Up until recently, it had seemed like the collective knowledge of regular investors had hit an all-time high. The science of the stock market had been settled, and investors understood that low-cost, passive investing was the best way to accumulate wealth and save for retirement.
COVID’s Impact on Investors
That seemed to ring true for most people up until COVID struck. In my view, the brief market turmoil we experienced didn’t dissuade investors from passive indexing – hardly, most passive investors were excited to buy more as they saw markets fall. Instead, it’s been the roaring of the tech sector, speculative companies like Tesla, and stories about hot-shot fund managers like ARK’s Cathie Woods that have irrevocably damaged the prospects of young, naive investors getting into the market today.
COVID has had an impact in another way. With huge amounts of people sitting idle at home, neglected from the personal and social responsibilities that existed pre-COVID, they’re looking for something fun to do outside of their regular routine. And what are many of these “idle hands” doing? Well, gambling in the stock market of course. And these idle hands have never been busier than on Reddit’s WallStreetBets.
The WallStreetBets Phenomenon
WallStreetBets entered into the common parlance in January of this year. News outlets all across the continent reported on how a bunch of would-be stock market gurus rallied to “stick it to the hedge funds” and strike back at Wall Street. Young investors were especially susceptible to this message – the idea that they could double their money or more, all while defending a diminished GameStop from a cabal of hedge funds.
In reality, this “protest” movement to “stick it to the hedge funds” devolved into something resembling a pump and dump scheme. Early investors in the scheme encouraged others on WallStreetBets to invest in GameStop. The enthusiasm behind GameStop was so high that its share price quickly rose to over $300 per share.
Promotion and Pain
Along the way, GameStop promoters encouraged investors not to sell, to “HOLD”, and that “they liked the stock.” People who weren’t promoters became promoters when they saw how much others were making in the scheme. In unison, WSBers novices and veterans alike parroted the same lines to encourage naive investors to get in on the action.
The promotion of GameStop, and the idea that participants going to “get back at Wall Street”, lead many to invest thousands in the scheme.
Unfortunately for WallStreetBets, the enthusiasm didn’t last for long. Not more than a week later, GameStop came crashing down to Earth as investors dumped their shares.
The GameStop Aftermath
Sadly, investors who joined late and weren’t able to get out in time lost most of their investment. This result is typical of a pump and dump scheme and lends credence to the argument that the rise in GameStop’s price was artificial.
What’s not typical is the cognitive dissonance investors had to buy “what they could afford to lose” just to “be a part of the movement.” This popular sentiment shows that the scheme worked far better than any pump and dump of recent history. Not only were investors ambivalent about losing money, the scheme’s proponents had the perfect scapegoat in Robinhood to deflect away from the fact that unsophisticated investors were duped into losing millions of dollars.
The truly crazy thing, however, is that we’re not done. People are still bored at home and stimulus cheques are flowing. Perhaps as a result, Gamestop has rallied, reaching back towards it’s previous all time high. Are novice investors going along for the ride? For their sake, I hope not.
Thanks for Reading!
Thank you for reading my little rant on WallStreetBets and its impact on investors! What do you think of the whole saga? Are you team WallStreetBets or team hedgefunds? Let’s discuss!
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