How do bored investors invest?

Earlier this year, the inimitable Matt Levine (currently on paternity leave) came up with the “boredom markets hypothesis” ($, Bloomberg).

If you like eating at restaurants or bowling or going to movies or going out dancing, now you can’t. If you like watching sports, there are no sports. If you like casinos, they are closed. You’re pretty much stuck inside with your phone. You can trade stocks for free on your phone. That might be fun? It isn’t that fun, compared to either (1) what you’d normally do for fun or (2) trading stocks not in the middle of a recessionary crisis, but those are not the available competition. The available competition is “Animal Crossing” and “Tiger King.” Is trading stocks on your phone more fun than playing “Animal Crossing” or watching “Tiger King”?

The idea was that with the coming of the pandemic, there was a stock market crash and that “normal forms of entertainment” were shut, so people took to trading stocks for fun. Discount brokers such as Robinhood or Zerodha allowed investors to trade in a cheap and easy way.

In any case, until August, a website called RobinTrack used to track the number of account holders on Robinhood who were invested in each stock (or ETF or Index). The service was shut down in August after Robinhood shut down access to the data that Robintrack was accessing.

In any case, the Robintrack archives exist, and just for fun, I decided to download all the data the other day and “do some data mining”. More specifically I thought I should explore the “boredom market hypothesis” using Robintrack data, and see what stocks investors were investing in, and how its price moved before and after they bought it.

Now, I’m pretty certain that someone else has done this exact analysis. In fact, in the brief period when I did consider doing a PhD (2002-4), the one part I didn’t like at all was “literature survey”. And since this blog post is not an academic exercise, I’m not going to attempt doing a literature survey here. Anyways.

First up, I thought I will look at what the “most popular stocks” are. By most popular, I mean the stocks held by most investors on Robinhood. I naively thought it might be something like Amazon or Facebook or Tesla. I even considered SPY (the S&P 500 ETF) or QQQ (the Nasdaq ETF). It was none of those.

The most popular stock on Robinhood turned out to be “ACB” (Aurora Cannabis). It was followed b y Ford and GE. Apple came in fourth place, followed by American Airlines (!!) and Microsoft. Again, note that we only have data on the number of Robinhood accounts owning each stock, and don’t know how many stocks they really owned.

In any case, I thought I should also look at how this number changed over time for the top 20 such stocks, and also look at how the stocks did at the same time. This graph is the result. Both the red and blue lines are scaled. Red lines show how many investors held the stock. Blue line shows the closing stock price on each day. 

The patterns are rather interesting. For stocks like Tesla, for example, yoou find a very strong correlation between the stock price and number of investors on Robinhood holding it. In other words, the hypothesis that the run up in the Tesla stock price this year was a “retail rally” makes sense. We can possibly say the same thing about some of the other tech stocks such as Apple, Microsoft or even Amazon.

Not all stocks show this behaviour, though. Aurora Cannabis, for example, we find that the lower the stock price went, the more the investors who invested. And then the company announced quarterly results in May, and the stock rallied. And the Robinhood investors seem to have cashed out en masse! It seems bizarre. I’m sure if you look carefully at each graph in the above set of graphs, you can tell a nice interesting story.

Not satisfied with looking at which stocks most investors were invested in this year, I wanted to look at which the “true boredom” stocks are. For this purpose, I looked at the average number of people who held the stock in January and February, and the maximum number of of people who held the stock March onwards. The ratio of the latter to the former told me “by how many times the interest in a stock rose”. To avoid obscure names, I only considered stocks held by at least 1000 people (on average) in Jan-Feb.

Unsurprisingly, Hertz, which declared bankruptcy in the course of the pandemic, topped here. The number of people holding the stock increased by a factor of 150 during the lockdown.

And if you  go through the list you will see companies that have been significantly adversely affected by the pandemic – cruise companies (Royal Caribbean and Carnival), airlines (United, American, Delta), resorts and entertainment (MGM Resorts, Dave & Buster’s). And then in July, you see a sudden jump in interest in AstraZeneca after the company announced successful (initial rounds of) trials of its Covid vaccine being developed with Oxford University.

And apart from a few companies where retail interest has largely coincided with increasing share price, we see that retail investors are sort of contrarians – picking up bets in companies with falling stock prices. There is a pretty consistent pattern there.

Maybe “boredom investing” is all about optionality? When you are buying a stock at a very low price, you are essentially buying a “real option” (recall that fundamentally, equity is a call option on the assets of a company, with the strike price at the amount of debt the company has).

So when the stock price goes really low, retail investors think that there isn’t much to lose (after all a stock price is floored at zero), and that there is money to be made in case the company rallies. It’s as if they are discounting the money they are actually putting in, and any returns they get out of this is a bonus.

I think that is a fair way to think about investing when you are using it as a cure for boredom. Do you?