When it was first revealed that hedge funds were losing billions of dollars on the other side of the GameStop trade to the fanfare of Redditors on the WallStreetBets forum, one of the questions was: Who is this new type of stock market participant and why were they so bent on disruption?
The answer is complicated but the disruptors are, in part, the young, student-debt laden, high-house-price chasing, underemployed Main Streeters who have grown up watching Wall Street get bailed out after bringing the global financial system to its knees.
The deck is so stacked against these young traders that they may see this as their only chance to claim a stake in whatever the American Dream is today. And if they can put the screws to hedge fund billionaires while doing it, that’s just a bonus for them.
It started last summer. In August of 2020, a YouTube channel named “Roaring Kitty” laid out a case for why GameStop could see an explosive increase in share price. To make a long story short (pun totally intended), he was right. At one point, he posted a table showing a daily gain of more than US$20-million on his GameStop positions. (For a detailed explanation of what happened to cause GameStop’s price to skyrocket, you can watch this video.)
Enter WallStreetBets, a “subreddit” of millions of gamblers and investors that have piled onto the idea that GameStop’s share price would continue to “go to the moon.” With a cult-like following of Roaring Kitty’s every word (real name Keith Gill, but his Reddit handle is not fit for print), they’ve taken one of a million investment hypotheses floating on the internet and turned it into so much more.
The Hail Mary bets posted by other users in the subreddit are met with support, whether they turn out to be profitable or not. And when someone loses big, it’s not unusual to tag a screenshot of their heavy losses as “loss porn.” The bigger the loss, the more upvotes the community provides.
After reaching a peak of US$483 a share last week, GameStop had lost 80 per cent of its value trading at under US$93 at the end of Wednesday. The hype is dying down, but the damage may be done.
Cardify, a market research company that examines real-time transactional data in Canada and the United States, just released the results of a survey of do-it-yourself traders who were buying positions in either GameStop or AMC Entertainment Holdings Inc. Of those polled, 44 per cent have less than 12 months of experience investing, and another 25 per cent have between one to two years of investing experience.
In addition, 42.6 per cent had made their biggest trades in the last four weeks. And when asked for their motivations behind their trades, 44.6 per cent did it for the hope of quick profits while 16.1 per cent did it to spite hedge funds and institutional investors.
I spoke with Silvio Stroescu, the president of BMO InvestorLine, on my podcast last week, inspired by Rob Carrick’s article on long wait times for discount brokerage clients. He said a main reason for the long waits was that trading volume in December, traditionally a slower month, was 45 per cent higher than the traditional peak volumes in a typical year. And the first five trading days of January saw more transactions than all of January, 2020.
The collateral damage of the GameStop frenzy could be great. For investors driving down the highway to their long-term goals, there is a danger of rubber-necking to see the spectacle on the side of the road. “Wow, a trade like that would change my life.” That fear of missing out was exactly what was happening in 1999. And stopping to get in on the action did indeed change some people’s lives. It wiped a lot of them out.
And for new investors, whose first exposure to investing has been the short-term market distortions in a handful of stocks that have dominated the headlines for the last two weeks, the damage can be severe and long-lasting.
The gamification of trading (animated confetti explodes on the screen when you buy stock on the Robinhood app), may have worked too well. Instead of encouraging and facilitating the next generation of investors, we may have witnessed the creation of the extremist stock market gambler.
The spectacular gains in GameStop stock last week have been met with almost equally spectacular losses this week so far. The short interest declined. And what started out as a David versus Goliath trade has turned into a Goliath versus Goliath trade with David getting tossed around like a canoe in a tsunami on the side. Because while some of the players on Wall Street took a beating, others zoned in like sharks once they detected blood in the water.
There is a difference between investing and gambling. And when you gamble, the house always wins in the long run.
Preet Banerjee is a management consultant to the financial services industry and founder of MoneyGaps.com.