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The United States is playing YOLO, China is playing fund, the rise of individual active investment

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A16Z: The wave of active investing is driven by American exceptionalism and the difficulty of Gen Z's financial accumulation.

"Buy and Hold" No More: The Resurgence of Active Trading

Original source: Anish Acharya, General Partner, A16Z; Matthieu Hafemeister, A16Z Partner

Text compilation: beats 0x49

Reviewing the capital market in these two years, there is a more obvious trend at home and abroad.

The majority of American retail investors began to make active trades in 2020, the climax of which was the WSB event of "retail investors beating institutions violently". The investment community users represented by WallStreetBets brought the YOLO spirit of Generation Z to the extreme, and the targets selected by the community, such as marginal votes like Game Stop, fluctuated violently in a few days, which went down in history.

And Chinese investors, the fund has become the first choice of investment, passive trading trend is obvious, and even the fund began to eat circle, investment has become social. The contrast with abroad is stark.

Anish Acharya, a general partner at A16Z, and Matthieu Hafemeister, a partner at A16Z, summed up the phenomenon by saying that a combination of factors has led to the rise of active trading, with U.S. users investing more in active trading and less in buy-and-hold and passive funds. Meanwhile, Anish Acharya and Matthieu Hafemeister predict that the phenomenon will become more common in the future.

The full text of Rhythm Blockbeats is translated as follows:

The traditional view is that passive trading is a rational investment strategy. Day traders are often seen as gamblers or lucky opportunists. Once stretched out the time dimension, the latter did not outperform index funds. However, the rise of platforms such as eToro and Robinhood, as well as the rise of the investment community represented by WallStreetBets, has stimulated the interest of ordinary users in trading and contributed to the loss of institutional power.

The agglomeration of marginal behavior on the Internet has enabled individual users to use collaborative trading strategies that were previously available only to institutions. This technological shift and cultural upheaval in the United States, where easy money and uncertainty about the economy have made it harder for young people to accumulate financial resources, has led to a frugality that is more prevalent among Gen Z.

This is a new phenomenon.

In 1976, passive investing first became part of the portfolio of US investors. At the time, John Bogle, founder of Vanguard Group, one of the world's largest fund companies, introduced a new type of investment vehicle called index funds. John Bogle created the Vanguard 500 Index (VFINX), which will track the S&P 500 Index. By buying the index, retail investors are buying a basket of stocks that represent the market, rather than having to buy each individual stock.

John Bogle was the leading voice in the market for this new type of investment. Since then, passive investments such as low-cost mutual funds and index funds, which track all types of indexes and baskets, have become increasingly common among retail investors. Passive equity funds surpassed active investments in September 2019.

Comparison of active and passive size of US equity funds

In recent years, however, the trend has shifted towards active investment. There are psychological and structural reasons why the new generation of investors is more inclined to invest actively.

First, the American mindset about money is changing. The combination of a false sense of superiority and a culture of optimism about the financial system has led most retail investors to believe they have above-average trading ideas and strategies. American exceptionalism, meanwhile, extends to active trading. "American Exceptionalism" was written by Alexis de Tocqueville in 1831. The main concept is that the United States of America and Americans have a unique place in the world.

Perceptions of investors on financial risk and average return in different countries

In addition, Gen Z's financial accumulation is different from that of their grandparents. Rising asset prices and easy monetary policy, spurred by quantitative easing (QE) and coronavirus, are driving a transfer of wealth from the asset-poor young to the asset-rich older class. To that end, Gen Z investors are willing to take risks to deal with circumstances that may work against them.

Active investment is the extension of the culture of struggle, in which the risk is bearable. People accept and even celebrate failure, as the YOLO craze popularized Wall Bets forums. "YOLO" means you only live once, act boldly. In the WallStreetBets forum, it is shown as the stocks with the highest volatility using high leverage and heavy positions.) .

Gen Z-ers have yet to experience a market downturn, and the oldest members of this group were just 10 years old when the S&P dropped 50% in 2007. For many, passive investing belongs to the strategy of someone who is already rich and someone who stays rich, rather than the strategy of an investor who wants to be rich.

The rise of active trading can also be partly structural. Innovation in infrastructure has lowered barriers to entry for retail investors. Robinhood introduced fee-free trading in 2013, while big brokerages such as TD Ameritrade and Charles Schwab have only recently eliminated fees and opened stock trading to all investors. Similarly, the emergence of companies like Acorns and Stash has made piecemeal investing possible, allowing investors to participate in the market for $10 or less, which was previously unimaginable. Finally, broker-as-a-service platforms such as DriveWealth and Alpaca enable existing apps and new investment platforms to provide users with brokerage capabilities.

Fintech platform from passive investment to active investment route

Currently, we see the emergence of four types of active investing, supported by a growing number of specialized vehicles.

Distributed hedge funds

In the past, the best investors worked on Wall Street, executing their strategies behind the balance sheets and research desks of hedge funds and banks. Individual retail investors can now share their own research and co-ordinate trading strategies to achieve hedge-fund-like complexity and scale.

Investors can post trading ideas and other investors can verify them with their own money, a process that can be demonstrated by a trading app. Users with a high win rate (profitability) will gain a higher community status, and in the future, the incentive mechanism can be unified through economics. Further, transactions can be coordinated across multiple participants' accounts without the need to pool funds. The application will vote whether or not to trade and execute trade actions for high winning trading ideas. Previously, only hedge funds had the capital resources to make such deals. Today, similar operations can be accomplished through communities such as WallStreetBets and execution layers such as Numerai.

Individuals become asset managers on an institutional scale

Star stock pickers have long existed on Wall Street, but on the Internet they have been liberalised by platforms such as Apex and start-ups such as Doji, so that anyone can follow Cathie Wood, the female equivalent of Warren Buffett, in creating their own indices.

Truly efficient markets mean that the best ideas should attract the most capital.

In the past, investors mostly bought ETFs of name-brand funds such as Vanguard funds and Fidelity index funds. But in the future, retail traders will follow individual investors who match their investment style and returns.

Etoro's documentary trading in crypto and Doji's "create your own ETF" are two possible paths for the future.

Low code integrated development environment trading

Just as GitHub and Figma provide collaborative environments for programmers and designers, there are emerging collaborative development environments for hobbyists and would-be consumers to do quantitative analysis. With a GitHub-like investor application, the world's best managers can create a public record of their investments, which can be invested with their primitives by fellow investors in the same economic behavior. Previously this was only happening to quants at banks and hedge funds, but with new tools and increased investor interest, such applications are gaining ground. Today, Composer, Tuned, and Tradologics have created a set of programmatic trading templates for developers.

Bottom-up communities

In the past, investment exchanges were mainly conducted through FintWit, Discord, YouTube and group chats. Today, StockTwits, WallStreets and Commonstock gather the majority of investors, and investment exchanges are becoming more concentrated. The integration of trade proof and trade execution also increases the overall transparency of the industry, setting the current community apart from its predecessor, Cake Financial, a free web-based social network for Financial services where individual investors allowed members to share their real stock portfolios with other members.

Social platforms that showcase open trading data have become a trend in the investment community.

Many of those who attribute the rise of active trading to the bull market are ignoring the structural catalysts behind it. The rise of this culture is driven by American exceptionalism and the difficulty of Gen Z's financial accumulation, which, combined with technological change, suggest that the active investment boom will continue. In short, retail portfolio theory (buy and hold for 30 years) has been replaced by new investment approaches, including bottom-up communities and zero-cost passive investing. We believe that active buy strategies will have a place in every retail investor's portfolio over the next few years.