2021 has been the year of the retail investor. Long derided as dumb money, commentators increasingly argue that retail investors now need to be taken more seriously.
That's bunk, says Liberum Capital strategist Joachim Klement. On his blog, Klement refers to a recent study contrasting the behaviour of retail investors with the people who know most about a company – corporate insiders.
Using Google Trends to identify times when retail investors paid more attention to a particular stock, the study found a "strong link" between retail investor interest and "opportunistic" insider trading.
Insiders are much more likely to sell shares when retail interest is high. They are also likely to sell more shares than usual at such times.
Insiders profit in two ways. Firstly, such trades, the study found, generate “substantially higher returns”. Secondly, they are much less likely to be investigated by regulators, as they are not acting on private company information.
Unsurprisingly, these kind of insider trades are more common in lottery stocks and in firms that have “weaker corporate governance, lower corporate social responsibility, and poorer reputations”.
Klement’s take is blunt but accurate. “Retail investors really are the patsies in the market,” he says, “and the Robinhood crowd doesn’t even realise it.”