The Hidden Power Held by Individual Investors

Recently we had FoolFest, our annual (this year virtual) event open to all Motley Fool U.S. premium members. In this episode of Industry Focus: Wildcard, we're bringing you one of our favorite sessions from the event: "Retail Rise Up: The Hidden Power Individual Investors Hold." Analysts Bill Mann, Maria Gallagher, and Alyce Lomax walked through the advantages average folks have as investors and the growing power and influence retail investors hold in the market.

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This video was recorded on July 28, 2021.

Dylan Lewis: It's Wednesday, July 28th, and we've got a special episode in store for you today. I'm Dylan Lewis, but you will not be hearing from me for long. Last week was FoolFest, our annual, this year virtual event open to all Motley Fool U.S. premium members with a full day of programming featuring sessions on newsy topics like inflation, the real estate market, but we also focused on the Foolish investing foundation of building a portfolio of 25-plus stocks and holding them for five or more years. We had our team pitch stock ideas, about two dozen of them. But one of my favorite sessions from the event was focused on the rise of retail investors. Analysts Bill Mann, Maria Gallagher, and Alyce Lomax walked through the advantages that average folks like you and me have as investors, and the growing power and influence retail investors hold in the market. It was part macro discussion, part pep talk, and it seemed like the perfect conversation to share with our podcast listeners. We'll be doing that in just a second. Before that, a reminder: If you're a Motley Fool premium member, you can access all of our FoolFest replays at our multimedia hub at live.fool.com. With that, here's Bill, Maria, and Alyce with "Retail Rise Up: The Hidden Power Individual Investors Hold." 

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Bill Mann: Hi, Fools. Bill Mann here, and I'm joined today by Alyce Lomax and Maria Gallagher. We're going to talk about the hidden power that individual investors hold in the market, what we call the rise up. Over this last year, in fact, about a month ago, Robinhood came out with its S-1. It's planning on going public. One of the really interesting things in that document was that they have 18 million live accounts, 47% of which are active every single month, and almost 9 million of those accounts did not have a brokerage account before they joined Robinhood. Truly, what we've seen in 2020 is a year in which the individual investor has gotten interested in the market and it's gotten to be a much bigger component of the market, something that people need to pay attention to. What we're going to cover over this next 20 minutes with you all is I'm going to turn things over to Alyce and to Maria where we talk about the power of the individual investor. If you think about investing, if you are buying and selling shares, you could potentially be buying from the largest fund in the world. You could be buying and selling from Warren Buffett for all you know. We are all in the same arena together buying and selling shares. But as we're going to discover, if you are an individual investor, you actually are a different player and you have some distinct advantages over the big investors out there. Maria, I'm going to send this over to you first. Could you talk a little bit about the advantages and the differences that retail investors have over institutional ones?

Maria Gallagher: Of course, it's pretty fascinating. Just to make it clear what the difference is between institutional investors and retail investors, institutions are pension funds, mutual funds, money managers, endowment funds, hedge funds, private equity investors, and commercial trusts. What really matters here is these are people who are investing for other people. They have some regulations they have to maintain in accordance with the SEC. When we're talking about retail investors, that's really anybody else. Those are generally people like us who are investing for themselves with their own goals in mind. Something that's really important and that's a distinction is the time horizon. Retail investors, you can choose the amount of money, you can choose the amount of stocks you invest in, you can choose how long you're going to buy and hold them for, where you have much less of that control when your money is with an institution.

Mann: It's really important what you just said. I want to drill down on something. You, Maria, can be both an individual investor and you can be an institutional investor, if you are investing in mutual funds, for example.

Gallagher: Absolutely.

Mann: Your interface with the stock market is through that institutional asset. A lot of people don't really realize that institutions make up the vast majority of both the amount of assets held and the amount of shares that are traded each day. In some ways, we are quite small compared to institutions.

Gallagher: Yeah. Institutions are about three-quarters of the volume of the trades on the New York Stock Exchange, so they are the majority.

