Market Bubble, Retail Frenzy, and Tracking the Big Whales

What do the successful investors think about the current market? Are we in a market bubble? How does the retail frenzy correlate with the market and market bubble?

Retail Investor Behaviours

• Active retail investors underperform the market by 6.5% every year, as compared to 1.5% for investors who buy and hold.
• Gambling : Retail investors’ decision-making process is mainly dominated by the magnitude of the potential winning, rather than its probability.
• Robinhood 50 list — equities on this list are more correlated to retail investors’ market activities than the stocks that are not on this list

Retail Investors’ Underperformance factors:

• Overconfidence in their investing decisions (high portfolio turnover)
• Poor risk evaluation
• Overreacting to news events causing high portfolio turnover
• Believing they can predict the market

Retail Investors are More interested in depressed stocks:

• Compared to undepressed stocks, depressed stocks are more likely to attract retail investors at year-end and experience an increase in retail investor attention

6 Factors that are positively correlated with Retail Investors’ Trainign activities

Tracking the Big Whales and Their Q1 Trades

“Big Whales” Perspectives: Views on Market Bubble

• Michael Burry: “People ask me what’s going on in the market? It’s simple. Greatest Speculative Bubble of All Time in All Things.”
• Ray Dalio: Some stocks are in a serious bubble, while some are not

So, which companies do the successful hedge fund managers use to hedge against the market bubble?

Who to track?

Consensus of 7 Successful Investors’ Trades during Quarter 1 — Which sectors did they buy/sell?

7 Investors in the consensus:

• Michael Burry
• Cathie Woods
• Warren Buffett
• Stanley Druckenmiller
• Prem Watsa
• Bill Gates Trust
• Tiger Global
• Buys & Increased Holdings Vs. Sells & Reduced Positions

• Hold:

Consensus of 7 Investors’ Trades during Quarter 1 — Which Stocks?

• Buys & Increased Vs. Sells & Reduced Positions:

• Hold:

7 Investors — Individual Portfolio Analysis

Michael Burry — Scion Asset Management

• Q1 Transactions as % of Portfolio:

Stanley Druckenmiller — Duquesne Family Office

• Q1 Transactions as % of Portfolio

Warren Buffett — Berkshire Hathaway Inc.

• Q1 Transactions as % of Portfolio:

Prem Watsa — Fairfax Financials

• Q1 Transactions as % of Portfolio:

Bill & Melinda Gates Foundation Trust

• Q1 Transactions as % of Portfolio:

Tiger Global Management

• Q1 Transactions as % of Portfolio:

Cathie Woods — Ark Investment Management

• Q1 Transactions as % of Portfolio:

Increased position & Buy Trades

Watch the Market Bubble — Optimistic Investor Sentiment

• Investor sentiment significantly predicts stock bubble probability, with a higher probability of bubble occurrence following periods of higher investor sentiment.
• A more optimistic investor sentiment also increases the size of stock bubbles.
• Sentiment has the tendency to reach its peak prior to the bubble’s peak
• Thus, Investor sentiment has strong predictive power for bubble bursts.
• Overall, retail investors optimism + overall market positive investor sentiment → Market Bubble?