Power to the People
The Revolution of Retail Investing (Part 1)
Hi Everyone 👋,
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Whenever I talk with my non-finance friends about getting into investing, they always look at me as if I have three heads.
Those that do not have any business-oriented background often have an overcomplicated view of the industry.
They look at it as I would look at being a rocket scientist - over my head, and impossible to grasp.
That is why I began this newsletter. To narrow the gap between blissful ignorance and masterful understanding while providing a fresh look to those more familiar with the industry.
I also wanted to empower the retail investor with confidence to get in the game.
This newsletter is about arming the masses with weapons of mass instruction.
My goal is to provide a fresh look to those more familiar with the industry. But also to empower the retail investor with confidence to get in the game.
And boy, what an exhilarating game it is.
A retail investor is a nonprofessional investor that uses their own money to buy and sell securities, mutual funds, or ETFs through a brokerage firm or savings accounts.
They’re the people in the Questrade commercials, not the people on CNBC.
They’re also the people that aggregate on an internet forum and blow up hedge funds.
Totally punk rock!
Historically, because of their smaller purchasing power, retail investors would have to pay higher fees or commissions that would eat into their total return.
Now, through Exchange Traded Funds (ETFs), discount brokerages, and robo-advisors, fees are racing towards zero.
There is even rumour that Goldman Sach’s retail arm Marcus is launching negative investment management fee accounts. Meaning they pay YOU to manage YOUR money. Wild!
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle (the grandfather of low fees)” - Warren Buffett
For the next two weeks we will dissect in a two-part series: 1) The early stages (The Retail Revolution) and 2) The modern-day advances (The Evolution) of retail investing.
This week, in <5 minutes, we’ll cover The Retail Revolution:
A Brief History of Market Access 👉 Exclusivity & Old ‘Boys’ Clubs
The Information Age 👉 Electronic Trading
Entry of ETFs 👉 Jack Bogle, Passive Investing
The Buffetf Bet 👉 Hedge Funds vs. ETFs
How GRIT’s Playing it 👉 Tipping the information scale in your favour
Let’s get started!
1. A Brief History of Market Access 👉 Exclusivity, Old Boys Club
In a not-too-long ago world, investing in a single stock as an individual was hard.
This is what’s is portrayed in old movies when you see a gaggle of “stock brokers” huddled around an outstretched newspaper checking the quotes.
An individual would listen to the radio, comb through a massive newspaper stack, or even have to go to a library to look at financial statements in order to learn about a company.
Who has time for this on top of their day job and taking care of a family at home?
What this created was an extended era of information asymmetry. Meaning a certain group of people with the right amount of resources were the only ones that could access a wealth of information in order to make a decision (Buy or Sell).
On top of this, the mechanics to actually carry out that action was even further complicated.
Once you knew which company you wanted to invest in, you called your local broker and asked to buy the stock, indicating what quantity and price you wanted over the phone.
They would then maybe participate in what was an “open-outcry” trading floor where a bunch of hectic animals in suits would scream at each other and use hand signals so complicated, even the 2017/18 Houston Astros couldn’t interpret them.
This inefficiency allowed the middlemen in the system to extract value, which ultimately took returns away from the individual average investor.
Or worse still, everyday people would get targeted by snake oil salesmen after hearing about their friends getting rich through this mysterious celestial body called the Stock Market.
The first cases of FOMO (Fear Of Missing Out) were actually etched into the stone commandments of scummy stock peddlers in the early days.
Doctors would receive phone calls between surgeries from Straton Oakmont selling some bogus biotech miracle stock. All of his doctor friends were in, and if he wasn’t, his next-door neighbor would be driving a Ferrari while he putted around in a tin can.
Although an entertaining movie, there were real victims to the other side of this trade, and to romanticize straight-up predatory criminal activity seems a bit gratuitous to me.
The underlying theme of this pressure tactic was to increase the portion of total sales towards high fee/commission products. To follow the Wolf of Wallstreet example, in the timeless words of Matt McConaughey’s character:
“You got it?
What we're gonna do is this.
First we pitch 'em Disney, AT&T, IBM, blue chip stocks exclusively. Companies these people know.
Once we've suckered them in, we unload the dog shit.
The pink sheets, the penny stocks, where we make the money.
