Wall Street professionals have been known to exhibit a haughty attitude toward retail traders. But as it happens, the “dumb money” — a phrase occasionally applied to mom-and-pop investors with more than a dollop of derision — might be smarter than some pros think.
“Smart” vs. “dumb” money One of the first investing “myths” addressed in the report is whether retail interest in a stock serves as a reliable “contrary indicator” — that is, if rising retail interest is a sign that a stock might be headed for a rough patch. The team’s data-driven analysis found that stocks with strong retail inflows tended to outperform their benchmarks over the following four weeks by 1.1 percentage point, compared with 1 percentage point of outperformance for stocks with inflows from hedge funds.
For example, over the long-term, the Russell 1000 Value RLV, +0.22% index has outperformed the Russell 1000 Growth index RLG, +0.42%. But during “late cycle” periods, where equity benchmarks tend to decline, the trend reverses, and value outperforms. The BofA team found that while growth stocks have outperformed since 1978, value stocks tended to outperform from 2007 to mid-2020.Value stocks also tended to put in their best performance during the first 12 months of a tightening cycle.