Some of our experiences during lockdown, like the retail investing frenzy, resembled a lab experiment, where scientists test theoretical assumptions by focusing on one or more elements of their theory. Only this time, the theories were accelerated, magnified, and made real. The rise of the retail investor may slow down, now they have less time on their hands, but it is unlikely to stop. There are wider forces at play, and we’ve seen what can happen.
The biggest driver is the emergence of sophisticated technology, widely available and neatly packaged to fit the palms of our hands. It gives us information, the ability to act on that information and the ability to coordinate our actions.
The frenzied trading in Gamestop shares, which famously upended sophisticated short selling strategies adopted by professional hedge funds, was driven by a retail investor forum. WallStreetBets on Redditt boasted 9.4 million degenerates in 2021, a tenfold increase at the start of 2020. Their moniker encapsulated their attitude – many were motivated by the thrill of the ride. They adopted their own language and challenged the conventional wisdom that the games retailer was no longer relevant in the digital age.
Reddit's degenerates didn’t change the laws of finance. Time will tell if Gamestop can reverse its decline, possibly using the capital it raised on the back of its unexpected share price appreciation. New investors rode a rising market with interventions by central banks boosting asset prices and they still need to experience the other side of the cycle. The key takeaway was the powerful forces unleashed by retail shareholders coordinating their activities on social media and concentrating their sights on a single stock. Imagine what could happen if a group of retail investors combined to address climate change or campaign on a social issue by targeting your company.
The ability for retail investors to act has been greatly enhanced by the emergence of trading apps that don’t charge dealing fees. The likes of Robinhood have been available to US investors for a while but companies such as Freetrade, Lightyear and Dodl have launched in the UK. Another sign of the changing dynamics of the market and retail investors becoming more sophisticated is the availability of fractional shares on some of these new platforms, albeit more relevant to some more expensive US stocks. Another new platform is PrimaryBid, which provides retail investors with access to IPOs and public company fundraises, at the same time and price as the professionals.
Retail investors can access more information than ever before and it’s very different to the information available to professional investors. Many IROs have never communicated with retail investors and research notes from brokers were never intended for them either. To their frustration, retail investors rarely got access to transcripts of earnings presentations or invites to capital markets days. Specialist publications have proliferated online but the online forum did most to shape the opinions of retail investors. Different sources of information provide a different perspective that the company may not have considered. Gamestop showed what can happen when trading was informed by unconventional views. The result was a share price that had divorced itself from the company’s fundamental value.
These actions and trends, shaped by technology, are operating in a changing environment which concentrates their effect. With more shares held by the big three passive investors, levels of liquidity are lower and coordinated activity by retail shareholders can have more impact. Changes arising from MiFiD have reduced the amount of research published by investment backs with direct access to IROs, particularly for smaller companies. It means there is less information in the marketplace to counter some of the more extreme views emanating from chatrooms.
If the face of these changes, IROs need to review their communication strategy. The annual report has become more important. It is a source of information that has consistently been available to all investors.
So-called 'meme stocks' reminded us how people find narratives everywhere. Having a consistent top-line message running through your annual report with a design that reinforces it, amplifies your story, and means you shape perceptions.
More than ever, the annual report needs to be credible. Companies must resist the temptation to put a positive spin on their business by not addressing the challenges they face. More effort should be made to explain how the business makes money and the drivers behind this. We’re not suggesting that a new generation of ‘degenerates’ are going to start building valuation models. But if you were an IRO at the centre of a trading frenzy, you need to be sure you’ve done everything in your power to communicate the fundamentals of your business as widely as possible. It also gives you publicly available information to point to should you need to explain your position in a crisis.
The website provides a broader canvas to provide context and detail. It enables you to speak to a bigger audience and is where you can educate investors. Writing content for an intelligent reader who doesn’t necessarily understand your business as opposed to a sell-side analyst you deal with regularly is a good discipline. When people are so familiar with a business, it’s easy to fall foul of the curse of too much knowledge. The writer is unable to imagine a reader without the same level of knowledge and the writing can be dense and hard to follow. Writing for an intelligent person with no specialist knowledge will make your content clearer to all investors.
We don’t advocate communicating in chat rooms, but your website provides an important bridge to social media and the digital world. Posting highlights makes your message more visible and means you can direct people back to the website.
As we move slowly from pandemic to endemic, restrictions and lockdowns will recede into our memories. In some areas of our lives, the events will mark a turning point. The rise of the retail investor brought into focus changes that will continue to influence investor communication.