Wallstreetbets and the Internet of Finance
The internet has changed the landscape of investing and institutions should pay more attention
I spend a lot of time on reddit – specifically, r/wallstreetbets. For a long time this forum was pure comedy. “Loss porn”, shitty memes, and stock images of printers pretty much encapsulate the large share of content exhibited on the subreddit throughout the past few years. Users constantly tried to one up each other on how much they were losing. To an outsider, it would be easy to dismiss these people as complete morons. And frankly that would mostly be a fair assessment.
But the subreddit has only grown, and quite consistently. So the next logical question is: why are people signing up to lose their money? When I tell you that many of them are not, you’ll say, but how? These people are fools! Running into stocks with no value! Their due diligence is based on memes!
Again, not entirely false.
But also, not true of the entire segment – as Chamath tried to assert on CNBC, met with ridicule by Scott Wapner’s boomerism, some of the due diligence that you’ll find on this subreddit is as good, if not better, than what any junior analyst at a top hedge fund or equity desk can produce. The research is thorough and, most importantly, fairly unbiased (in the institutional sense). Take internet legend DeepFuckingValue’s research on GameStop over a year ago, and you’ll find a sophisticated financial analysis from someone without any editorial influence over his thoughts. His conclusion was that everybody beating up on GameStop could possibly be wrong. He had no agenda other than to make himself money, and he provided concrete numbers for why the retail gaming business could actually see a few more good years, as explained in his thesis on YouTube. He saw a good value play, executed on it, and shared his thoughts on the internet for anyone who cared to read. Not as financial advice, but as public, non-profit research.
Fast forward a few months and a few key positive events for the company, and GameStop’s stock price started rising. Soon, another redditor known as u/Jeffamazon posted a blueprint for a gamma squeeze on the stock that was so genius and undeniably prescient that after reading it you might end up questioning your day job. Soon enough the masses of redditors find the research, follow suit, and the stock price heads toward the moon.
The story on GameStop, at the time of writing this, could be nearing its end as the price continues to crater, due in part to actions like Robinhood placing restrictions on buying. Arguments on market irregularities aside, what we are seeing here is important, something that Chamath and Mark Cuban have been trying to tap into. Something that the career financiers are missing, unable to pull their eyes away from short term earnings reports to look up and see the bigger picture: the full value of internet’s impact on investing.
This the empowerment of the retail investor; millions of people with a few thousand bucks in a checking account and a willingness to blow it away for the prospect of some glorious, outsized reward. Arm these millions with quality analysis and information on stocks, and the potential is stunning.
The investment behind this short squeeze would’ve made a traditional broker at your local Schwab branch spit out their coffee - and that is exactly why r/wallstreetbets was created. People with a little bit of play money wanted to bet big in the markets, but as the traditional gatekeepers of the modern financial system for the retail investor, your local Schwab advisor would never condone such a move. You must diversify and create a quality portfolio filled with both blue chip equities and bonds to avoid undue risk and big losses during corrections! Redditors on r/wallstreetbets spit out their coffee at such a preposterous notion.
The fact is that in the cost benefit analysis that a user on r/wallstreetbets is weighing, the benefit of YOLOing a few thousand into a highly risky play with a low chance of outsized gain seems to FAR outweigh the benefit of slowly building a rock-solid portfolio through traditional investment vehicles. To them, the latter handcuffs them to the lifelong journey of labor entrenchment, wherein they work hard while sidelining a small amount each year toward a 401k and a diversified portfolio, barely taking home enough to provide for posterity, let alone themselves individually. The former seems fun and exciting, and if you lose, well, the government seems content on printing more money anyway. So, the thinking goes that if those are my options, I’d rather be poor and take a shot than be still pretty poor but also pretty miserable for the rest of my working life. When looking through this lens, does it still seem so crazy? All of this just breeds even more resentment toward the establishment.
And that seems to be part of the underlying thesis behind the revolution r/wallstreetbets has ignited. It is a chance to win big for the common man or woman working a 9-to-5 with not much career advancement to look forward to AND a chance to stick it to the man a little. They take extreme pleasure in seeing just how much the gatekeepers of investment management absolutely despise this. Again, arm the masses with some play money and some sound due diligence, and they can take the same risks that all of the hedge funds do. Why shouldn’t they be allowed to play the game?
For those users piling into GameStop stock right now, it’s possible many will face even harder times financially because they jumped onto a sinking ship for fear of missing out. But spend a few hours on this subreddit, and you’ll see that legitimately none of them care. The self-destructive nature is maniacal, but somehow admirable. This is the internet in its most pure form. They dislike institutions, they dream of more financial freedom - now couple that with (near) limitless access to markets and some actually smart people sharing solid investment ideas, and the result is chaos. And they will only continue to find investment plays and pour tons of money into them because, and this is going to be highly controversial, investing doesn’t seem hard during a bull run. That is not me saying this – it is a core tenet of r/wallstreetbets (stonks only go up - see why here (dear lord this is not investment advice).
For now, the wildly entertaining show goes on. But it seems as if a movement has begun: the power of the internet combined with the ever growing sense of mistrust and dislike in institutions. r/wallstreetbets now has close to 10 million people subscribed, and gains millions more each week. Ultimately, I’m impressed by a lot of what I read on the subreddit. I think anyone who is categorizing the whole populous of this forum as misguided fools, simply has not taken time to read through it. To anyone working in finance reading this, you should check it out - you might learn something.