Anything You Can Do I Can Do Better, The Rise of the Active Retail Investor

Jan Szilagyi, CEO and co-founder of TOGGLE AI joins IBKR’s Senior Trading Education Specialist Jeff Praissman to discuss the evolution of the retail investor from passive to active over time and the factors that have contributed to this change.

Note: Any performance figures mentioned in this podcast are as of the date of recording (September 28, 2022).

Summary – IBKR Podcasts Ep. 43

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi everyone, welcome to IBKR Podcasts. I’m your host, Jeff Praissman, Interactive Brokers, senior trading education specialist. It’s my pleasure to welcome back Jan Szilagyi, CEO of TOGGLE AI. Jan spent most of his career managing global macro strategies and holds degrees in both mathematics and economics from Yale and completed his PhD in quantitative finance at Harvard. Hi Jan, welcome back and thank you for joining us.

Jan Szilagyi

Hi, thanks very much. Really a pleasure to be back on the show.

Jeff Praissman

And I’m really excited for this conversation we’re going to have today. You know, it’s such a timely topic over the last, let’s say … 15 years or so, just the rise of the active retail investor. And I’m really curious if you could just kind of give us some background of when you think this started and the evolution of the investor? I mean, obviously for a long-time people been investing in pensions and 401K’s, but this is, I think, a relatively recent phenomenon over the ages of investing.

Jan Szilagyi

Yeah, I think you’re right. I think that we’ve obviously witnessed an absolute explosion in interest in markets, particularly from some of the younger investors, but I would say that the seeds of this were actually planted early on. And I would even put it as far back as when we started seeing some of the, some of the brokers began with their online offerings. So for example, you remember that during the dotcom bubble, one of the things that came out of that was, for example E*Trade, which I think back then everybody considered to be just part of the dotcom mania, how everything needed to be on the Internet, but actually in hindsight, ultimately, everybody moved towards the model that Interactive Brokers also had pioneered, where people are being able to execute their trades themselves without having to call anybody and so on. So that I think was the first time that a significant barrier was really removed because it allowed people to log in at any time, execute trades at their own pace, select things that they wanted to trade, and so on.

Now it then took quite a long time before we got some of the other barriers that I think were also meaningful removed, that in particular were meaningful for people who had wanted to invest but didn’t have the amounts of money that they were expected to put into an account like this. And so, I would say among those are things like fractional share trading. I think there are things like 0 commissions which we’re seeing now. And then, as you mentioned, the conversation we were having earlier, the fact that we then went through a pandemic that forced everybody to stay at home for a long period time further increased the time available for other things, and some people decided that the best thing to do was to spend it by trying to turn themselves into a better investor. So, without belaboring the point, I think there are range of factors, but I think that it’s been a process that has gone on for quite a long time and went from being very gradual to suddenly really accelerating.

Jeff Praissman

Well, you know, it’s interesting too that you point out the dotcom bubble because, yeah, there’s a whole generation of investors or maybe a couple generations at this point that have no idea that not too distant ago you had to pick up your phone and call your broker to make a trade, and that’s all but unheard of at this point in time. In fact, I would make a case that probably anyone 35-40 years or younger would have no idea that this wasn’t the norm as far as just being able to log into a computer, use a trading platform, log into your cell phone, use a trading platform, send your trade … generally no minimums almost. I would say as far as like you mentioned to invest with the fractional shares and just, you know, lower priced stocks and that barrier to entry is completely gone almost it seems.

Jan Szilagyi

Yes, that’s right. I think that’s another excellent point, which is when it comes to availability of platforms where you’re able to invest, you don’t even have to be in front of your laptop anymore. You can execute a trade on your commute. You’re going to work, you started reading about what the Fed had done the previous day, you see the market react, you think this is the opportunity to snap up a trade that you’ve been waiting for, for a long time and take 10 seconds and you’re done. So absolutely, I think it’s become very, very widespread, which of course, leads to both good and bad outcomes, but nonetheless it does mean that participation and ability to participate in public markets is at its …  certainly, at the highest it’s ever been.

Jeff Praissman

What do you think … obviously with the barriers of entry being so low and we’ve touched on the dotcom bubble but also 2008 which is probably more in recent memory of probably today’s active investors, judging by their demographic qualifications. Would you think that had any effect on them as far as them getting more involved, less involved? Also sort of the impact of social media as well, right? Like that’s again something that we take for granted now, but not so long ago it really didn’t exist.

