Many analysts and investors believe the stock market has evolved into a machine for transferring wealth from shareholders to promoters. This may not be true in all cases, as long-term investors have made money and become wealthy by holding on to some fundamentally strong companies. However, when it comes to precisely timing a stock’s entry and exit, investment bankers and institutions have demonstrated an uncanny ability to time the market.
The only principle for making money in the stock market is to buy low and sell high. But, as is often the case, it is investment bankers who take an early position in stocks and let the euphoria run its course. The retail bandwagon continues to grow at various levels until the music stops. Investors who bought stocks at or near all-time highs have been hit the hardest. Some of the top US stocks from the past, such as Cisco, which delivered massive returns to investors in 1999-2000, have yet to regain their previous all-time high.
The other side of this phenomenon is that the wealth made by retail investors during a stock run-up is also due to institutional interest in the company’s shares. “Institutional investors, with their enormous levels of capital and influence, clearly can have a major impact on stock valuations. When they buy this can be hugely beneficial to retail investors, but of course, when they sell it can have the reverse effect. However, it would be misleading to suggest that institutional investors are to blame for leaving retail investors holding stocks at a big notional loss. Institutional players buy and sell according to the market conditions and what benefits them and their clients – this is their job,” says Nigel Green, chief executive of deVere Group, one of the world’s largest independent financial advisory, asset management, and fintech organisations.
If meme stocks like GameStop (GME), AMC Entertainment Holdings ( AMC), Bed, Bath and Beyond (BBBY) and AMTD Digital (HKD) were the retail investor’s reply to Wall Street institutional giants in 2021-22, the bear market meltdown of 2022 has been the investment banker’s response to the investors at large. US equities went down by 20% in 2022 with some of the top US stocks shedding more than half of their value while many crashed nearly 90% eroding leaving investors’ portfolios in a bad shape.
To investors’ relief, there were at least three bear market rallies and the buy-the-dip strategy resonated quite a few times in the market. S&P 500 and Nasdaq 100 finally ended 2022 down by 19% and 33% respectively.
Tesla, Facebook, and Apple amongst others witnessed a consistent rise in their stock price followed by a sudden crash. Short-selling of stocks could be another factor that influences stock prices on their way down. Few retail investors engage in short selling or have access to information on stock trading shorts, in contrast to intuitional players.
Here’s an illustration of how short sellers could profit by selling Tesla at a time when long sellers were playing the long game. According to data from S3 Partners, Tesla which suffered its worst yearly performance in company history could be the most profitable short trade of the year as short-sell investors, who profit when an asset’s price decreases, are anticipated to have got mark-to-market returns of roughly $17 billion in 2022.
Jose Torres, Senior Economist at Interactive Brokers says, “ Declining asset prices and tightening liquidity conditions affect everyone negatively in aggregate (brokers, hedge funds, pension funds, retail, etc.). For better or for worse, retail traders tend to be long-only, which can be terrific during bull markets, but particularly painful during bear markets. The tightening of monetary policy doesn’t pick and choose who wins or who loses.”
As a stock market investor, you need to be aware of the fact that sitting on a broker’s terminal or placing a buy or sell order online from your favorite stock market platform is the only thing in your hands. Investment bankers, who serve as a bridge between investors with funds to invest and companies in need of funding to expand and operate their operations, also have a role to play in the fortunes of your stock portfolio.
Apart from the role of the investment bankers, there are several factors both internal and external to a company that ultimately determine a company’s valuation and stock price. Some events and developments have an impact on short-term performance, while many others, including earnings, have an impact on long-term stock price performance.
Also Read: Stock market expecting Fed to be less aggressive ahead of next FOMC meeting
The high valuations enjoyed by many technology companies during the low or zero-interest-rate era are over for now. The sky-high returns that most top-tier US companies have generated in the past have been largely due to ever-expanding valuations based on the companies’ future growth prospects.
Things began to change in the second half of 2021, when inflation began to knock on the door. US Fed, however, washed the ominous signs away, by calling inflation a ‘transitory phenomena’. In early 2022, reality set in, and the Fed began raising interest rates. By the end of December, the US interest rate had been raised by 425 basis points from its near-zero level in early January.
“US stocks fell to end 2022 with their worst show since 2008, with S&P 500 tumbling close to 20 per cent, tech-heavy Nasdaq sliding 33.1 per cent, and the Dow somewhat salvaged with 8.8 per cent. Retail investors had their worst year in 2022 as they were roiled by the crumbling of growth stocks including the technology sector. The US saw the highest inflation in forty years which triggered the Federal Reserve to implement some harsh monetary policies to tame the raging inflation. The steep interest rate hikes throughout the year may have induced pessimism in the equity market and stocks began to fall like a pack of cards,” says Kunal Sawhney, CEO, Kalkine Group.
Equity is inherently volatile in the short term, but the stock selection and holding on to it over a longer time horizon requires conviction. If one believes in a company’s products, services, and business, as well as in its management’s ability to navigate through difficult times, investing in it through dollar cost averaging is a better approach. Investing in stocks based on cash flows is more important than investing in stocks based solely on growth projections.
Still, stock picking is not your cup of tea? In that case, opt for exchange-traded funds that can assist you in investing in the equities asset class to produce a higher inflation-adjusted return if you are not comfortable investing in individual companies.
Also Read: S&P 500 to fall for the second year in a row or end 2023 with gains?
Stocks losing between 60% and 80% over 1-year
Tesla, Inc.
Meta Platforms, Inc.
Lucid Group, Inc.
Rivian Automotive, Inc.
Snap Inc.
Unity Software Inc.
Shopify Inc.
Credit Suisse Group AG
Roblox Corporation
DoorDash, Inc.
NIO Inc.
Spotify Technology S.A.
Palantir Technologies Inc.
Cloudflare, Inc.
DocuSign, Inc.
Zoom Video Communications, Inc.