The Dark Side: Small Investors the Most Optimistic Since 2007

Stories like these – “Return of the daytrader: can you earn a living by copying other investors?” which the Telegraph ran on Saturday – are priceless:

It promises an irresistible combination of wealth and independence. All you need is a computer and an internet connection – and then you can earn a fortune from the comfort of your home.

This is the lure of financial trading for profit. As the popular BBC programme Millions by the Minute has shown, the dream seems to be gaining hold. It appeals to parents who hope to be able to squeeze in some profitable trading between school runs. And it is equally a way out for those who simply don’t want – or don’t fit into – the corporate world of the office.

Now the world of social media has added an additional, attractive twist to the dream of being your own boss and making a killing. With “copy trading” – which enables you to mimic the investment moves of the “professionals” – you can supposedly cash in even if you know nothing at all about the markets.

The fact that this day-trading theme – the idea that anyone can just shuffle stocks around for a living – is showing up on public television, even in the UK, that companies see an opportunity to make money off these folks, and that big newspapers like the Telegraph report on it, even if tongue in cheek – that’s like so January 2000.

There are many parallels today to the zaniest days of the dotcom bubble, but this time, it’s different: it has a darker hue – particularly concerning retail investors.

The Wells Fargo/Gallup Investor Optimism Index, released on Friday, jumped 17 points to +46, the highest level since fall 2007. That was the time when the US was teetering on the Great Recession and the Financial Crisis. It was the time just before all heck broke loose.

But these exuberant respondents are not investment pros on Wall Street, or wealth managers, or big investors. These are people with $10,000 or more in stocks, bonds, mutual funds, or in a self-directed IRA or 401(k). So not the entire American public but only those who have a stake (if a small one) in the markets. The results are based on interviews with 1,011 of these folks, 374 retirees, 631 non-retirees, and 6 people who I would guess checked “neither.”

So how knowledgeable about the markets are these exuberant folks? Turns out, these are the same kind of folks, based on the same selection criteria, who in a Wells Fargo/Gallup poll in August had mostly no clue how the stock market did last year.