Retail Investors vs. Reality
- Balkar Sivia
- Sep 4
- 5 min read
Updated: Sep 5
This summer, while flipping burgers at a backyard barbeque, the conversation turned to markets. Within minutes, someone leaned over and asked what’s become an all too familiar question for me these days: ‘Do you own Palantir?’ I smiled politely and dodged the question, as I often do. But the truth is, some version of this question - ‘Do you own XYZ meme stock or ABC crypto? - has become a recurring theme in these conversations.
Adapted from Britannica’s definition, meme stocks have the following characteristics:
Social media plays a significant role in generating interest
The price action connected to meme stocks is often highly volatile, with wild shifts in volume
The majority of interest comes from retail traders, rather than hedge funds or asset managers
Prices are disconnected from company fundamentals, such as how much the company is earning or other performance metrics.
This got me thinking about a deeper issue: the market structure has fundamentally changed. The rise of passive investing, the growing power of retail traders, and the influence of social media have created a new market environment. We will cover passive investing in a future blog post but this post will explore the psychology of retail investing and what it means for all of us.
As Charles Kinderberger said in Manias, Panics and Crashes, “For historians each event is unique. Economics, however, maintains that forces in society and nature behave in repetitive ways.” Each wave of innovation, be it the railroads in the 1840s, electricity in the 1920s, the internet in the 1990s, and now AI, sparks a powerful narrative about the future. These stories are typically very seductive. When the technology is new, unproven, and hard to quantify, investors fill in the blanks with optimism. The less data there is, the more room there is to dream.
Also, every major mania driven by technology has been spaced roughly a generation apart. That’s not a coincidence but a reflection of how long it takes for collective memory of financial pain to fade. “Financial disaster is quickly forgotten,” John Kenneth Galbraith, an expert on bubbles, observed. “When the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely confident generation as a brilliantly innovative discovery in the financial and larger economic world.” The dotcom crash of 2000 wiped out trillions in market value and scarred a generation of investors. But by 2025, retail traders have no lived experience of that fallout due to which caution is again giving way to imagination.
Today, the platforms may be different - Reddit, WhatsApp groups, TikTok influencers instead of Yahoo chat rooms - but the behavior is the same: chasing stories, ignoring fundamentals, and assuming this time is different.
History suggests it rarely is.
“There is nothing so disturbing to one's well-being and judgment as to see a friend get rich.”
- Charles Kindleberger
Back at the barbeque, I learned that my friend is part of a WhatsApp group where participants recommend stocks to each other. Each person belongs to multiple groups, forming a hive network. Platforms like WhatsApp, Reddit, and TikTok have become informal trading desks, where stock tips trigger coordinated buying. Meme stocks peaked after the COVID-19 pandemic, as retail traders - coordinating via social media - drove a dramatic surge in GameStop (GME), targeting hedge funds with heavy short positions. Today, hedge funds have grown increasingly cautious about confronting retail investors, leading to unchecked rallies in these stocks. This is ushering in a gambling culture in the markets that blurs the line between investing and speculation.
Clockwise from top left: Margin debt is at record levels; US household total stock holding as a percentage of total assets are at an all time high as have been during previous manias; Retail and algorithmic trading is now over 30% of all trading volume; 0DTE options are over 50% of all options trading on the SPX index.
Of course, bubbles do not happen without excessive leverage. In addition to the above charts, please see below from Brian Armstrong, CEO of Coinbase.
Buoyed by zero-commission trading and the gamification of investing platforms, retail investors now account for over 20% of daily trading volume for the US market, up from an average of 10% a decade ago. And options have become the tail wagging the dog. Retail investors now account for 35% of daily options volume including a large portion of the risky 0DTE options. These options expire in less than one day making them a pure gamble on daily market direction. Options also create a feedback loop where options flows influence stock prices (as dealers have to hedge their positions), which in turn affect options pricing - further detaching markets from fundamentals.
“The four most dangerous words in investing are: ‘This time it’s different"
-John Templeton
Unfortunately, some of this speculation stems from sheer financial pressure. With student debt mounting, housing costs soaring, and inflation running hot, many retail investors feel compelled to take risky bets in hopes of breaking ahead.
To be fair, many retail investors have done exceptionally well in this cycle. The strategy of "buying the dip" has handsomely rewarded those who bought during sharp corrections. This success is largely due to an extended bull run and a unique environment where governments and central banks have repeatedly intervened in the markets with stimulus. For most people, the market structure, driven by passive flows and retail speculation, has created an illusion of effortless gains. However, every cycle of excessive risk-taking, from the railroad manias to the dotcom bubble, has ended with a painful reminder that fundamentals eventually matter.
This speculative bubble in meme stocks requires a constant influx of new investors to keep prices rising. It breaks when this momentum stops. The reason could be anything from a change in monetary policy, a scandal, or a public failure of the hyped meme stock. Once the belief in ever-rising prices is broken, a wave of selling begins. Investors, fearing they will be the last ones to get out, rush to sell their holdings, leading to a rapid and often catastrophic collapse in prices. In fact, that is exactly what happened in the meme stock bust of 2021-22 where while the early adopters profited handsomely, the majority who joined at the peak of the hype saw their portfolios wiped out.
Back to Palantir. No, I do not own it.
Palantir currently trades at 80 times revenue. Not earnings. Revenues.
But, I am talking like a value investor with no imagination, right? Well, even if we assumed generously that Palantir can grow revenue 35% per year and have 50% profit margins (S&P 500 average profit margin is 12.7%), investors buying at this valuation would need 12.5 years just to get their money back!
When stock prices are going up, who cares about earnings and cash flows! However, as market momentum fades, we believe the enduring principles of investing will once again come to the forefront. Thoughtful research and strategic insight will matter far more than impulsive decisions driven by the latest WhatsApp message. This shift will demand a disciplined fundamental approach:
Rigorous analysis of financial statements with a focus on cash flows
A deep understanding of business model, unit economics and industry dynamics
An understanding of company culture, management incentives, sentiment and market structure