Fifty percent commission, baby.”
Imagine paying 50% commission on a trade. You have to have a $100 stock go up to $151 before you even make a dollar!
This is an extreme example, but it still happens on a retail investor level. Some big banks still charge $10/trade. If you’re just getting started and buying one share for $20, this is the same math.
2. The Information Age 👉 Electronic Trading
I remember back when I got my first gig in the business as a summer intern, the traders on the floor (and in our office) used an actual physical piece of paper to write down buy and sell orders. I couldn’t believe it.
Computers existed, but the old school mentality refused to change. Instead, they marked up these sheets then made their assistants log the trades into the computer.
There were two revolutions taking place. First, the wide access of information made possible by the internet. Second, the reduction of frictions necessary to execute a trade.
It’s no secret the internet gave everyone access to unlimited instantaneous information. You could now check through financials and market news all right at your fingertips from a terminal.
This is how Mike Bloomberg (aka the grandfather of the US$50k a year Bloomberg terminal that is a staple in the industry) got so rich. As a merchant of information.
His namesake product made financial information more accessible - all for the cost of a simple (yet expensive) subscription.
The next to get disrupted was execution.
Although the NASDAQ started in 1971, it didn’t begin as an electronic trading system. It was basically just an automated quotation system that allowed broker-dealers to see the prices that other firms were offering, while trades were still handled over the phone.
The 1987 stock market crash '“Black Monday” changed this.
As major US markets crashed 20-30% in one day, some market makers straight up refused to pick up their phone.
This caused contagion in the system and ultimately made the panic sell even worse.
After this, the Small Orders Execution System was launched, allowing electronic order delivery. Other exchanges soon followed, like CME’s Globex in 1992 and EUREX in 1998.
Up here in Canada, it’s tough to believe that we didn’t have an electronic exchange for the Toronto Stock Exchange until 1997.
What electronic trading did is lower information asymmetry when it comes to executing trades and accessing prices. I no longer have to have a direct line to a trading floor, I just need a computer system.
This would start off as a technology still only available to big brokerage houses charging slightly-not-as-big commission. But it was the beginning of the end of the “middleman tax” AKA Huge Trading Commission.
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3. Entry of ETFs 👉 Jack Bogle & Passive Investing
With execution and access to information simplified, the retail investor was now more empowered to buy individual stocks.
But individual stocks are risky and most people don’t want to remain tapped in 24/7 to monitor their positions, and the only pooled options at the time that were mainstream were mutual funds.
Mutual funds have been around for a very long time - dating back to the launch of the Vanguard Wellington Fund in 1929.
They had a common fee of around 2% per year based on what you put into the fund AKA assets under management (AUM). The idea here is you get someone who can beat the market consistently by more than 2% that thus can manage your money to make you rich.
But is that always the case? Below we will explore the “Buffett Bet” and see why that’s not always the way to go. But first, let’s break down the math.
Hedge funds push the envelope on fees further and charge “2 and 20”, AKA 2% management fee per year on AUM, then 20% of the fund’s performance above a certain benchmark.
Say you start out with $10,000 and the benchmark return for the year is 5% while the hedge fund returns 10%.
The hedge fund would earn:
You would end up with:
So you end up $200 richer going with the hedge fund vs. investing in the benchmark.
Conversely, if you started out with the same $10,000, the benchmark return for the year is 5%, and the manager returns -10%.
The Hedge fund still gets paid:
You would end up with:
So you end up $1,700 poorer going with the hedge fund vs. investing in the benchmark, AND the hedge fund still makes $200.
Even if they lose, they win.
Pretty sweet deal… for the hedge fund.
All this is to say that not only PERFORMANCE but also FEES are very important components of your return.
This is why Exchange Traded Funds (ETFs) came into existence. To lower the fees.
In 1971, William Fouse and John McQuown of Wells Fargo established the first index fund. This concept would then be brought into the mainstream by Jack Bogle through ETFs.
ETFs are a basket of stocks that track an index, sector, commodity, or other types of asset that can be bought and sold just like a stock on an exchange.
Instead of buying one stock, you’re buying hundreds or thousands of them, and betting on the overall composite basket.