Jan Szilagyi

Yeah, you’re right. I think when we look at and talk to our users about you know, … we’ve had over 100,000 users signed up for TOGGLE AI and most of them fall into the category we talk about now. We learned quite a lot of interesting things about where they come up with trading ideas, and so many of them will now talk about things like YouTube or Reddit or any of these sources where they go for so-called stock research. Whether or not these are actually the right sources to go to, we can leave for a later time to discuss but nonetheless, it does show that there’s been a very, very wide range of forms that people are now turning to, to find these ideas. Now, I would say during 2008 and 2009 that was present, but I think not to the same extent that it was this time, and I think what really amplified the importance of social media this time around was certainly the experience of the pandemic, because it prevented a lot of things that normally would have happened. People going out to lunch together, people going out to talk together and so on. A lot of that interpersonal interaction was severely curtailed, and so as you were browsing the Internet, you probably came across a video about somebody talking to you about options. Maybe you came across a video that talked about why investing in tech stocks or EV stocks was a really good idea and what was the experience that most people had in the aftermath? Unbelievable rally in the stocks right after you had an amazing decline. I think that 2008, 2009 was a much more painful experience that for many of the current younger investors is nearly as relevant as what happened in March of 2020, when literally any stock that you bought a year later was worth — not even a year later, months later — was worth a lot more. And so, what I’m very curious to see is as we now go through what feels like a proper bear market with Fed tightening and so on, something that many of them would have never seen before, how these investors will be able to fare through that and how they survive and what their enthusiasm and engagement with the market will do in the aftermath.

Jeff Praissman

Right. It’s very easy to love investing in stocks when all you see is them go up especially.

Jan Szilagyi

Yeah, in a bull market, everybody is a genius as my old boss used to say.

Jeff Praissman

You made a really interesting point as far as where these active retail investors are going for some of their sources, whether it’s YouTube, whether it’s Reddit and you kind of, maybe misstating you a little bit, but you basically said whether these are good sources or not that leaves to be decided, right? So, these aren’t necessarily — These investors that saw their buys go up over that course of nine months don’t necessarily have the full picture of an actual market. They’ve never seen a bear market They may not be super sophisticated as far as knowing that maybe they need to start hedging their positions, maybe getting into options or buying puts. Do you think they’re fairly … these active investors, are fairly one-sided in that they really just dwell on stocks and ETF say?

Jan Szilagyi

It’s a good question and I think I would say that on the whole, the average investor is still definitely unprepared for what it takes to invest in the market in a way that would either secure some kind of income or sustainable capital appreciation because there is plenty of evidence that shows that actually active trading is difficult even for professional investors who do it all day long, and it must be even more challenging for individual investors who don’t have nearly the same kind of resources and especially now that you know we’re mostly back to the office, are not able to do this full time anymore, this is an endeavor that they probably devote an hour of their time at the end of the day. If it were that easy to make money by actively stock picking, then hedge funds probably on the whole would be doing a whole lot better than they are. So, I would say we need to separate the idea of investing as being something that generates income versus something that to an extent is an activity that is helping people learn about markets, which hopefully leads that to them making better decisions about some longer term allocations, but there’s also presumably the entertainment value. I think people are investing in part because they now have an opportunity to invest in trends that they’re living through. So, there’s a discussion about climate change, there’s a discussion about space travel, and so on. You’re now able to go and place trades on any of these trends if you’re excited about eventual colony on Mars and you think that is a real thing that will happen in our lifetime. Well, there are stocks that you can bet on that presumably will do very well when that happens. Again, a lot of “ifs” here, but the reality is that I think there’s more to this than just trying to eke out the daily P&L.

Jeff Praissman

Right. So, there’s really not a one-size-fits-all active retail investor, it’s almost like some of them may evolve into educated, well thought out investors. Some do it for like you said, entertainment value or they believe in something, whether it’s like you said, colonizing Mars or maybe they love Starbucks and they want to just go and invest in Starbucks. And then there’s others that maybe just come on the scene and are maybe looking to try to make that quick dollar thinking it’s going to be …  it’s guaranteed money, which obviously we all know that it’s not.