Mann: Yeah. So that doesn't sound like a position of strength, Alyce. We're the small fish, so why would we say that this is the rise of the individual investor, that the individual investor has power that institutional investors don't have?

Alyce Lomax: Well, one thing that we have is that we do have that gift of time. We don't have to prove within a couple of months that we're doing great. We can hold. Another thing that means a lot to me personally is that we can invest with our own moral compass in mind. We can choose certain stocks that fit our own capabilities. There is a lot of power in that, and it's interesting. I know that we'll talk about this later but as a part owner, there's proxy voting, and for a long time it was arguable that a lot of investors were asleep at the wheel, but we can be part of that democratic process as a part owner to be voting our proxies.

Mann: Yeah. All of that is incredibly important and you're exactly right, but I want to put it into a bucket. Because a lot of people think of if I buy a mutual fund, even if I buy an index fund which is an institutional product, even though it's a bunch of individual investors buying in and out, it's an institutional product, when you buy into an institutional product, you are tied to whatever the framework is of that institution. You also have exposure to whatever the beliefs are of all of the other investors in that asset, particularly as it comes to mutual funds. Mutual fund managers, and I say this as a recovering one, and I know that Maria also has done some time in the institutional world, their time frames are not their own. They are held to account in time frames that they may not find to be even appropriate. I like the way that you frame it, thinking about investing in a way so that you can take all of your goals and you get to take charge of them. You mentioned ESG investing and that is environmental, social, and governance.

Lomax: Yes.

Mann: These are huge companies. Some of the companies that we are investing in are dominated by institutional investors. Why do we think that individual investors do have some degree not just to choose what they own but also to affect change at some of these large companies?

Lomax: There's been an interesting sea change over the last 10 or 15 years. Fifteen years ago, any kind of stakeholder-centric investing was viewed as a niche and you couldn't actually do well that way. We have seen not only a rise of individual investing but a rise in ESG investing, and a lot of that is about a demographic shift with younger people who are more interested in companies doing right by the environment, by their employees, by communities. That has actually driven a lot of the growth in those companies that are looking at their businesses in a more stakeholder-centric way and investors, including big institutions that are also looking at companies in that way and pushing for change. That has been a big sea change that we can all participate in now now that that market has grown so much.

Mann: I think, Maria, morals-based investing or however you would like to describe it, ESG maybe is the best term for it, it has gone from being a nice thing and, oh, isn't that great, to something that is required for companies.

Gallagher: Yeah. The assets under management in sustainably focused funds reached nearly $2 trillion after this last quarter, with $185.3 billion inflow, which was up 17% from quarter over quarter. What's really fascinating is that ESG funds on average in the past year are up about 4.6% compared to a 1.1% gain for non-ESG funds. Not only are we seeing people excited about investing in their values and investing with their own moral compass; we're seeing that these companies within these funds are actually outperforming. It is proving that you can do well while doing good. I think that that is just going to continue as we see the rise in retail investors, we see a synonymous rise with this ESG demand and I think both of those things are going to continue. It's a chicken and an egg situation. Have companies started caring about stakeholders because they realized it's the right thing to do or are they doing it because a lot of new investors are really interested in this space? I think that's another way that there's a lot of power, is there is a lot of power in what the retail investors are interested in, and that's really pushing a lot of change in reporting standards for companies and the way that funds are even created and produced. I think that that's another really big, powerful place for retail investors to be in.

Mann: I love that you made that one inference though that I think is so important when you think about what individual investors' interests are. Because one, it is absolutely true, it's not just demographics; it's also the share of GDP of millennial investors. Millennials, by the way, they aren't necessarily as young as we thought that they once were. The oldest millennials are now approaching 40 years of age. They are in their prime asset gathering and investing stage. They are coming into the moment. It's not necessarily the number of participants; it's also the sheer dollar they have. But I think the thing that was really interesting about what you said, it was all interesting, but this to me I think is really cool is, is not so much that the individual investors are making the choices themselves; they are pushing institutional investors to do it also, which is why I started by saying I don't think companies have a choice anymore about how they present their environmental, social, and governance policies, what they're trying to do, because it is becoming a core element of what a larger component of the market is interested in. That really started with individual investors.

