Retail investors: the new lords of misrule


Jon Macaskill
Published on:

The Hertz share sale saga has baffled many in the industry, but it has illuminated a new type of feral retail investor that is winning grudging respect from some of the financial industry’s aristocrats.


Retail investors have played a big role in a rebound in global equity markets that seems bizarre in the context of Covid-related economic challenges, but makes more sense given the determination of central banks to support asset values.

Analysts from banks and asset management firms are increasingly shifting from bemusement at some of the antics of the new breed of retail investor to grudging respect for the collective wisdom of a crowd that seems willing to back any long shot in the hope of a profit.

Much of the attention to the boom in retail investor demand has been on the occasional excesses of customers of Robinhood, the commission-free trading app that is popular in the US.


Jay Clayton,

A snapshot of volumes on Robinhood on June 17 shows that the stock with the biggest increase in trading popularity over the previous day was Genius Brands, a media company that has risen by around 2,000% since the worst of the equity market downturn in March, and was given a further boost by news that Arnold Schwarzenegger has agreed to take a big stake as part of his deal to star in the upcoming show ‘Stan Lee’s Superhero Kindergarten’.

Still ranking in the top 10 of stocks to see increased volumes on Robinhood was Hertz, the bankrupt car rental firm that has become a symbol of the half-crazed enthusiasm for speculative bets by retail investors.

Hertz filed for Chapter 11 bankruptcy protection less than a month ago and its debt is trading at under 50 cents in the dollar, so the chances of any recovery value for shareholders is close to zero.

There has nevertheless been so much demand from retail investors for its stock that Hertz on June 15 announced the sale of up to $500 million of new shares via Jefferies, after receiving approval for issuance of up to $1 billion from a bankruptcy judge.


Hertz issued a prospectus with a comically straight-faced warning that stock investors should not expect any recovery value, given that they rank behind debtholders, unless there is a “rapid and currently unanticipated improvement in business conditions to pre-Covid-19 or close to pre-Covid-19 levels.”

The share sale looked like it was going ahead, complete with fees of up to 3% of gross proceeds for Jefferies, until Securities and Exchange Commission chairman Jay Clayton said on TV on June 17 that the regulator had contacted Hertz with comments about its unorthodox disclosure.

A few hours later Hertz said that it had suspended the share sale.

Jefferies had already made its approach to reputational risk clear when it agreed to handle the potential share sale for Hertz. As well as an agreement to gain fees that might have been as high as $15 million, Jefferies had also secured an indemnity agreement from Hertz against the obvious risk of legal claims for a sale of stock that was likely to prove worthless.

Analysts at other banks have been willing to acknowledge the influence of retail investors, who are dealing with a gusto not seen since the halcyon days of technology stock day trading in the late 1990s – which was a prelude to an epic crash in 2000.

Goldman Sachs analysts point out that a basket of stocks popular with retail investors rose 61% since the March lows seen during the worst of the Covid crisis, compared with a rise of a relatively subdued 36% for the S&P500 index.

The captain

There has also been a massive increase in traffic to the Robintrack website that follows activity by users of the Robinhood app, with some of the interest coming from financial industry professionals, including hedge fund investors and bank analysts.

This is creating a fascinating feedback loop between the supposedly smart and dumb money in the market, to use a traditional divide between institutional and retail investors. 

I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now 
 - Dave Portnoy, Barstool Sports

The highest profile representative of the new breed of traders is Dave Portnoy, founder of the website Barstool Sports, who relishes tweaking the noses of establishment investors. He went viral on both social and traditional media on June 9 with a tweet reading: “I’m sure Warren Buffett is a great guy but when it comes to stocks he’s washed up. I’m the captain now.”

Many industry professionals took the bait and expressed outrage at the presumption of an investor who is happy to tell his online followers that stocks only go up.

Another of Portnoy’s recent tweets offers an intriguing vision of an ever-closer dependency between smart and dumb money.

Just before the SEC’s Clayton made what amounted to a live TV share sale suspension announcement for Hertz, Portnoy issued the following tweet: “My brain operates at such a high level that it’s buying stocks I want before I know they exist.”


This opens the possibility that Portnoy is effectively operating like a human algorithm, at a time when actual market algorithms overseen by humans at funds and banks are likely to be prompted to trade by retail investor-driven momentum and volatility in stocks that have little intrinsic value.

Philip Roth’s 1969 novel ‘Portnoy’s Complaint’ has understandably inspired many of the headlines about the day trader who is currently disrupting the markets with his antics.

George Orwell’s 1945 allegory ‘Animal Farm’ might be a better source text for the current symbiosis between smart and dumb money investors who are seemingly locked together in a compulsively bullish trading pattern.

Animal Farm ends with a blurring of the distinction between animals and humans: “The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.”