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Should You Be Worried About the Stock Market’s Fringe Players?

Scott's Column

We recently ran across an article about a little corner of the Internet known as “r/WSB.”  It’s where a modern-day version of day-traders hang out to share ideas, brag about their conquests, and sometimes try to move the market to their advantage.

Here’s a link to the article:

The article shows that the more things change, the more they stay the same.  There have always been quick-buck traders and market manipulators hanging around the stock market ever since it was formed under the buttonwood tree on Wall Street in 1792.  The crew congregating at r/WSB is merely a digitally enhanced version.

These fringe players can and sometimes do have an impact on stock market activity.  But over the long-term their impact is marginal.  Ultimately, their trading activity is largely offset by market participants who have opposing views (i.e. the unseen hand of the efficient market), or by systemic changes in the direction of the markets that thwart their fast-money schemes.

For better or worse, there is no way to anticipate the impact these fringe players will have on the markets, which means there is no way to trade around them or profit from their activities.

Their strategies tend to be highly active.  Research shows that such strategies are very ineffective and significantly undermine performance over time.  (See, e.g., Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors, by Professors Brad Barber and Terrance Odean, The Journal of Finance, April 2000).

The tech-bubble era day-traders bought and sold their portfolios into oblivion.  They proved, once again, the truth of the old saying: “A portfolio is like a bar of soap—the more you touch it, the smaller it gets.”  There is every reason to believe the r/WSB crowd will do the same.

But don’t breathe a sigh of relief just yet.  They, too, will be replaced by others.  The stock market will always draw its share of shady characters and those looking for easy money.

Get-rich-quick traders are annoying, but simply don’t have enough muscle or unity of purpose to change the course of the markets for long-term investors.  Regulators, like the SEC, eventually take care of the worst of the manipulators and Darwinian forces mop up the rest.

The best strategy is simply to treat these players like you would pesky flies on a summer’s day.  Ignore them as best you can, because you can’t avoid them, and you shouldn’t let them drive you indoors and deny you the pleasures of sunshine and fresh air.