Gallagher: Yeah, absolutely. You see with these individual investors and these retail investors that accounted for about 70% of sector inflows this year, they hold at times above $1 trillion that they can deploy in funds and savings.

Mann: That's a lot.

Gallagher: It's a lot. So it's an incredibly powerful group of these retail investors and you can see that. They are really causing a lot of change in, like I said, the reporting standards. A lot of companies didn't have sustainability reports, and now, I think over two-thirds of companies in the S&P have yearly sustainability reports. That is because people want to see them and people are holding these corporations accountable, and that's really the retail investors are pushing that change.

Mann: Yeah. Alyce, we're talking a little bit how this creates some change on a systematic level, but it's also something that's powerful for you as an individual investor. Because if you are interested in investing on an ESG basis, you may be less interested in a large number of companies or trading in and out.

Lomax: Yeah, absolutely. I feel like over my years at the Fool, developing this lens to look at companies has actually really helped me with my temperament. It makes me feel more patient if I feel good about my companies being very stakeholder-centric and being very additive to the entire economy, not just my investment but to the economy at large. They give me a sense of well-being. When I look into their sustainability initiatives, I see a remarkable amount of innovation, I find that inspiring. I'm like, look at what this company is trying to do. It does narrow my universe. It reduces the noise. If I'm honing in on certain companies or industries, there are some industries I just won't consider, I don't have to worry about this. There are just ways that I feel ESG investing can actually not only help you sleep at night but also just make you feel very comfortable, less worried about a big ESG blow up happening, [laughs] which sometimes happens, I don't know.

Mann: It sometimes happens the companies are giving you a fish story about what it is that they are doing. One of the really cool things about taking that on yourself is that you get to have a portfolio that represents the future that you would like to see as David Gardner always has so eloquently said. It's a really incredible thing. But also, when you think about what you get to do versus what an institutional investor gets to do, or what you have to do if you are invested with an institutional investor, those time frames matter. The time frames in which you hold securities matter. If you as a retail investor have the ability to say, I'm going to buy 25 stocks, I'm going to hold them for five years, and at that point, that's when I'm going to first start to really think about the accountability of what I have done, what choices I have made, I think you're going to end up in a much better place than investing with almost any institution.

Gallagher: It's a really exciting place to be, I think.

Mann: Yeah. I want to make sure that we cover, because we've talked a little bit about the rise of retail investors. We here at The Motley Fool feel like we've been here all along. We've been here since the middle ages, since pricing in stocks was done in pencil. These last two years have been pretty fascinating and have been pretty remarkable in terms of both the amount of individual investors who are taking an interest in the stock market, and then also the amount of even just trading volume that we've seen as a result. Maria, are there inferences that you can make from that data? I want to see if you can recite the data from memory. The statistics you were pulling out earlier were fantastic.

Gallagher: I think something that you can really see where this shift has happened is that in late 2019, we see a lot of these individual investors began to be able to use free commission trading. That was a pretty big barrier to entry for a lot of investors. When we saw that shift, I think you've seen a really big increase in the amount of individual investors who can participate in the stock market. Just on a daily trading volume alone, the stock market in general is averaging about 15.2 billion shares daily, which is about 50% higher than last year's levels, and anecdotally [unclear] to those institutions, to those hedge funds, their volume hasn't changed that much. A lot of that increase is due generally to the rise in retail investors. There's also this really interesting way to look at it. There's something called the trade reporting facility which deals with trades not done in exchanges. They're trades routed to moneymakers, and so that's usually if you're using Robinhood or SoFi, when you're selling your trades there, that is generally those retail investors and that's now making up almost half of all trading. Those trades at those retail brokers keep increasing. We're seeing all of these different ways to measure the rise of just the sheer volume of retail investors. As that increases, the power of those retail investors increases as well.

