Morgan Stanley
  • Thoughts on the Market Podcast
  • Oct 1, 2021

Taking the Temperature of Individual Investors, Part Two

with Andrew Sheets and Lisa Shalett


Andrew Sheets: Welcome to Thoughts of the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.

Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.

Andrew Sheets: And today on part 2 of the podcast, I’ll be continuing my discussion with Lisa on the retail investing landscape and the impact on markets. It's Friday, October 1st, at 2p.m. in London.

Lisa Shalett: And it's 9:00 a.m. here in New York City.

Andrew Sheets: So, Lisa, over the last 12 months, we've seen a real boom in the amount of activity in the stock market from these so-called retail investors. And, you know, I want to ask you, you know, given your perspective over several market cycles, you know, what do you think is kind of similar and different in terms of individual investor activity now versus what we've seen in the past?

Lisa Shalett: So you know what's similar to episodes of, you know, retail participation that we've seen in the past? I think the first is momentum and crowding. So as we know in, you know, prior market cycles you know, periods like a 1999, 2000 tech bubble, for example. We had a lot of enthusiasm around stocks that perhaps, you know, didn't have great profit fundamentals or whose valuation paradigms shifted to expand beyond things like profit to things like, you know, share of eyeballs and things of that nature. And we're you know, we've certainly during this market cycle with the emergence of, you know, zero commission trading platforms, you know, seen, you know, some of that type of activity where stocks are seem to be moving based on other dynamics, be they momentum, be they you know, social media chatter.

Lisa Shalett: Obviously, I think one of the things that that is different is this role of social media. I think that. This idea that a, set of, you know, investors will crowd or attempt to drive the market through social media postings is an interesting one, if you will. And I think we're going to need to see how it plays out. But I think what we know is very often when you we get into periods in the market where we're drawing in a large share of brand new investors, you know, they are not particularly experienced and they, you know, seemingly have had success by dint of, you know, the benign nature of the environment, which is what we've kind of had. We've had a relatively low vol, high central bank involvement environment. We know how these parties tend to end. And, you know, since this seems to happen every couple of times in a generation, this generation of new investors, I think, you know, may be set up to, you know, quote unquote, learn the hard way. But that remains to be seen.

Andrew Sheets: Lisa, I know another question that you spend a lot of time thinking about is whether or not investors should look to be active or passive in how they're trying to take exposure to markets. How are you thinking about that and kind of what type of environment do you think we're in today?

Lisa Shalett: We try to take a pretty, you know, systematic and methodical and analytic approach to the active/passive decision. We want to make sure that when we're giving advice that if we think that there's idiosyncratic alpha opportunity out there above and beyond what, you know, the passive market can deliver and we're asking our clients to pay for it, that it's there and with high probability and that it exists. And so, you know, what are the environments where that tends to be true? What we have found is it tends to be environments where you have large valuation dispersions in the market, where you have high levels of controversy in terms of earnings estimate dispersion tends to be environments where there could be, you know, policy inflection points. And so, you know, based on some of those type of variables, over the last two to three months, our models have moved us to a maximum setting towards active management. When we look at the passive index today, one of the things that, you know, we continue to point out to our clients is the extent to which the S&P 500 index, for example, has become very concentrated, concentrated in a in a short list number of names. So, you know, we contrast that recommendation that we're making right now for a maximum stock picking or maximum active manager selection stance with, you know, perhaps where we were at the beginning of the cycle last March, when policy actions are so profound in terms of driving liquidity, and the stimulus was coming from the federal government. When you're in an environment where "the rising tide lifts all the boats" and performance dispersion is very narrow and you have, you know, very high breadth where, you know, almost all stocks are rising and they're rising together. Those are certainly markets that are very well played using the passive index. But that's how we make that contrast. And today we are, you know, trying to encourage our clients to move to a more active stance where they're reducing their vulnerability to some of the some of the characteristics of the S&P 500 index that we think are fragile.

Andrew Sheets: Very interesting. So Lisa the last question I want to ask you is, what do you think are actually the advantages that this group has, maybe underappreciated advantages? And then what do you think are kind of some of the most common pitfalls that you see and strategies to try to avoid?

Lisa Shalett: Yeah, no, that's a great question. So, look, you know, one of the advantages of being an individual investor is you can truly take a long term view. At least most of our clients can. And so they don't need to worry about, "mark to market," they don't need to worry about quarterly returns and quarterly benchmarks. They don't even need to worry about benchmarks at all, quite frankly. And that allows the individual investor to take a long view, to be patient, to be, you know, to utilize tools like dollar cost averaging in over time and to not necessarily, you know, have to buy into the pressures of market timing.

Lisa Shalett: I think the pitfalls for individual investors are you know, individual investors are just that, they are individuals. Individual investors tend to be motivated by very human behavioral finance concepts of fear and greed. And so I think one of the things that very often we as private wealth advisors battle are emotions. And when our when our clients, you know, feel a degree of fear, they will do things that potentially are drastic, i.e., they will, you know, sell and, you know, take profit and incur a tax event and get out of the market. And then the challenges of market timing, as we know, are always, you know, twofold. Right? If you're going to get out, you've got to have a discipline of when to get back in. And we know that those two things: getting in and getting out, are very hard to do and do well without destroying wealth, without concretizing losses and without, you know, leaving money on the table. So, you know, I think I think, you know, the value of advice, as we always say, is keeping clients in that first bucket, keeping them attached to a long run, process driven plan that avoids market timing, that allows you to take the long view, that measures things in years, not quarters and months, and avoid some of the pit falls.

Andrew Sheets: I think that's a great place to end it. Lisa, thanks for taking the time to talk and we hope to have you back soon.

Lisa Shalett: Thank you very much, Andrew. I appreciate it.

Andrew Sheets: As a reminder, if you enjoy Thoughts of the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people find the show.

On part two of this special episode, Lisa Shalett and Andrew Sheets dive into meme stocks and individual investor trading advantages… and pitfalls.

For Part 1 of this discussion, click here

Thoughts on the Market is also available on Apple Podcasts, Spotify, Google Podcasts and other major podcast platforms. In addition, you can explore our insights, podcasts and more with your Alexa- or Google Assistant-enabled devices. Just enable the “Morgan Stanley" skill in the Alexa app or ask Alexa to "Add Thoughts on the Market to my Flash Briefing." Or use the Morgan Stanley Action on Google by saying, “Hey Google, Talk to Morgan Stanley.”

For more about our Morgan Stanley skill for Alexa or the Morgan Stanley Action on Google, visit

For more Ideas, visit