Retail investors are dogshit traders

This article is written by Erik Hartanto, CFA , our investment team lead.

Disclaimer: not a buy, hold, sell recommendation for any mentioned stocks in this article. Nothing in this article should be construed as financial advice. Author’s views may not necessarily reflect the company’s views.

I am a candid person, thus the article title.

Statistically speaking, retail investors (of which you are probably one) are very likely to lose money when you invest in the stock market. The reason is simple: most trades are based on emotions and are driven by hype, rumors or news. I will provide supporting data in the hopes of convincing you out of this habit, better to stop now than when your portfolio is down significantly before you know to stop being stupid.

Let’s start by looking at some of the most hyped stocks in recent memory and see how retail investors acted.

Case study #1 - GOTO

GOTO went public on 11 April 2022. In the weeks leading up to the IPO, the whole market was talking about “GOTO, GOTO, GOTO”, creating the kind of buzz that retail investors often fall temptation to.

Despite some skepticism floating around due to the precedent of Bukalapak’s perceived failure less than a year ago, demand for GOTO’s IPO was considerable.

I use orders below IDR 100 million as a proxy for retail investor demand. This order made up around 23.9% of the allotment (% of orders filled) for GOTO IPO. Putting this into context, GOTO IPO is a sizable IDR 13.73 trillion. This means retail investors spent IDR 3.28 trillion on GOTO IPO (more than enough to feed 3 generations of your family, wouldn’t you say?).

What happened to this precious IDR 3.28 trillion? Well, as of 25 February 2024, GOTO stocks has dropped by 76% from its IPO price.

Long story short, just about everyone who bought GOTO stocks hoping that it would be a good long term investment lost money. But one group in particular suffered the worst loss: retail investors.

The following table shows the top buyers of GOTO stocks since it went public (data taken from KSEI):

The vast majority of retail investors would be registered in KSEI as local individuals. This means that data proves that retail investors, more than any other investor category, continued to buy GOTO even as prices dropped — 2x more than local and foreign institutions.

Ultimately, retail investors lost most money due to constantly averaging down and an unwillingness to cut losses. Cutting losses is very difficult even for experienced investors, and even more so for investors without a clear trading strategy.

The key is to not make purchases decisions emotionally in the first place.

Pop quiz: if you bought GOTO in the past, did you buy because you did the due diligence and were convinced that it was a good business? Or did you buy because everyone was buying it?

Case study #2 - BUKA

Another tech IPO stock — because retail investors like stocks that give them dopamine and excitement.

Again this is not the best approach for investing, but there was tremendous anticipation surrounding BUKA’s IPO. Demand for it was intense, allotment for orders below IDR 100 million is ~1.3%. For a IDR 21.9 trillion IPO, this means retail spent a remarkable IDR 285 billion on BUKA.

Just like GOTO, BUKA’s stock dropped considerably since its IPO, approximately 81% lower since listing.

Using data from KSEI there are 2 different periods of interest for retail investors:

1. From September 2021 to September 2022: when they were aggressively buying BUKA
2. From October 2022 - present: when they were selling off BUKA

Local Individual (retail investors) BUKA transaction:

Again they did badly:

What does this say about retail investors?

There are several key takeaways here.

When a stock has a lot of excitement surrounding it, be wary. The price is usually inflated due to irrational demand. This is exactly why it is not a good time to buy. I chose the examples above because they are both reasonably high market cap stocks with a lot of interest from the public.

There are many ways of inducing irrational excitement in the market — when you see a celebrity or stock influencer telling you to buy a stock, be wary. You are gambling at best and being taken advantage of at worst. I advise strongly against it because oftentimes minimizing losses is more important than reaching for gains.

My biggest responsibility at Recompound is to protect our client’s downside risk. Here’s why:

• IDR 100 million that consistently grows 15% a year will become IDR 1.63 billion at the end of 20 years.
• IDR 100 million that consistently grows 20% a year but loses 50% once every 10 years will become IDR 665 million after 20 years.

And I’ve seen a lot of retail clients lose a significant part of their portfolio time and time again because they can’t manage their emotions, over-speculate, and FOMO buy/sell.

Here’s a contrarian view:

Unless you’re investing professionally, you’re probably not going to get rich quickly from the market.

You’re gonna get rich by focusing on your career. Investing is a means for you to protect and grow your wealth. Don’t buy stocks because it makes you excited — save the excitement for your honeymoon.

Bonus

Toby wrote a code to see how badly retails perform as a whole. Pay up if you want to see how retails perform against IHSG from 2021 - 2022.