Jan Szilagyi

Yes, that’s right. So, I think that’s a really good way of putting it, there’s definitely a broad range of investors. I think some of them will probably, over time, naturally reduce the amount of money that they’re able to invest that way because they will have lost some of it and presumably will say like, “OK, you know what? I need to restrict this” and then there will be others who will find that actually, this is a pretty good way to supplement some of the allocations that they’re making potentially to ETFs, some of the allocations they’re making to much more passive investments and so on. But I think it is actually also a valuable learning experience about the variety of instruments that exist out there … again, for some people, that experience will be more painful than others, but overall, so long as they have the resources to help them avoid making some really large mistakes then I think presumably the downside is relatively limited. Again, that’s a gray area because depending on the platform, some of the instruments that people probably shouldn’t be trading if they don’t understand them in more detail are more easily accessible than in other platforms.

Jeff Praissman

And you know, certainly trading education is a big part of Interactive Brokers, it’s clearly labeled on our website. I know other brokers are following suit as well and in investing money in education. In fact, over the course of recent years, especially from let’s say 2019-2020, — maybe that’s one really big benefit of this active retail investor too, it’s really brought forth everyone’s need to realize that education is a very important part of this. When the market turns around and people start losing money, it’s sort of like everyone realizes, like, wait a second, we need to make sure these people know what they’re doing. They’re educated, they’re not just going in blindly.

Jan Szilagyi

Yeah, so this has been fascinating to also see come through the surveys that we do and the dialogue that we have with our users, which is there is an enormous appetite to learn. Of course, people come to find a tool like TOGGLE because they generally are looking for help with investing, but more importantly they really value anything that they feel like they’ve taken away as a learning experience. So, if you come in and for example, in the case of TOGGLE, you see there are certain highlights about a particular asset, but then there’s also a clear explanation as to what the P ratio is and why the P ratio is relevant for this stock or if there is a large range of possible outcomes for a particular stock to understand what convexity means and why you would sometimes consider options versus stocks. All of these things should not be taken for granted because to your point from earlier that there’s a wide range of investors almost every investor generally considers themselves as being still in a learning phase and wanting to get better, even some of the most experienced ones that we see, and those are typically the Interactive Brokers users are always looking to improve, are always looking to make their process more rigorous, but also learn about new instruments, learn about new strategies to use those instruments and so on. So, this is probably an area that we should see go through quite a lot of evolution over the next couple of years because I do think it’s actually lagging. For the most part, the learning resources that exist across the platforms that we have found tend to be of kind of a static nature. So, they will be in the form of FAQs like, “what is an option? what is convexity?  what are the Greeks?” and so on. This is partly why I think people search for this on YouTube, because at least then you might get a video of somebody explaining, walking you through things and so on, but I think there’s a lot of work that can be done there to really improve the overall experience for the users.

Jeff Praissman

Yeah, and I mean, I think a big part of that too can be paper accounts where they’re trading in their virtual world, it’s not real trades and they can see the cause and effect of their actions prior to doing it. That’s another I think, important user tool that a lot of exchanges provide. I know IB provides it and they’re able to use it. With the low bar for entry, obviously we’ve talked about all the dangers, right, or a lot of the dangers where they can kind of be there — the retail investor can be their own worst enemy. But there’s also a lot of positives to as we’ve discussed, and I don’t want to dwell on the negatives and you know, while again you think about it, trades probably used to cost $25-30, then down to $7.95 and now basically free or a dollar depending where you go. Stocks are now multi-listed, IBKR has 20 stock exchanges that they have access to in the US alone. So that’s, you know, brought down the bid-ask spread. So, there’s also a lot of I think really good positive things have come out over the last 10-15 years that has probably helped spawn this active retail investor and made things easier, safer, more transparent for them as well.

