How Little-Guy Investors Bested the Pros by Riding Popular Iffy Stocks

Maybe the smart money ain’t that smart. Since the market’s low point March 23, stocks that retail investors picked trounced those that hedge fund operators and mutual fund managers preferred, according to Goldman Sachs. Credit the Average Joe’s nose for popularity.

Since the trough, the retail favorites surged 61%, versus 45% from the pros, while the S&P 500 gained 36%, a research note from the firm’s chief US equity strategist, David Kostin, and his team found.

“The narrative of Main Street weakness versus Wall Street asset inflation is misleading,” they wrote. “The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks.” That’s part of the story.

How did Main Street really best Wall Street? Surely, you’ve heard that the growth kings like Apple and Amazon, which the pros back heavily, have killed it in this recovery rally. And, indeed, the Russell 1000 growth index has outpaced its value counterpart, 45% to 36% since the market trough.

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But the basket that ordinary investors assembled didn’t fit into the neat categories of the Russell indexes, the Goldman study shows. Many of the top picks of the retail crowd were stocks that have had the hell kicked out of them—in finance parlance, they’re deep value names. Other picks were perennially celebrated stocks or ones that got positive media notice as coronavirus fighters.

Typical of the roughed-up stocks that turned around: Royal Caribbean Cruises, which is down 59% for the year but has sprung back from the nadir, climbing 95%. What a paradox. Royal Caribbean and other cruise lines are in dock, unable to set sail at all, and that stasis may persist for months.

On the other hand, there’s some hopeful news about virus treatments, so the appeal of getting in on an eventual comeback may seem enticing. After all, cruises were a longtime go-to getaway for average folks. Royal Caribbean’s stock expanded five-fold over 10 years, until late January.

And then there’s the popularity factor. Tesla, the car company headed by the ever-colorful Elon Musk, has solved its production problems and has entered into modern folklore as the little company that could. Over the past 12 months, Tesla stock also has quintupled. The halo effect of Musk’s other company, SpaceX, which has returned America to the manned spacecraft ranks, hasn’t hurt.

Finally, little-known outfits that are pioneering potential treatments and vaccines for COVID-19 have bolted into the limelight, with salubrious results for their stocks prices. Moderna had been a stalwart biotech firm that, like the bulk of its brethren, was in the red. Well, now it may well be closing in on a vaccine for the virus. Since the low, the stock has tripled.

The rap on retail investors is that they are ignorant fools swept up by emotion. A classic indictment of Main Street stock players is seen in an academic study published in 2013 by Terrance Odean, a professor at the University of California, Berkley, and Brad Barber, a prof at UC Davis. The most damning passage, describing these amateur investors:

“They tend to sell their winners and hold their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios, resulting in unnecessarily high levels of diversifiable risk, and many are unduly influenced by media and past experience.”

That may well be the case. Still, for one shining moment, the little guy called it right.