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One Wall Street veteran's explanation of weird investor behavior: gambling

Ethan Wolff-Mann
Senior Writer
The MGM Grand hotel-casino closed in March. Day-trading seems to be up. DataTrek research wonders if there's a connection. (AP Photo/John Locher)

The investment veterans at DataTrek Research put forth an interesting theory in a recent brief that sheds more light on an interesting phenomenon in the markets right now: the buying role of retail investors.

Specifically, DataTrek’s Jessica Rabe wrote that some mom and pop investors might be day-trading the market more because casinos professional sports have shut down and casinos have closed.

Across certain segments of the “regular people” investment landscape — Vanguard and Fidelity, for example — there hasn’t been much in the way of panic selling as many customers seem to have internalized the “stay the course” messaging that followed the last financial crisis (and was conspicuously displayed on investment websites). In fact, many of these retail investors have bought equities as markets plunged.

For Robinhood, there seems to be even more activity — and on the buying side. A Robinhood spokesperson told Yahoo Finance that the company has seen “historic participation and activity” on its platform and customers trading at record volumes; March daily trade volumes were around three times that of Q4’s daily volume — which has continued into April.

The company also said that it has seen “significant interest in ‘buying the dip,’” as well as many first time investors opening accounts in March.

One explanation

Rabe called the “tremendous rush of retail investors into US equities over the last 8 weeks” one of the “most surprising financial market features of the COVID crisis.” She pointed out that this didn’t really happen in 2008 and probably not in any turbulent market going back to 1987.

“Retail tends to sell sudden shocks that cause incremental unemployment because, well, fear is a powerful motivator to action and many investors want liquidity in case they lose their jobs,” said Rabe. In other words, when the economy is awful, even though people might want to buy cheap, they also need money to make rent, pay tuition, and live their lives.

Patrons place bets during the launch of legalized sports betting in Michigan at the MGM Grand Detroit casino in Detroit, Wednesday, March 11, 2020. (AP Photo/Paul Sancya)

DataTrek looked at data from Robinhood users, from a data aggregator called Robintrack that looks at holdings in accounts. Compared to Vanguard and Fidelity, Robinhood is probably more likely to be home to active traders and holders in individual stocks, given the company’s original value proposition of $0 trades and stock-focused business.

For the Robinhood cohort, there’s been a huge upswing in people who are holding its biggest names, which are Aurora Cannabis, Ford, GE, Disney, and GoPro.

These are not the most held companies, nor are they companies that garner the most market interest. (You can see the most searched for stocks on Yahoo Finance here and get more information with Yahoo Finance Premium.) 

The number of accounts holding these stocks are up 43% (Aurora), 99% (Ford), 99% (GE), 122% (Disney), 51% (GoPro).

This list is interesting, Rabe points out, because with the exception of Disney, they are all cheap and very volatile stocks that can move up and down 10% in just a few days. Why are so many people drawn to them?

The explanation Rabe lands on sounds wild, but compelling.

“This shoves us to a strange, but we think useful, conclusion,” Rabe writes. “The rush of retail investors into U.S. equities is at least partly a function of a world with no casinos, no sports betting to speak of (horses and ping-pong aside), and little to do outside the home.”

The dopamine rush of having a full house, she says, is the same as “holding a hat-sized stock into an up 3% open on the S&P.”

The relationship between casino news and people looking to buy stocks is interesting, says DataTrek. (Google)

It’s pretty far out, but there’s at least one example of this happening. Barstool Sports founder Dave Portnoy who said he switched from gambling to day trading and is down $647,000.

"I like betting on sports," Portnoy said on his radio show. "Sports ended, and this was something that was still going that I could do during the day."

DataTrek suspects that Portnoy isn’t the only one. 

“The human brain doesn’t know – or care – that one is gambling (a proven long run zero return) and one is investing (proven long run compounding),” she wrote.

Rabe puts forth another chart for us to think about here: a Google Trends chart highlighting the differences in search volume over the past 90 days. There’s a spike in “casino” when the news of U.S. gambling houses closing down came out. According to Rabe, “it coincides almost to the day when searches for ‘buy stock’ began to rise. When one door is closed, another one opened.”

Rabe said that she and DataTrek co-founder Nicholas Colas admit that it’s a bit “off the wall analysis,” but the data was compelling enough to chew on. When the economy opens up, it’ll be interesting to see whether this trend continues.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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