Matt Levine talked about what he called the Boredom Markets Hypothesis, the idea that an important driving force in modern stock markets is the demand of retail investors for entertainment. The basic theory is that ordinary people will do more trading (1) if trading is entertaining and (2) if other things are less entertaining: The more bored they are, the more they will trade stocks.
In general, this theory predicts that retail trading would decline over time. As other entertainment options become richer and more accessible and more personalized, everyone can find a really good television show to watch or ax-throwing bar to patronize, so they will spend less time chatting with their broker about stocks. Meanwhile growing efficiency and electronification in the stock market make the brokers less fun to chat with, while the increasing age and size of public companies make stocks more boring. So people who a few decades ago would have actively followed the markets will now be really into fantasy football or Fortnite, and they’ll just put their investments in index funds.
If active investing is going to compete with modern entertainment options, it will have to be more entertaining. To be popular, active investments will have to offer wild price swings and the potential for instant wealth, but they’ll also have to offer colorful characters, fast-paced narratives, and a sense of moral superiority. The BMH offers an explanation for Bitcoin, or for Tesla Inc.’s stock price. It is not a financial explanation; it is essentially a literary one. Bitcoin and Tesla have good stories, so they are the investments that break through in a saturated entertainment landscape.
Of course we talked about the BMH last month because, right now, the entertainment landscape is the opposite of saturated; people can’t leave their houses and have finished Netflix. This makes stock-picking a much more (relatively) attractive hobby than it was a few months ago, and so, as the BMH predicts, there has been an increase in retail stock-picking. I argued that, in the case of a coronavirus pandemic, the BMH is pleasingly countercyclical:
The worse the economy is, the more bored investors will be. If stocks sell off because the coronavirus crisis is longer and worse than expected, there will be even fewer entertainment options and more people will turn, in desperation, to buying stocks on their phones. If someone finds a magic cure for the virus tomorrow, stocks will rally and all the new retail investors will happily sell into the rally at the top and go back to their other, more entertaining, entertainments.
Since then I haven’t gone anywhere or done anything and the stock market is up, so I guess it checks out. And at Bloomberg, Sarah Ponczek, Elena Popina and Gregory Calderone have an incredible update to the BMH:
Forget buy-and hold. Stuck at home and dreaming of a killing, bored retail traders are branching out into all manner of Wall Street exotica.
Darting in and out of stock options, dabbling in complicated exchange-traded funds, devouring trading how-to books by the dozen — all have become tools in the self-directed portfolio playbook. Locked down and socially distant with lots of time and (apparently) money to spare, they’re leveraging zero-percent brokerage fees in new and surprising ways. …
“People are still trying to learn to do this better,” said JJ Kinahan, the chief market strategist at TD Ameritrade. “People are just saying, ‘OK, retail is going in and being crazy.’ Well, I think the fact is retail is trading more because they have more time. People actually have time to do so, and that’s why they are more interested.”
The number of investors at Robinhood currently holding the U.S. Oil Fund, the biggest exchange-traded fund invested in oil, stands at 171,000, 20 times the number of users that held the fund in early March, according to website Robintrack, which uses Robinhood’s data to show trends in positioning but isn’t affiliated with it. The popularity of the fund only increased after negative oil prices captivated and confused traders.
See? The BMH is countercyclical. Ordinarily one thinks of retail traders as momentum followers who sell stocks when they go down. But when investments go down in an entertaining way—USO plunged in March, and has had troubles ever since, because it owns oil futures that can now go below zero—traders flock to it because, you know, at least they can feel something. “Ooh a stock that can go below zero,” they almost say, “that’s new, sounds fun, I want that.”
Also here’s a cab driver, because you can’t have a story about retail traders without a cab driver:
“It’s a gamble, but a highly intellectual gamble,” he said by phone. “It’s about knowledge and risk, but especially for guys like me, it’s all about sheer luck.”
And here’s Chris Camillo, a retail trader/YouTube star/chatroom host:
“And, hey, it took a pandemic, but it was already happening before this with Wall Street Bets and cryptocurrency,” Camillo said by phone. “Now they’re wanting to go one layer deeper. OK I did that, I did crypto, OK now I own Tesla, I get it. But there has to be more to investing than just Tesla.”
There has to be more to investing than just Tesla! You need a Netflix algorithm that is like “if you enjoy Tesla, here are some other funny stocks.” It is a market opportunity; if you’re weird and like rockets and Twitter, you should start a cannabis-and-laser-guns company and sell stock to people who enjoy Tesla but would like to get a little deeper into the genre. “I love how unfiltered Argon Dusk is on Twitter,” your fans will say on r/wallstreetbets, “and how many ‘420’ jokes he makes, and how he took a stand against outdated safety regulations when he launched his death-ray space station. I’m gonna buy lots of call options and you should too.”