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A Parisian Hairdresser’s Winning Style

18 March 2021

 

One of the marvels of the pandemic crisis has been the rise of the individual investor. Trading on online brokerage platforms, they have punted on the latest hot stocks free of charge.

They are drawn from one hot theme to the next. Since late last year, many have locked onto the ‘reopening trade’, where value stocks like banks that would perform well in a reflationary world trump the tech stocks that led markets higher in 2020.

I am a great believer in democratising investment and the power of the individual investor. But I have found myself wondering in recent days whether these market newcomers are riding for a fall. By contrast, I recall the story of a Parisian hairdresser who invested quietly in stocks all his life and on his death in 2012 left EUR 2.5 million to L’Orne, the Norman village of 850 inhabitants where he grew up.1

While the news article I read almost 10 years ago does not relate the man’s investment style, one imagines that it was long-term, diversified and prudent. In fact, far from the speculative style of the latest newcomers to stocks, taking up investment to escape the boredom of lockdowns.

New individual investor army

A recent Deutsche Bank survey, reported in the Financial Times, profiled the new individual investor army. Almost half of US individual investors were completely new to markets in the past year, it found. They were mostly under 34. They were willing to borrow to fund bets; to use options; and to research trading ideas on social media.

So far, these new investors have looked wiser than many market professionals over the last extraordinary 12 months. Deutsche Bank believes they are the driving force behind the equity market rally running since late March 2020.

But the future is a long time coming. Over time, it’s the Parisian hairdresser’s style that has won out. In other words, a broadly diversified portfolio of equities, perhaps some bonds and also some real estate and gold. In these modern times, even a small allocation to cryptocurrencies is even thought wise by some investors. ETFs and ETNs are cost-efficient instruments allowing to achieve a diversified exposure.

In years to come, it may well be that some elements of today’s individual investor inflows come to be remembered in similar ways to the UK railway investment boom of the 1800s or Dutch tulip mania in the 1600s. Both investment crazes sucked in ordinary investors who later suffered huge losses.

Choose your favourite style

Illustrating the tendency of individual investors to get sucked in to hot markets, the chart below shows how their number has risen and fallen in sympathy with peaks and troughs of the Euro Stoxx 50 Index.

Figure 1 – Number of individual investors versus stock market levels. Example: Germany

Number of individual investors versus stock market levels

Source: Bloomberg, Deutsches Aktieninstitut. Past performance is not a reliable indicator for future performance. This also holds for historical market data.

I am not suggesting that today’s equity markets are in bubble territory. Indeed, many investment professionals think the bull market has some way to run. But some individual hot stocks may correct fast, leaving new investors nursing large losses.

So, for me the winning style is the conservative coiffure of the Parisian barber rather than the reckless buzzcut of the foot soldiers of the new individual investor army.

1Source: Le Point.

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