Despite COVID-19, widespread job losses, and market uncertainty, retail trading reached unprecedented levels in 2020. An intermingling of psychological, socio-economic, and technological factors is driving the boom. What can businesses learn from these trends?
Retail investors in 2021 took on Wall Street, revolutionized the high-end art marketplace, and turned a joke into a quasi-legitimate asset class. These investors made bold bets, purchased innovative asset classes, and sought out diverse opinions to find growth opportunities and manage their risk – touching upon the Art of Smart’s four pillars of decision making.
Without the usual avenues for spending, people turned to investing as lockdowns and working from home increased savings and free time. Furthering the trend, job insecurity and rising unemployment saw people invest their stimulus checks, seeking quick wins. Declining trust in financial institutions paved the way for entirely speculative digital asset classes such as cryptocurrencies and, more recently, non-fungible tokens (NFTs).
Globally, business leaders trying to maneuver around these opportunities can learn from the new breed of retail investors. Where should they make a bold play? What innovations will turn out to be fads? And which trends are likely to lead to long-term growth?
The Art of Smart has identified four emerging trends in how retail investors think today. These trends highlight: the role of social media, a do-it-yourself mindset, investing in novelty asset classes, and a desire to make an impact.
When institutional investors add Reddit to their daily reading list, strange things are afoot. Indeed, in February 2021, the Brunswick Group reported that a fifth of professional investors made a trade, or changed a recommendation, because of Reddit.
The most significant incident in this area happened in January 2010 when members of the WallStreetBets subreddit, looking to disrupt Wall Street, bet against hedge funds shorting the stocks of GameStop thereby causing the stock to spike to a high of 1,500 percent over two weeks.
Kartikeya Shekhar, a venture capital Associate at Blume Ventures in India says: "Social media is driving momentum for such investment. People share stocks trades and strategies and learn from people they wouldn’t normally meet." The ubiquity of financial education and diverse communities developed online made it easier for these subreddit participants to band together and take riskier, more profitable positions.
Traditional businesses are accustomed to investors who gauge trustworthiness at a superficial level, suggests Jonathan Bill, a serial entrepreneur based in the UK. However, suits, seniority, and offices in prominent locations are no longer indicators of trust. Today, investors need not look their advisors in the eye.
"They are looking for micro-accountability,” Bill says. “Many meme stock trends come down to the desire to beat institutional investors at their own game, calling out a lack of transparency."
Organizations need to focus on correctly combining rapid digitization and accessibility with the right blend of tradition.
Investors, with more free time, savings, and access to knowledge, were willing to experiment and learn sophisticated strategies for trading. India has seen a record 14.2 million demat accounts (accounts needed to trade stocks in the country) opened so far in 2021. This figure is nearly three times that of the previous fiscal year.
"Technology and design thinking have made it easier and more friendly for retail customers looking to invest," says Shekhar. He notes that zero-commission platforms such as Robinhood also make it easier for newcomers to trade. EToro, a social-investing leader, goes a step further, allowing novice traders to copy the trading positions of more established traders automatically to help them learn the ropes.
Speed and convenience underscore the DIY mindset. Businesses looking to capitalize should reduce onboarding friction and create a superior user experience. Shekar explains the opportunity by citing the Account Aggregator Framework, introduced by the Reserve Bank of India. He says: "The framework gives consumers a secure platform through which they can choose to share their financial data with third parties. Businesses use this information to tailor offerings to the needs of the end customers."
He sees cash-flow-based lending as a high potential use case of this framework. Traditionally, lending in India is based on balance sheets, which many small businesses cannot provide. Shekhar adds: "Switching to cash-flow-based lending would unlock the latent potential of many small businesses."
"People who grew up with the internet have seen it decentralize knowledge and information," says Siddharth Menon, COO of WazirX, India's largest cryptocurrency exchange. "Today, the internet is decentralizing value creation. People who grew up seeing value created on the internet see cryptocurrency and NFTs as the natural progression. As a result, young people are more likely to be invested in it." WazirX surpassed one million users in September 2020. By May 2021, they had attracted close to five million users.
"A virtual world needs a medium of exchange and a marketplace for virtual transactions," says Menon referring to social media, streaming, messaging, and banking. Betting on this trend, WazirX announced India's first marketplace for NFTs in May.
Shekar highlights the incredible value proposition of NFTs. "On crowdfunding platforms, such as Patreon and Substack, consumers could fund their favorite artists. Via NFTs, they can invest in and participate financially in the rise of an artist's popularity."
Calling it the “Instagramization of investment”, Bill is more cautious. "What we have seen is that there is rapid growth in a trend, which turns into a frenzy, bursts, and then moves somewhere else. Ultimately though, someone will be left holding the bag." The most recent bust in crypto trading led to a spike in the trading of meme stocks.
Further, frenzied investment in cryptocurrency and NFTs comes with growing environmental distress. The high electricity use required for mining and supporting a blockchain can seem hypocritical for more socially-conscious investors. Famously, once the poster child for cryptocurrency, Elon Musk sent the price of Bitcoin spiraling after his company Tesla banned purchase of their cars through Bitcoin, citing climate concerns.
Measures to reduce these hazards are being actively sought, though. One such case is adopting more environmentally-friendly coins, such as Cardano, which do not require extensive computational power. Ultimately, Menon believes "over time, the technology will become more efficient, which will reduce the consumption of power."
Businesses looking to launch digital assets such as NFTs need to proceed with caution. Customers can face significant financial losses from whiplash swings in the prices of these assets. Profiting from it would do long-term harm to the brand's reputation.
In the face of climate change, income inequality, and social injustices, consumers are holding companies to higher standards. And they voice their views with their money. In the last decade, investment around ESG (environmental, social, and governance) frameworks has gone up and also proven to be a smart bet, outperforming emerging market indices.
ECube Climate Finance is an ESG-focused fund investing in and lending to Indian companies adopting climate-friendly business practices. Co-founder of ECube, Alan Rosling, CBE, says: "We're interested in companies that recognize how ESG drives growth, going beyond compliance. There's plenty of evidence that good things follow from good governance."
Diversity is part of that, Rosling adds. "Not just that management should reflect the markets they serve, but that diverse groups make better decisions. We look for management that will take calculated risks, and, in that sense, boldness, innovation, and diversity lead to growth."
Rosling sees two great investment opportunities around ESG. Firstly, for incumbent organizations that are willing to embed ESG into their strategies. He cites FTSE 250 member Coats, a provider of renewable threads to brands such as Nike. After fixing its governance and reducing water consumption, its share price has more than doubled in the past five years. It can also access financing that rewards ESG achievements with lower interest rates.
Secondly, startups innovating around climate solutions, power generation and storage, and electric vehicles are positioned for high growth.
An explosion in wealth accumulation has driven the investment trends highlighted – increased consumer savings from lockdowns, working from home, and an inability to spend it on leisure activities. "It is unlikely that we will see such high levels of investment continue as lockdown measures ease," says Bill. "Eventually, the inflows from micro investors will decline. Though they will probably remain at higher levels than before the pandemic."
Regardless, the pandemic has spawned a new generation of bold, technology-savvy investors willing to bet on companies that reflect their values. By engaging with proactive financial partners, businesses can mirror this new reality by promoting boldness, innovation, and diversity.
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