According to a report by Aite Group, online trading is on the rise. About a quarter of all US adults with internet access are now retail investors. These self-directed investors making up a large group of around 50 million people are amateur traders. This is in stark contrast to the just 2.8 million registered professionals associated with investing.
It also means that we’re headed into dangerous territory as more and more retail investors throw money they can’t afford to lose at inflated stocks based on emotion or market hype.
In an article for Fobes, David Trainer talks about the danger–and rise–of what the industry calls “noise traders.” These are individuals who distort the market by trading with accurate or incomplete information. Self-directed investors are particularly susceptible to this type of din.
Although noise traders have been around for many years, industry professionals and academics have always brushed them off as having little to no effect on the market overall.
But over the last 20 years, which includes the .com bubble, the housing bubble, and one of the largest financial crises of our time, the influence of noise traders can no longer be ignored. And with the rise of investment platforms like Robinhood and TradeStation for self-directed investors, the influence of noise traders is growing.
Noise Traders Hype the Markets
It’s hardly surprising that interest in investing online is growing. With the rise of exciting alternative investments such as cryptocurrencies and pot stocks, along with advancements in technology allowing people to buy and sell online, it’s simply easier and more attractive to younger people than investing in paper stocks.
Anyone with an internet connection and a bank account can read a few articles, company blogs or financial media and collectively force giant market swings, as witnessed by the Bitcoin phenomenon at the end of last year.
To be fair, noise traders are not only and always inexperienced retail investors buying into the hype. Noise trading can be carried out by experienced industry professionals as well. Why? Because noise trading can pay dividends. Plenty of people make plenty of money on the hype created by noise traders.
However, the danger is that experienced traders know when to buy and when to sell. They can tell how to cut through the red flags and have the experience to look beyond the marketing to the real project. They can analyze the team, the technology, the viability, and longevity. And they make trading calls based on statistics, information, and research–not with their emotions.
If you’re looking for the perfect example of noise trading on steroids, go no further than pot stocks.
With the Tilray share price rising over 1,500% since its IPO and now displaying high volatility, Trainer comments:
“The unrealistic assumptions embedded in TLRY’s stock price, combined with the wild daily swings, make it impossible to argue that the stock is trading on any rational assessment of its projected future cash flows.”
Noise traders like fake news and marketing hype aren’t going to die down. In fact, with the rise of internet connections, trading sites, and attractive alternative investments, they’re going to become a deafening chorus capable of distorting the market until there’s nothing behind the price but pure speculation.
Since retail investors don’t have the time or tools to get into deep financial analyses before they make a decision, there should be easier access to information.
So if you’re one of the 50 million US citizens who invest without guidance (or anywhere else for that matter), be sure to conduct your own research first. If it looks to good to be true, it probably is. Take a leaf out of Baron Rothschild’s book and buy when there is blood in the streets–not when FOMO is pumping prices to unrealistic heights and creating the mother of all bubbles.
Is Starbucks a Buy? Depends on How Much You like Coffee
Starbucks shares are approaching a 52-week high after activist investor Bill Ackman announced a $900 million investment for accumulating 15.2 million of the company’s shares.
Starbucks has a market value of $29.2 billion and is the third-largest restaurant chain in the world. The company has 28,218 locations in over 75 markets, and more than 238,000 employees worldwide.
Ackman Says Starbucks Is a Good Bet
Ackman believes Starbucks shares could double in value in the next three years. According to the investor, the company has many business opportunities ahead, both in the US and in the Chinese market.
Moreover, Ackman didn’t forget to mention Starbucks’ plans for some serious share buybacks of $14 billion in the next few years. Doing the simple math, earnings per share have a growth potential of between $3.70 and $4.35 by 2021, from $2.40 in 2018.
Such a performance would push the Starbucks stock to a value of $93 to $117, by 2021. The company has already started with a $5 billion accelerated share repurchase agreement.
Besides, coffee is still a strong business worldwide. Despite its domestic performances, Starbucks has seen significant revenue growth, and has a financial position widely-recognized as reliable; its earnings per share have a notable record.
Starbucks has 3,300 stores in China and continues to open about 50 new ones each month. The company’s market share in China reached 80% last year, in a coffee shop market estimated at $3.4 billion.
Things aren’t all smooth for the company, though. As the Chinese market is expected to grow, more competitors are looking to overtake Starbucks, the most important being the Chinese chain Luckin Coffee and Coca-Cola’s Costa Coffee.
Starbucks Is Making Significant Changes in Europe
With so many events ahead, Starbucks is planning a revolution across its business operations. CEO Kevin Johnson announced changes starting next week, as the company enters a new era of challenges due to the inactive domestic market, a mammoth expansion into the Chinese market, and harsher competition. CEO Kevin Johnson said:
“Starting next week and into mid-November, there will be leadership shifts and non-retail partner impacts as we evolve the direction of teams across the organization in size, scope, and goals.”
The first strategic move will happen in Europe as Starbucks sells 83 stores to Alsea, its South American partner. The Mexico City-based company that already owns 900 stores across Central and South America will add coffee shops in Belgium, Luxembourg, France, and the Netherlands to its portfolio. However, the roasting plant in the Netherlands will continue to be owned by Starbucks.
The company is planning to close outlets in Amsterdam and focus on its presence in London instead. The management encourages its 186 employees who will suffer from this move to apply for jobs available in London. If Brexit doesn’t stop them in their tracks.
Is Starbucks a Buy?
Starbucks has enough room for growth, despite competitors, the restructuring in Europe, and a possible slow down in the Chinese market. So, even if Ackman’s predictions don’t come true, the company is probably still a good bet for long-term investors who don’t get scared off by temporary downward trends.
Featured image from Shutterstock.
From CCN.com & Hacked.com
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