A flood of new investors in theory should be an invigorating tonic for the market, but such events typically come with side effects of manias and bubbles. And because the arrival of the new cohort typically coincides with a rising market, often their initial, but incorrect, view is that successful investing is a doddle.
It isn't of course and that's why it’s difficult not to make the comparison with the dotcom boom when the belief that “it’s different this time” held sway, investors chased the hottest tips and FOMO was rife. No wonder the City watchdog is concerned about investor behaviour and gamification influences. Many new and typically younger investors have exposure only to high-risk assets, in particular cryptos. Crypto currencies are here to stay but that doesn’t mean prices will continue to rise. Preventing harm to these new investors has become a priority for the FCA and last week it outlined its plans to stick harder-to-avoid risk warnings in front of people with high- risk investing habits, particularly around cryptos and peer-to-peer.
But the new generation is also trading shares, with many drawn to the market’s highest-risk darlings. Whereas lists of the most bought shares at well-established platforms are largely a balanced selection of FTSE 100 stalwarts, some economic recovery plays and a smattering of exciting new things such as Argo Blockchain, over at the free-to-trade apps, the focus is heavily on more thrilling plays – Tesla, Gamestop, Argo and Coinbase among them. On one app there are nearly seven times as many buyers of Tesla as there are of Shell. That’s hardly a surprise when Ark Funds reckons Tesla could have a market cap of $4 trillion within four years in its best-case scenario. HanETF, which runs the Tech Megatrend ETF, also believes that despite their meteoric rise, shares in Tesla are undervalued. Tesla it says is “not just a car company”, it has cutting-edge manufacturing and the capacity to disrupt a growing number of industries from energy and software to insurance.
There’s nothing wrong with backing disruptors and innovators, or being a believer – “not a trace of doubt in mind, couldn’t leave if I tried”, as the hit song goes – until that belief causes the investors to lose perspective and ignore risk, when fear of missing out overrides the danger signals.
The FCA, which wants younger generations to be more mindful of risks and to invest in a risk-appropriate way, says conventional reasons for investing (such as to save for retirement) are very much secondary to thrills, status and even competitiveness among many new investors, a perspective that’s supported by chat forum comments such as one user’s remark that he “would personally be very happy with 20 to 30 per cent a year”.
But any investor, experienced or not, can be prone to throwing caution to the wind and making decisions based on a firmly held belief. It’s an issue addressed by Algy Hall in our cover feature this week as he explores how investors can avoid making the kind of “grossly oversized bets on low probability outcomes that create irrecoverable losses”.
As our trader Michael Taylor says, put your money in your best ideas but not so much that a 100 per cent loss is enough to knock you out of the game.