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  1. Wealth
September 4, 2020

Portnoy’s complaints: The Pied Piper to a new generation of day-traders is taking on Wall Street

By Edwin Smith

Dave Portnoy has become the standard-bearer for millions of new, inexperienced day-traders, who have been drawn into the market by volatility, new technology and social media hype 

It was a stunt with some Scrabble tiles that made Dave Portnoy famous on Wall Street. Until then he was just an internet entrepreneur known for online pizza reviews, albeit a rich one.

Earlier this year the gambling company Penn National Gaming acquired a 36 per cent stake in the irreverent, politically incorrect website he founded, Barstool Sports, at a valuation of $450 million. So when the pandemic put a stop to Portnoy’s own gambling on sports fixtures, he diverted his attention – and his wealth – towards the stock market.

It was ‘too easy’, he claimed in a regular broadcast to his 1.7 million Twitter followers: ‘Stocks only go up.’ Portnoy planned to prove it by using a bag of Scrabble tiles to select
a stock at random. In a video now viewed by almost a quarter of a million people he narrates as he draws letters from a bag: ‘R, T, X… Does that get me anything?’ he asks himself, before finding the answer. ‘Raytheon it is . . .  Don’t know nothing about it. Done. Two hundred grand. . . Done.’

Portnoy has since made some other big bets, and claimed to have been up around a million dollars on a long position in the airline Spirit when its share price tripled inside a little more than three weeks. This – despite a warning from the Sage of Omaha himself, Warren Buffett, to stay away from airlines and cruises. ‘I told my clients to dive headfirst into both industries,’ boasted Portnoy, even though he doesn’t really have ‘clients’.

His antics have coincided with a marked uptick in the number of ‘retail day-traders’ – members of the public who use smartphone apps such as Robinhood to buy and sell shares, ‘commission-free’ at the touch of the button, and with zero prior knowledge or training. In May, with many people languishing at home in lockdown and with live sports fixtures suspended, Robinhood announced that the number of users on its platform had jumped from 10 million to 13 million since the end of 2019.

‘The suits,’ he claims, ‘want to get paid whether they win or lose,’ and to have ‘a monopoly on making money’

Some, like investing guru Dennis Gartman, have interpreted this mass participation as a harbinger of doom for the market. But such remarks are only fuel to Portnoy’s fire. He claimed critics were unsettled, because ‘for the first time in history’ retail investors didn’t need middlemen to invest their money for them. ‘The suits,’ he claims, ‘want to get paid whether they win or lose,’ and to have ‘a monopoly on making money.’

Stephen Yiu, fund manager of the £480 million Blue Whale Growth Fund, likens day-trading to walking into a high-stakes poker game: ‘There’s a big difference between the professional player, amateur player and novice player,’ says Yiu. ‘If you have never traded a stock in your entire life and then you follow a recommendation, you’re probably going to be a source of funds to the better players in the market.’

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But the professionals may be well advised to take the public’s access to day-trading seriously. It could be moving the market. A recent Bloomberg article noted that ‘hitherto sleepy companies’ such as Virgin Galactic and Plug Power ‘went crazy’ soon after being mentioned on an online messageboard popular with day-traders.

‘We’re perfectly happy with them pushing our stock higher,’ says Ross Gerber of California wealth management firm GerberKawasaki. However, he estimates the capacity for day-traders to influence the price of the large technology companies his firm favours to be ‘incredibly low’.

Recent research by Société Générale shows that, as a proportion of market cap, the average position that Robinhood customers hold in companies with the weakest balance sheets is six times larger than their average position in companies with the strongest balance sheets.

So if day-traders do have the power to move share prices, then this section of the market – often constituted by smaller firms – is where their influence is likely to be felt. Could Portnoy inadvertently benefit from his status as the Pied Piper of day-traders, if stocks surge on the back of an announcement to his legions of followers? Maybe, says a former bond trader. ‘But would it be any different to the “Buffett bounce”?’

‘Don’t be confused about what Dave’s doing,’ says Gerber. ‘He doesn’t care whether his fans make or lose money. And most of them do lose money, as we all know.’ Indeed, just
1.1 per cent of retail traders on the iBovespa platform made a net return higher than the Brazilian minimum wage over the course of more than a year, according to academic research published this summer.

But the over-estimation of one’s ability is by no means confined to amateurs. Stephen Yiu of Blue Whale, whose flagship fund has generated market-beating returns of 65 per cent since its launch a little more than three years ago, notes that of the roughly 300 comparable funds in the IA Global sector, around two-thirds have significantly under-performed a passive index fund since 2008. ‘And those funds are still around.’

Things are at least heading in the right direction for today’s day-traders, says Nick Leeson, who notes that they don’t lose money quite as rapidly as their 1990s predecessors did. The ‘rogue trader’ who brought down Barings bank now provides the benefit of his experience (‘admittedly not all of it good’) through to traders – although he says he is not trying to bring new people to the market, but helping those who are already there. ‘You can’t shut the door after the horse has bolted,’ he says. It’s up to regulators to make sure ‘the horse doesn’t bolt in the first place.’

Apparently unencumbered by the attentions of the regulators, Dave Portnoy’s livestreams and big-money bets continue to win fans. Notably in the White House, where he was invited to interview Donald Trump in July. In August, Portnoy struck up a relationship with Cameron and Tyler Winklevoss, the identical twins who sued Mark Zuckerberg for stealing the idea that became Facebook, and who are also known for being ‘Bitcoin billionaires’. In a video with the pair Portnoy suggests that the trio team
up to launch a cryptocurrency, which they could ‘pump’ and then ‘dump’.  Raytheon, meanwhile, seemed like a distant memory. In case you were wondering, it was down 2.5 per cent.

Illustration by Rebecca Hendin

Read next:

The Colour of Money: How the Black Lives Matter movement is changing the world of wealth

The ‘black swan’ funds that cleaned up during the crisis

Liquid Lunch: Xavier Rolet

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