Part 2: The Retail Investor Feedback Loop
Unlike professional fund managers, retail investors typically base their investment decisions almost entirely on recommendations from friends, colleagues, group members (social/sports clubs, community groups, etc.), family, trusted financial writers (journalists, newsletter writers), investment advisors (for those who can afford them) and—for momentum-oriented investors—social media influencers.
This contrasts sharply with institutional investors, who rely heavily on their own in-depth company analysis. Institutions typically discover new investments through a combination of direct outreach from companies (an inbound call from a CEO or IR representative), direct interaction at events (conferences, industry receptions, etc.) and independent electronic screening.
With retail investors effectively outsourcing both the sourcing and the analysis to people they trust, their investments are typically made in lockstep with a broader network of like-minded investors united by a single group leader (or a small core group of leaders) whose conviction they share.
Therefore, while any individual retail holder may not own a large position, their group leaders can easily control more shares than any one fund manager.
These network leaders crave direct company engagement and, when given the opportunity to do so, become fiercely loyal to companies they believe in. CEOs and IR teams that recognize this dynamic need to allocate the same level of time and resources to identifying and cultivating relationships with these network leaders as they allocate for institutional coverage.
The challenge is that finding retail network leaders is far less straightforward than identifying fund managers. Institutional investors are catalogued in public databases, typically searchable by AUM, mandate, and holdings or simply through online searches. Retail investors appear nowhere comparable. NOBO lists may reveal their names and addresses, but offer no indication of how many other shareholders they may influence or if they bought due to a certain financial advisor’s recommendation. Such lists also don’t capture prospective investors who don't yet appear on the register at all.
Issuers who commit to this effort can build meaningful retail feedback loops, but the discovery process is resource-intensive and requires breadth of methodologies that most individual companies lack. IR agencies are often better positioned to lead this work as their relationships span multiple issuers, thereby giving them the ability to recognize voices who appear across multiple shareholder bases.
Next week: Discovering and Motivating Investor Group Leaders