Jan Szilagyi

No doubt. I think again for the journey an investor now can be a lot more rewarding than it was before because previously when you tried to put a trade or try to manage your portfolio actively, as we discussed, it usually involved calling somebody then over the phone deciding do you want to trade at this level? Do you not want to trade at this level? Potentially getting some unsolicited advice from the from the person on the phone. Now you are effectively having to really think through the decisions that you’re making, doing them on your own and I think again, for those who take this seriously, it’s led to really think hard about the connection between business fundamentals and the stock price, the macro context in which all of this is taking place, the idea of risk-reward. This is I think also somewhere where we have found that people generally can get better really quickly if you give them the right tools, which is managing the portfolio. So not just placing a trade, but then maintaining and managing that portfolio trade which for a professional money manager is probably at the heart of what they do, but I think for a retail investor it’s really not how they were thinking about this. They were thinking about this as a bunch of individual trades and, you kind of kept them until you possibly lost money in them, or you made quite a lot and you at some point took them off. So, I would agree with you. I think that there are definitely many, many more positives. There are risks as with anything else and how we manage those risks I think is going to determine to a large extent how successful this tick up in market participation is going to be, right. What form of investing would individuals be doing 10 years from now? I think we’ll be partially informed by their experience through both the pandemic and after and the outcomes, that they sought from it.

Jeff Praissman

But that’s a good point and you know … where do you see the future of retail investing? Obviously, again, to take a step back, like the meme stocks GameStop, AMC, etc. it does seem like they’ve matured away from that at least, right? Those aren’t necessarily in the news anymore. They seem like they sort of had their moment in the sun and a lot of people got involved for various reasons, whether they’re trying to make some quick money … then it seemed it also almost turned social, like some people were upset at professional investors and we’re trying to, you run a short squeeze on them and drive GameStop up and really try to hurt professional investors that they felt had edge over them. But where do you see the future of this, maybe a couple years down the road? Five years down the road? 10 years down the road? Obviously, as technology gets better, as AI gets better, as platforms get even better and more access, you know.

Jan Szilagyi

So, I would say first on your point regarding the meme stocks, I wouldn’t write them off yet entirely that this phenomenon is over because I think this was really the first time that I think groups of individual investors discovered that they could actually really impact price action in a way that previously was really the kind of the domain of professional investors. So, when you read some of these history books about the stock market, you read about the various tools that were formed by these robber barons and so on. They try to coordinate the market and so on. I think the fact that now individual investors were able in such a powerful way to impact and influence the direction of a stock price that will remain quite appealing, and I don’t think it’s the last time that we have seen something like this. Might not be GME, we might see it somewhere else, but that degree of power is hard too –unless you somehow are able to regulate it away, which I think would be very difficult. — It’s a phenomenon that we’ll see again.

Separate from this, I think there are tools, and obviously TOGGLE is intended to be such a tool, that are hopefully going to help people avoid some of the stickiest situations by really to a large extent, supplementing a person’s ability to kind of process the information and then understanding how the information that they’ve taken in translates into some of the investment decisions they would make. And I think here the analogy that we often draw when we think about the retail investing audience is to the evolution of self-driving. So, despite Tesla’s claims, I don’t think that we’re quite yet in the world of completely autonomous driving but that has been the aim. However, in the process of reaching that goal, cars have gotten really quite a lot better at making everybody a safer driver. It doesn’t mean that they’ve turned everybody into a Formula One racer, but that they have been able to help everybody with things that maybe … often presented the biggest challenge, parallel parking, for example, you have cars that will now just do that themselves. Alerting to a car in your blind spot, again, something that can be a source of a lot of danger, but now the car will pretty much tell you that somebody is coming, don’t switch the lane now. … to more trivial ones, like just telling you how much gas you have left in the tank.

The technology I think now exists certainly in TOGGLE to let you know that you may have holdings in your portfolio that could be very susceptible to downside during a turn in the business cycle. So for example, now there’s a lot of anxiety about a recession, it would be quite helpful to a lot of active traders I think if they received alerts that would tell them there are three or four stocks that you currently have that generally struggled in a recession. Why don’t you take a look and see whether or not this is something you still want to hold? And you think I have this for the next 10 years; I don’t care about a recession in the next six months.

So, these kinds of nudges, I think, are ways in which we will be able to make the investing experience safer for the average user because let’s face it, I think people are always going to be drawn to the markets, if for no other reason that they can see other people from time to time making a big return on an investment, and so they will keep trying. Generally, you cannot dissuade somebody on the basis of saying, “oh look, on average the experience has been maybe subpar.” I think people will be always looking for that boundary, test themselves and see whether or not they couldn’t do better.

Jeff Praissman

So, it’s a really good comparison just between the evolution of car technology and trading in general, like obviously, the lower model Honda Civic has more technology in it today than say a Mercedes from 15-20 years ago.

Jan Szilagyi

Yes, yes.

