Bubbles, Instagram Influencers and DIY Investors

Nick Moules

The last 12 months has seen an explosion in amateur investing, from online trading platforms, copying other amateur traders, Instagram influencers and Bitcoin speculators. Nick Moules looks at what has occurred, why financial advice is a tortoise and how we can all help people to achieve their goals with considerably less risk.

If you had a four in five chance of losing money in an endeavour, would you do it? Unless it was for fun, you could easily afford to lose, or the reward outweighed the risk substantially, you would probably not do it.

Plus 500, the financial betting company, made a staggering 1,836 per cent profit in the early part of the first lockdown in 2020 after amateur investors piled in, fuelled by some spare time and cash and a desire to make money. Four in five of its customers lost money, but they kept coming back.Either way, Plus 500 was in the money and its customers were not. Other DIY platforms recorded huge rises in customer numbers and cash invested too.

What we don’t know is what people were investing for. With a lack of live sport on TV at the time, was this a way of filling a gambling-sized hole in their lives, or was it for long-term plans?

AJ Bell saw its inflows double and customer numbers soar at the tail end of 2020 as the platform continued to cash in on an increased number of investors amid the Covid crisis. A trading update published on January 21 shows investors placed £1.6bn with the platform in the three months to December — double the £800m recorded for the same period in 2019.

Advised investment business accounted for some £800m of the inflows, up 33 per cent on the prior year.Meanwhile platform customer numbers grew by nearly 17,000 over the three months, closing at a total of 298,000. This represented a 6 per cent increase in the quarter and 31 per cent over the year. Advised customers grew by 12 per cent year-on-year and 3 per cent during the quarter to hit 112,300.

Marketing by direct to consumer platforms has gone stratospheric and could help explain the rise in adoption. Some of the best-known brands, including AJ Bell in traditional investments and eToro in cryptocurrencies (reportedly in talks with Goldman Sachs for a $5bn IPO) have stepped up their game and are hitting consumers online and offline. A half-time ad break in a football match recently featured eToro and Vanguard’s direct to consumer offer within a couple of minutes of each other. With a potential clampdown on betting companies in top-level UK sport on the horizon, these platforms could step up and fill the sponsorship void.

All of this is good news for markets, at least in the short term. It pushes up the prices of stocks as more investors want to buy them. It does make the investing environment more volatile though. Algorithms designed to follow trades have accentuated the impact of movements for some time now. Social media and hype are adding extra wind to those sails.Arguably, an increase in participation in the investment market is a good thing for everyone. People are investing their money, rather than relying on savings accounts to grow their money, or, whisper it quietly, the property market. We’ve featured articles on these pages before talking about the difficulties in becoming a landlord these days and with property prices in urban areas forecast to fall plus the additional cost of Stamp Duty restricting entry, the attractiveness of property might be slipping further, leaving investments as one of the only options. TINA to her friends – the investment community coined this acronym for There Is No Alternative – meaning people are investing their money because there’s nothing else about with the bond market also returning very little.

However, there’s speculation that we’re entering bubble territory and there’s a very real risk that amateur investors are not going to read the signs or be able to spread their risk sufficiently to bear the brunt of a market slowdown. Investment management firm, GMO’s, co-founder Jeremy Grantham has described the rally since 2009 as an “epic bubble” characterised by “extreme overvaluation”.

Exploding bubbles

First-time investors have been intrigued by the recent Reddit-inspired pile-in to GameStop stocks, which has been a very handy example of a bubble. GameStop is the US equivalent of Game, a staple electronic retail presence in UK high streets for decades.

Threads on Reddit, the largest online forum in the world, encouraged retail investors to stick it to the man (the hedge funds) by buying up stock and blowing the hedge funds’ shorting strategies up in their faces. The hedge funds borrowed the stocks, paying a fee to do so, on the premise that they would dump the stock, cause a downward movement in valuation and then buy up the stock later on for less. The stock rises in time and the fund sells, repaying its loan fee and keeping a tidy profit. By keeping the price rising, amateur investors made sure the hedge funds couldn’t sell at a lower price, so they were carrying the can.

However, this pushed prices up to such an extent as more people joined in, that there are now people holding very overpriced stock. On January 11th, stock was worth $19.44 a share. It rose to $347.51 on January 27th. At February 9th, it is back down at $50, so anyone who bought in at the top of the market is looking at a $300 loss per share if they were to sell now. If they were investing because they wanted to see what happened and $300 isn’t a big deal to them, that’s a lesson. If they were investing because they thought it would go up further, they’ve learned a very expensive lesson.