Mann: Do you consider that amount of volume, I'm talking about the actual shares traded, to be a good thing or a bad thing, or just a thing?

Gallagher: That's a really interesting question. As we're seeing the rise of retail investors, we're seeing a lot of excitement in terms of trading. We'll see a lot of inter-day trading and a lot of that type of mindset, and I think what's really important with us, as we've already talked about, is our long-term time horizon. We're investors, we're not traders. We really like to continue to hold for the long term. It's a two-sided coin because I'm excited about the amount of volume in terms of how many people are engaged, but I do want the volume to be people who are buying things and planning to hold them, not so much those consistent traders. Hopefully, it will eventually even out to be more volume and maybe hopefully hold for that longer time horizon as well.

Mann: It's not just your hope. There is plenty of statistical inference that shows that one of the worst things that you can do, or the worst thing you can do, let's draw it out, is to not invest.

Gallagher: Yes.

Mann: But if you're going to invest, and you should, one of the most perfect correlations is the more you trade, the less well you do over time. It is a straight line, which is why perhaps apocryphally, one of the things that gets mentioned quite a bit is that the portfolios that tend to do best are ones that people have forgotten about or the people themselves have passed away. The volume itself might not be the thing that we consider to be most powerful and to be the thing that is most important. It really has to do with the amount of people, the individuals who are in the stock market, and that also, I think we've got some statistics, has gone up remarkably.

Lomax: I just wanted to date myself for a minute and talk about living through the dot-com era and looking around today, and saying, well, people seem to be a little bit speculative. Part of me wants just to get a little bit judgmental about it, but then [...].

Mann: Right.

Lomax: Yeah, right? I've seen this show, I've lived it, I did silly things myself, but then I'm like, well, I like the idea of people getting involved, and maybe everybody has to take a few knocks and then learn to be a long-term investor like we do at the Fool, because finding t\The Motley Fool saved me from myself when I used to be more of a trader.

Mann: I think it's super important for people to note, when they hear from us here at The Motley Fool, a lot of us didn't come to Motley Fool-style investing out of the gate. We tried some stuff.

Lomax: We did.

Mann: It didn't go well. I couldn't sleep. Now, I can sleep and it's gone much, much better. Fools, we have probably a minute left. I want to make sure that we hit the biggest points as we talk about the rise of the individual investor. Alyce, do you think this is a revolution? Is this something that's happened because the market has gone up, and do you consider this to be a good thing?

Lomax: You know what? It's interesting. Back in the winter, when the game stock and the meme stock stuff started, there was a narrative around that about a revolution, little investors sticking it to the man, stubbing the toe of the hedge funds. My thought was I am all about some positive revolutions, but in my opinion, a better revolution is to buy stakeholder-centric companies and hold them for the long term. I do think there is a revolution at hand, I just hope that it shifts in a certain way with patient money and encouraging stakeholder-centric economic value-add types of companies.

Mann: Yeah. Fantastic. Maria, you know this is very hard for me. Really, really hard. I'm going to give you the last word.

Gallagher: Wow, thank you.

Mann: Five years from now, if we look at what has happened during 2020, five years from now, what environment in the stock market makes you happy and feel like we have done a good thing and individual investors are on the right path?

Gallagher: I think it's continuing to be vocal about your interest, I think it's continuing for inflows to be in these types of institutions that vote in the way that you want to see and that you respect and you're a critical thinker. I think the best thing to be as an investor is to be a critical thinker and ask a lot of really hard and really interesting questions. I think that's what's most exciting is a lot of these new retail investors are not just blindly coming into the market, they are coming in with questions and they're demanding answers. I think as that continues, that's something I'm really excited to see in the next five and 10 years what that environment looks like.

Lewis: Listeners, that does it for this episode of Industry Focus, if you have any questions or you want to reach out and say, "Hey," shoot us an email at [email protected] or tweet us @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today, and thank you for listening. Until next time, Fool on.