Jeff Praissman

And you know, that’s a really good comparison. Obviously, again the technology gets better and cheaper as time goes on and it becomes more and more useful for the — and more available … more importantly, more available to the active retail investor to be able to use whereas before maybe only a huge trading firm or a trading desk or a huge advisor group would be able to afford this technology, but as time goes on it becomes more accessible through different platforms and really again kind of levels the playing field. It makes it a little bit — provides more education for the for these investors as well.

Jan Szilagyi

Yes, and you know, interestingly what we have found is that investors tend to be more willing to use new tools and new technology if they don’t see them as completely disenfranchising them. So, if they see this as more of a collaboration rather than a replacement, so in the system I’d say, “here are some of the parameters that you should consider” but then the user feels like they also had an impact on the decision that they could maybe tweak a dial or two. It makes them feel more like they have ownership of the decision that they finally make on the back of that. So, this kind of evolution I think is very, very important for widespread adoption, I think. While there is certainly a place for things like robo-advisors and so on, I think that by and large, the new generations of investors do want to have that feeling like they were part of the decision, that they weren’t just being told “look, this is what is best for you, and you should do this.” I think increasingly they will want to have a say in this and again to the extent that we can make that environment ultimately safer for these individuals and they will stay around longer. I think they’ll participate in larger and larger size and in larger and larger numbers.

Jeff Praissman

So, the idea really is that the AI would sift through the information, break it down into reasonable chunks that the investor can process and provide suggestions that they could make an educated choice on whether to sell, hold or buy an individual instrument versus just saying, “I’ll take care of this, where you don’t log in at all and don’t touch your trades. I’ll deal with this.”

Jan Szilagyi

Yes, yeah, because if you think about your everyday experience just outside of markets, there are quite a lot of technologies and AI assistance that we already rely on to an extent, right? There’s just the most obvious example of sort of the Alexa’s and Google’s and Siri’s of the world where if nothing else, you use them to quickly tell you in the what’s the weather going to be like, and you get that it’s a match. If in the morning your Google tells you there’s a 25% chance of rain, well, maybe you grab an umbrella on the way back and you appreciate that when there’s a downpour literally right before your about to board the train and you don’t have to come home soaking wet.

Jeff Praissman

This is great. And you know, one last question. If you had three key pieces of advice for a retail trader, what would they be?

Jan Szilagyi

So, I would say … distilling it down to three pieces, which is going to be hard because I think that every time when I think about this, I have 20, but three very important ones is number one: always, always think about the downside, control your risk, right? I think generally what professional investors have found out is that the upside takes care of itself, but the downside is where it becomes really difficult and so proactively think about what is the downside for any single investment that you’re making and what is the point at which you will exit the trade because you can no longer take the losses or because you don’t think that the thesis that you have for it has been borne out. Second, always keep learning about new instruments and potentially new investments. What we have also found is that a lot of investors tend to invest in a very narrow set of stocks, the ones that get the most attention on social media, in various discussion forums and so on. And I think that’s a shame, because actually you can probably introduce or let’s say, do you risk your portfolio by thinking a little bit beyond the meme stocks and the most obvious technology companies and so on. So, if you’re really out there looking to potentially make some lucrative investments, go a little bit out of your comfort zone and learn about businesses that you might not have read about before and study up on the on the stock, the business and so on and try to expand your horizons. And then I would think the third one would effectively just have patients. Don’t feel like every day when you come in you need to always trade something like think about what’s the right entry point and I think you will find that overall, that is going to be a far more rewarding experience because if you give yourself the chance of the right moment and the right entry level, you’ll find that your returns are going to improve quite substantially. So, those are probably 3 but again, as I said, there are at least 17 more that we could go through, but that’s for another episode.

Jeff Praissman

Now this has been great. Thank you so much. Once again, I’d like to thank our guest Jan Szilagyi, for joining us at IBKR Podcasts.

Jan Szilagyi

Thank you, Jeff.

Jeff Praissman

For more from Jan and TOGGLE please go to our website under education to view previous webinars and podcasts, as well as keeping an eye out for any upcoming live events. I also remind everyone that you can find all our podcasts on our website under education, scroll down to IBKR podcasts or on Spotify, Apple Music, Amazon, Podbean, Google Podcasts, and Audible. Thank you for listening, until next time, I’m Jeff Praissman with Interactive Brokers.

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