We’re all part of the bubble

News that Tesla invested $1.5bn of its spare capital in Bitcoin was taken by investors as a sign that the stock is solid and has driven the price of coins higher still. Furthermore, as Tesla itself is a stock held by many global funds, many of us now have an indirect stake in the performance of Bitcoin.

We’ve avoided speaking about Bitcoin in Money Matters before, primarily because it is not something we advise clients on. However, more institutions are buying it, including Blackrock. If pension funds begin dipping their toes in, we will all be more directly invested in Bitcoin – whether that means we will be able to succinctly articulate where it comes from or what it physically manifests as, is another matter.

The problem with Bitcoin, as it always has been, is that nobody is regulating it, nobody owns it and if it all went downhill, there would be no recompense for anyone. Investors are gambling that this isn’t the case. Cryptocurrency is a new field and we don’t know what future use there will be for Bitcoin and how valuable it could be to society – we could reflect on the current price of Bitcoin and consider it a bargain. The point is that nobody knows and while stock markets have risen historically over a sustained period of time, investment professionals are split on which way Bitcoin will go.

Murkier influence

GameStop and Bitcoin are very much mainstream though. There is a lot of media coverage from respected sources, which allows people to make their own decisions about the merits of being invested there.

Where the amateur investor pile-in is less noticeable, but arguably more serious, is the scam activity being rolled out of social networks, especially Instagram. The Facebook-owned app allows people to upload photos to be seen by others in their network. This has evolved into people offering “share tips” alongside images of a glamorous lifestyle, indicating that following the influencers trades can lead to similar rewards.

Since the coronavirus outbreak began last year, the average number of Instagram frauds reported each month has increased by more than 50%, according to new figures by Action Fraud, the UK police national reporting centre for fraud and cyber crime.

There’s also been a rise in the reported amount of money lost. Before the pandemic it averaged £60,000 a month, but it has now risen to about £200,000 a month.

Needless to say, the old adage of it being too good to be true is certainly the case here. As a society, we’ve always liked get-rich-quick schemes, from the 18th century South Sea Bubble, the build up to the Wall Street crash and the sub-prime mortgage crisis are good examples of this. Right now, it’s a perfect storm. The Covid crisis has wreaked a lot of economic havoc, social media proliferation means fraudsters have instant access to vulnerable people and regulation of activity like “share tips” is non-existent, it falls on the likes of Action Fraud to investigate after the event.

The role of financial advice

Rather like the sensible parent calling a halt to a children’s game that is getting out of hand before someone gets hurt, financial advisers can do the same for people who think they can outperform the market by picking stocks or following the foreign exchange tips of a twenty-something with a Maserati.

It’s doubtful that people attracted to these sorts of schemes will have their head turned by the chance to sit down and discuss their life goals and go through a fact-finding process to understand their motivation and attitude to risk. It’s considerably less exciting and gratification is far from instant.

However, in the age-old parable, financial advice is the tortoise and playing the stock markets or piling into markets on the strength of a tweet is the hare. It’s up to everyone connected to financial advice to make that point loud and clear and to refer people to financial advisers if they have the chance.

Our messaging around the Covid-19 crisis was to trust in the efficiency of global markets and to hold positions and the recovery has born that out. However, many investors did sell at the bottom of the market because they listened to hype and didn’t have the reassurance of an adviser to fall back on.

We all know people who have talked about buying Bitcoin or a Tesla stock. They want to grow their wealth and there’s nothing wrong with that, but they’re probably not seeing the bigger picture.

What if they could still make their money grow, but they can invest in a diversified manner so they’re not going to lose it all, they can maximise their pension and ISA allocations so they’re benefiting from time invested in the market, and they can put insurance in place so that if they lose their job they won’t have to liquidate their investments to cover them? Cashflow planning tools visually convey this message to people but they need to engage with an adviser first.

Helping people to understand that there’s a way to their objectives that is slower, but with considerably less risk is a tough message to get across but it will become more important than ever over the next few years as the proliferation of DIY opportunities and socially-pushed scams is likely to increase.Do you know someone who could benefit from a cashflow planning session with an adviser? Please speak to your adviser or email marketing@wrensterling.com and we will get in touch.The value of an investment and income from it can go down as well as up. Capital is at risk.

Nick Moules
About the Author

Nick has been in charge of Wren Sterling's marketing since 2016. He is a Chartered Institute of Marketing-qualified marketer with experience in financial services and start-up marketing, as well as a background in public relations. Nick is Wren Sterling's media contact.