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Why Retail Investors Are Beating Wall Street at Software Stocks

Wall Street pros are known for spotting trends early, but lately, they’ve been betting against software stocks. The reasons? High interest rates, tech layoffs, and the idea that the pandemic-driven digital boom has already run its course. But here’s the twist: while the big funds piled on short positions, everyday investors jumped in—and many of them actually came out ahead.

Take the past year—software names like Atlassian, Snowflake, and CrowdStrike were a wild ride. Hedge funds quietly trimmed their stakes, waving the “overvalued” and “slowing growth” flags. Analysts seemed almost eager for a correction. Yet, if you peek into Robinhood or Fidelity accounts, software stocks kept showing up as top buys month after month.

So, why the big disconnect?

It often comes down to timing. Institutional investors have to report quarterly results, which means they can’t always stomach the ups and downs. Retail investors? They’re usually in it for the long haul—either because they can’t or because they believe in the companies. This patience has paid off big time this cycle.

Let’s zoom in on CrowdStrike (CRWD).

At the start of 2023, Wall Street was heavily shorting CrowdStrike, expecting cybersecurity budgets to tighten. But guess what? Cyber threats didn’t take a break just because inflation was high. Companies kept pouring money into security, and CrowdStrike kept beating earnings expectations—three quarters in a row. The stock doubled, and retail investors who held steady ended up ahead of many pros.

Atlassian (TEAM) tells a similar story.

The consensus was that demand for workplace tools would fade as remote work settled into a new normal. But retail investors on places like Reddit argued differently—they believed hybrid work was here to stay. The stock had its ups and downs, but those who bought the dips and held on have seen returns north of 30% since last summer.

What’s behind retail’s edge?

First off, the tools have gotten incredibly user-friendly. Fractional shares, zero-commission trades, and straightforward dashboards make holding onto quality stocks easier than ever. Plus, younger investors are generally more comfortable with volatility—they don’t panic at the first dip. Social media communities, for better or worse, often reinforce this “hold tight” mentality.

That said, it’s not all smooth sailing. Retail investors can get caught up in hype, especially with software stocks that can swing wildly. Chasing “the next big IPO” or meme stocks without solid fundamentals has sunk plenty of portfolios. And when things go south, retail investors often don’t have strong risk management strategies in place.

Watch out for surprises.

Software stocks can look strong on paper, but a failed product launch or an unexpected regulatory move can send prices plummeting overnight. Most retail investors aren’t digging through SEC filings or product roadmaps like the pros do, and that can lead to costly blind spots.

Still, there’s something to learn here.

Institutional teams tend to overthink, over-hedge, and get rattled by short-term noise. Retail investors—free from those pressures—can afford to wait it out. In software, patience has been a surprisingly powerful advantage.

Of course, survivorship bias is real. We hear about retail traders who held on and made money, but not the ones who lost big. If you bought Zoom at its pandemic peak, you’re probably still feeling the pain. Chasing SPACs or AI startups without revenue also hasn’t been kind to many.

That said, the numbers speak volumes. According to Fidelity’s Q1 2024 report, software stocks made up four of the top ten retail buys, and their returns outpaced the S&P 500. A simple strategy—buying companies with real revenue growth and holding through volatility—has beaten many complex hedging tactics.

What does this all mean going forward?

Wall Street’s bet against software hasn’t exactly paid off recently. The world isn’t getting less digital. Even as AI hype fades in and out, demand for secure, reliable, cloud-based tools keeps growing—and retail investors seem to get that instinctively.

But nothing is guaranteed. If interest rates spike or a black swan hits tech, software stocks could finally face the correction Wall Street’s been waiting for. And in that case, retail investors—known for holding through pain—might feel the squeeze the most.

For now, though, the takeaway is clear: Wall Street’s skepticism hasn’t been the winning bet. Retail investors, armed with better tools and a stronger stomach for volatility, have come out ahead more often than not. It’s not a failsafe playbook, but it’s a reminder that sometimes, sticking with your convictions and riding out the storm beats following the herd.

The next time you see hedge funds lining up against software stocks, remember—the crowd isn’t always wrong. Sometimes, the real edge is simply not flinching when everyone else does.

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