considers himself a day trader, and said he is closing in on $10,000 in returns. He said he already doubled his money on a quick trade in Virgin Galactic Holdings Inc. — Richard Branson’s space tourism company — while dabbling in risky psychedelic drug companies and tracking retail investor volumes to identify opportunities for one-day swing trades. He’s even learning technical analysis.
The influx of new retail investors like Smit, many of them young and some willing to bet heavily on risky names that have suffered the most during the crash, has left veteran market watchers befuddled. Analyzing company fundamentals no longer seems to work when a group of investors ignoring them is leading the charge.
“It’s almost a perfect storm,” said Smit, who has taken advantage of the current market conditions for profit. “I don’t think this was going on a year ago. I don’t think retail traders like me have had this much impact in the markets.”
In the first quarter of 2020 alone, discount online brokerages in Canada added 500,000 new accounts, according to Investor Economics, meaning that they’re growing at three times their normal pace. That same growth was seen in the U.S. where commission-free trading platform Robinhood added three million new clients in the same time frame.
Many view Dave Portnoy, the founder of the controversial U.S. sports media site Barstool Sports as the de facto leader of this new generation of investors.
Without sports gambling to occupy his time, Portnoy has taken to day trading during the lockdown, livestreaming his trading sessions with a cigarette drooping from his mouth, his silk Hawaiian shirts half unbuttoned and the words “STOCKS ONLY GO UP” written on a white board behind him.
While Portnoy’s rash decisions — he has gone as far as deciding what his next investment would be by pulling Scrabble letters out of a bag — have earned him a diehard following, the truth is that many new Canadian investors have never heard of him and are using much different methods.
The Financial Post spoke with 15 Canadian retail investors who started investing for the first time around the market crash and found that they’re deploying a breadth of strategies from building dividend portfolios to looking for swing trades with penny stocks.
These investors had little knowledge before entering the markets and many admit they still don’t — several referred to real estate investment trusts as “R-E-I-TS”, spelling out the acronym instead of pronouncing it as a word.
They knew the learning curve would be steep when they put their money down but did it anyway because they sensed opportunity. Many are, as expected, millennials who are trying to put the savings they’ve accumulated from the first few years of their careers to work.
On the surface, they appear to be frugal. All but six of the investors have portfolios made up entirely of Canadian names. Most said they’re using Wealthsimple as their trading platform to avoid paying commissions. The majority said they won’t buy U.S. stocks simply because they would have to pay fees to convert their equity into U.S. dollars. Not one of the 15 who spoke to the Post owned a FAANG or casino or cruise line stock, all of which have been singled out as Robinhood favourites.
Seven of the investors owned portfolios heavy tilted toward Canadian banks, including one who owned shares of each of the Big Five. And even though some of them are still quite young, they’ve decided they’d rather build dividend portfolios instead of chasing growth. Mathew Bucci, a 23-yearold student in Montreal, told the Post he was buying dividend stocks because he was already planning off of them in retirement.
The group’s nervous relationship with investing is perhaps no better explained than through 26-yearold Bradley Ferns of Toronto. When the moment came for Ferns to start creating a portfolio, he was still so anxious that he only bought a single share of Air Canada to test the waters. He spent the next days watching his balance increase by pennies, instead of dollars.
It only took a couple days of seeing stocks in the green for Ferns and some of the others to grow more confident. After that, they were hooked and injected additional equity into their accounts.
“I’ve never been big on gambling or anything like that, but this is addicting,” said Waleed Hamed, a 25-year-old investor from Curtis, Ont. It’s even worse for Hamed, considering that he’s directly competing with a friend over returns.
In time, some let their initial conservative methods go by the wayside. Those who had the idea of keeping it simple with broad-market ETFS were all of a sudden dipping into individual stocks. Others began to seek out trades that could become four-, five- or 10-baggers in the small-cap market.
Smit is one investor who has done well trading penny stocks, but success has been harder to come by for others.
Josh Hanson, a 36-year-old investor in Calgary, didn’t have the best start to investing because of some bets that went awry on penny stocks. Hanson said he is improving and has clawed back some of those early losses, but those mistakes are still overshadowing the good trades he’s made so far.
It’s almost a perfect storm.
... I don’t think this was going on a year ago. I don’t think retail traders like me have had this much impact in the markets.
Hanson and Smit are among the most active investors of the 15. They have to be if they want to successfully trade these volatile stocks. And the more active they are, the more revenue their discount online brokers can bring in.
Questrade chief operating officer Steve Graham said his platform saw an incredible spike of trading volume, especially in March and April. Some of that activity was certainly caused by the estimated 100,000 new accounts the platform added to its base over the first two quarters.
TD Web Broker experienced the same boon with growth up as much as 350 per cent in March, TD Direct Investing president Paul Clark said. The average number of trades throughout March was higher every day than the peak of the cannabis craze, he said.
While daytraders only make up a small percentage of TD Web Broker’s client base, Clark said that March was the first time that longterm investors were responsible for more active trades.
This craze, however, was short lived. Trading volume has already dropped off and so have new account sign ups. What the brokerages saw throughout March and April was never going to be sustainable. Not only that, but Graham believes the market crash may have pulled forward some future accounts and the following years may see weaker than average numbers as a result.
“Will we see a period like this again for the industry? No,” Graham said. “This is a unique event. This is a once in a lifetime event.”
Like the brokerages, the investors that the Post spoke with are also focused on the future. Six haven’t even sold a single stock yet because they’re investing for the long-term.
Matt Warwick, an Edmonton-based investor who said he has grown his portfolio from $400,000 to $770,000 on bold bets on the likes of Shopify Inc. and Tesla Inc., hasn’t taken any money off the table.
He knows the risks — the market may not react kindly if Donald Trump is not re-elected while a second wave of COVID -19 is always a possibility. But he’ll need to keep going if he plans to reach his goal of saving up for a $2-million or $3-million “forever home.” He’ll keep riding these stocks up and, if anything, buy more on a second dip in the fall.
Almost all the others intend to add more funds to their accounts. Most want to further diversify their portfolios and to keep focusing on investing, even though they suspect they’ll have less time to do so when the economy further reopens. This isn’t a fad for them. Regardless of the success they have or haven’t had, they’ve all seen the power of the market.
“These large stock market pullbacks seem to happen once every 10 years,” Warwick said. “As a public servant, the salary is nothing spectacular, so in a sense, the stock market is a great equalizer for millennials in terms of potential wealth accumulation for those willing to put in the hard work of researching potential stocks.”