What this allows an investor to do is make a bet on an overall industry or market in an extremely diversified way. When someone says “just buy the market,” they’re talking about ETFs - Probably the ticker: SPY (The S&P 500).
They make the “benchmark” referenced above investible. And at a low cost! Like… 0.095% fee instead of 2%.
Performance and compound interest are wonderful forces; high fees are equally powerful but in a polar opposite, destructive way.
ETFs are magnificent tools to use in your portfolio in order to enhance your returns.
While they are one component that lower fees, there are also very cool products like Robinhood (minus their major f’up on the GameStop fiasco) where you pay ZERO trading commissions on top of very low management fees.
In 2019, when Robinhood got so large the big firms - eTrade, Charles Schwab & Ameritrade - couldn’t ignore them anymore they capitulated, copied and removed fees for stock and ETF trading. This changed the entire industry.
But Robinhood has to make money somehow… and the fee isn’t actually zero. Its’ much darker than that… DUN DUN DUN …. we’ll dive into this next week (as Robinhood is expect to IPO in June) PLUS some mind-blowing innovations in the retail space:
SoFi: Want in on the latest & greatest IPOs but can’t because 99% go to top institutions? This is changing with firms like SoFi getting into the game and taking allocations on IPOs to their millions of users. Expected to go public June 1st via SPAC at +$8.7B valuation!
eToro: Heard of copy-trading (and social investing)? It mean copying the trades of pros and/or your friends in real-time in your brokerage account. eToro is the pioneer, they have amassed 20MM users across 100 countries and generated +$600MM in revenue 2019. Going public via a SPAC at $10B valuation!
Heard of Synthetic (Tokenized) Stocks? You need to learn about this. Stocks like Tesla and Apple are being traded 24/7 via crypto. Volume is picking up fast, currently +US270MM in average daily volume. Check HERE! Had a long talk with the founder of Wallstreet Bets two weeks ago about this all… extremely fascinating!
Crowdfunding and 19 year olds getting in on hot VC investments!
And so much more!
The ecosystem is evolving at such a fast pace. My prediction for 3-5 years from now:
“The average 10 year old has a digital wallet that holds their allowance money, stocks their grandparents give them at Christmas, crypto, NFTs and digital collectibles they trade with their friends in the playground.”
Now, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel and see what he thinks of the Retail Revolution?
4. The Buffett Bet 👉 Hedge Funds vs. ETFs
In 2008, Warren Buffett placed a bet to prove that a group of hedge funds could not outperform the market.
He placed a $1MM bet that over the course of the next 10 years, an index fund (Vanguard’s S&P 500 Admiral Fund) would beat a fund of fund comprised of 5 hedge funds.
The results speak for themselves…
In his shareholder letter, Buffett said he believed the hedge fund managers involved in the bet were "honest and intelligent people," but added, "the results for their investors were dismal – really dismal."
He noted that the two-and-twenty fee structure generally adopted by hedge funds was the main culprit for this!
He expanded to say that managers were "showered with compensation" despite, often enough, providing only "esoteric gibberish" in return.
5. How GRIT’s Playing it 👉 Tipping the information scale in your favour
At GRIT, our primary role is reducing overall information asymmetry, so that you are armed with the same weapons as the pros.
There is no silver bullet. Like anything else, this takes time and practice.
But the most important thing is to start.
And to ABL (Always be learning).
It is better to learn and make mistakes early. As you fine-tune your acumen and your net worth grows, you will have made those VERY costly mistakes already.
This is why I write this newsletter, but it is also why I have introduced the paid version.
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A behind-the-scene looks on how I refine by process and try to become a better investor every day should also accentuate your learning curve!
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Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Dalio says he prefers Bitcoin to Bonds. Says the economics of investing in bonds “has become stupid” because they pay less than inflation and that ‘Bitcoin’s biggest risk is its success.”
What else we Grittin’ On?
Lowest Volume. Monday was the lowest volume of the year. Will it go lower as we head into “hot girl & hot boy summer” as the kids are calling it on social media?
AMC. Was the most traded stock in the WORLD thursday with +$13B in value traded. You guys, I think I found the missing volume ; )
Golden Time. Precious metal miners are on track to be profitable for the 6th straight quarter for the first time…EVER! They’ve got the highest median FCF yield in the last 26 years!
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