It’s the econ­omy, stupid

Can Trump pull off the po­lit­i­cal come­back of the cen­tury? Rus­sell Lynch

The Daily Telegraph - Business - - Front Page - Matthew Lynn Ben Mar­low is away

It has been the most un­likely tech star of lock­down. While most peo­ple were spend­ing their time post­ing pic­tures of freshly baked sour­dough bread on In­sta­gram, catch­ing up on ev­ery box set Net­flix had ever made, or fig­ur­ing out how to get the au­dio and video to sync on Zoom, it turns out a sig­nif­i­cant num­ber of us were do­ing some­thing more pro­duc­tive with all that free time. Trad­ing fu­ri­ously – and try­ing to make our­selves a for­tune.

The share deal­ing app Robin­hood has fu­elled a mas­sive rise in trad­ing in the United States. Like­wise, small in­vestors have been pil­ing into the mar­kets in the UK, Ger­many and else­where. Sure, plenty of in­vest­ment pro­fes­sion­als will dis­miss the new breed of in­di­vid­ual in­vestors as noth­ing more than a nui­sance. But in fact they can res­cue cap­i­tal­ism. How? By bring­ing fresh money into the mar­ket; by bring­ing en­thu­si­asm and knowl­edge to counter the trend to pas­sive in­vest­ing; and per­haps most of all by giv­ing a new gen­er­a­tion a stake in the free mar­ket’s abil­ity to gen­er­ate wealth. We should be do­ing ev­ery­thing we can to en­cour­age them to stick around even af­ter lock­down has ended.

Robin­hood is the most vis­i­ble suc­cess story of the in­vest­ment boom. Mostly used by mil­len­ni­als – the av­er­age cus­tomer is just 31 – its free trad­ing sys­tem has been a huge hit. Ever since lock­down started, ac­count open­ings, and trades, have soared, and in a fundrais­ing round last week it was valued at $11bn (£8bn). But it is just one sign of the boom. More tra­di­tional Amer­i­can bro­kers have scrapped fees as well, and signed up mil­lions of new cus­tomers. In this coun­try, Har­g­reaves Lans­down, the most suc­cess­ful plat­form for pri­vate in­vestors, has re­ported a surge in new ac­counts (188,000 in the last year). So have Ger­man plat­forms. Malaysia is even con­sid­er­ing con­trols on trad­ing to dampen down the in­vest­ment craze that has pushed its in­dex to record highs.

In the City of Lon­don and on Wall Street plenty of peo­ple will be tempted to agree with the Malaysians. Pri­vate in­vestors have long been re­garded as a nui­sance at best, and, at worst, a dan­ger both to them­selves and to the rest of us. We have started to see all the same old prej­u­dices as a new gen­er­a­tion have waded into the mar­ket. They are al­ready start­ing to be blamed for ris­ing volatil­ity. They are get­ting the rap for the crazy val­u­a­tions of a few of their favourite tech stocks. Even a few sui­cides have been pinned on day trad­ing af­ter losses have been racked up. We can ex­pect to hear a lot more about that if the up­surge of in­ter­est in in­vest­ment con­tin­ues.

Of course, we can un­der­stand why mar­ket pro­fes­sion­als don’t like pri­vate in­vestors. They just clut­ter up the mar­ket, and they don’t gen­er­ate much money. In­deed, their pref­er­ence for free trad­ing squeezes mar­gins. Nei­ther, on the whole, do big com­pa­nies. Life is much eas­ier if the chief ex­ec­u­tive can keep the share­hold­ers happy over a dis­creet lunch. You can do that with half a dozen big in­sti­tu­tions. With thou­sands of day traders, for­get it. But we should ig­nore all that. The new traders are the best thing to hap­pen to the mar­ket in years. Here’s why:

First, they are bring­ing fresh money and, per­haps more im­por­tantly, peo­ple into the mar­ket. With the de­cline of pri­vate in­vest­ment, the clo­sure of fi­nal salary pen­sion schemes, and fall­ing lev­els of home own­er­ship, mil­len­ni­als have in­creas­ingly been locked out of the main ways free mar­ket cap­i­tal­ism cre­ates wealth. But as Ama­zon and Apple soar in value, it is not just go­ing to be a few hedge funds and in­sti­tu­tions that make a lot of money. It will be the mil­lions of small in­vestors, and mainly younger ones, who have in­vested as well. Is that a bad thing? Of course not. Robin­hood took its name from the man who re­dis­tributed money from the rich to the poor. Equity own­er­ship is a far bet­ter way of do­ing that than high­way rob­beries (or in­deed its mod­ern equiv­a­lent, wealth taxes).

Next, they bring lots of fresh in­for­ma­tion and en­thu­si­asm to the mar­ket. An­other big prob­lem for all the main equity mar­kets has been the rise of pas­sive in­vest­ing. The in­sti­tu­tions have con­vinced them­selves they can never beat the mar­ket so they just buy an in­dex. The Robin­hood traders swap in­for­ma­tion fever­ishly, and back their own ex­pe­ri­ences and hunches. Should Tesla re­ally be worth more than Toy­ota and Volk­swa­gen? The pro­fes­sion­als scoff that is a bub­ble wait­ing to burst, but the small traders think it is the Apple of trans­port and are buy­ing into that vi­sion. Maybe they are right, maybe they aren’t. But the de­bate is far health­ier than sim­ply buy­ing an ETF of the Dow.

Fi­nally, they are far more com­mit­ted to the com­pa­nies they in­vest in, more in­ter­ested in small busi­nesses, and are will­ing to back favourites over the long term. Typ­i­cally, they back com­pa­nies be­cause they know the prod­uct, and think it’s great. That is a healthy cor­rec­tive to the riska­verse, safety-first ap­proach of the big fund man­age­ment houses.

In truth, small in­di­vid­ual share­hold­ers have usu­ally been far bet­ter in­vestors than in­sti­tu­tions. Over the last 30 years their num­bers have de­clined, and so has the num­ber of listed com­pa­nies. The re­sult? An equity mar­ket that looks about as lively as a night­club dur­ing lock­down. If the craze for equity trad­ing sur­vives, it will create a far health­ier mar­ket. Far from be­ing a dan­ger to any­one, the Robin­hood traders may well end up sav­ing cap­i­tal­ism for all of us.

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