Well … it was fast. In two short weeks GameStop (NYSE:GME) en AMC (NYSE:AMC) equity investors are from the new Wall Street government people to naive beginners. As Reddit-powered stocks fall back to earth, young Reddit investors are upset watching their heat-seeking investments turn into dust. And even before more experienced investors could begin their “I told you so” readings, one thing became clear: Less experienced investors had already begun to learn the wrong lessons from the fiasco.
Source: Shutterstock / TY Lim
Yes, deep-pocket hedge funds have won at retail investor tax – Citadel and Punt72 will likely walk away with a $ 2 billion profit this week. But as new investors nurse their loss of equity stocks, there is a great temptation to blame themselves incorrectly or ‘the system’. But if that was not the reason why they lost, what was it then?
GME and AMC inventory: the system is set!
It’s easy to think of Reddit investors as a single person – over the past month, r / WallStreetBets seems to be getting a life of its own. But for every smart (or lucky) soul who bought GameStop for under $ 10, there was a lot more talk on the popular forum about getting in late. It was the investors who paid $ 100 or more per share – granted by fellow Redditors with expiration-in-the-money call options. (Some of these early birds appear to have been financial professionals on Reddit.)
What in other words started as anger against short sellers has turned into a pump-and-dump place by people who knew what they were doing. In the end, it was the novice investor who lost the war.
But who can blame?
Wall Street mostly looked from the sidelines, causing novice investors to make mistakes. The banks with a bulge hook keep their research reports on stocks strong and give them only to the multimillionaires and family offices (i.e. the same people who can afford to ignore the advice). And the American education system was not much better. With a focus on efficient markets and financial theory, most schools do not prepare people for the possibility of losing 30% of their nest egg in a recession.
Therefore, young investors filled the void for themselves and turned to social media outfits like Reddit to share stories and advice. And it is no surprise that the echo chamber has created a whole generation of investors who are much more emotional than their predecessors.
Researchers Ryan Wood and Judith Lynne Zaichkowsky in the Journal of Behavioral Financing. “In other words, this group does not care to take risks, but feels terrible when they lose money.”
But really, the system looks right
In some cases, the Reddit echo chamber has managed a few things. When Robin Hood excluding retail investors on January 25 from trading high-volatility stocks, the trading platform may have inadvertently landed the GameStop bubble and sent a lifeline for short-term hedge funds. Robinhood CEO Vlad Tenev should expect harsh treatment when he is grilled by Congress later this month.
But in other cases, the Reddit rumor mill has become a scourge.
“I still like my stock, but I do not expect to see my $ 1200 ever again,” lamented one GameStop investor on Reddit. “Who knows … Maybe it’ll still go to the moon. I will be very happy! But until then, I’ll keep going, ‘said another latecomer on AMC.
As meme shares fell from their peaks, Redditors encouraged each other to adopt the ‘ostrich strategy’: ignore the losses long enough, and perhaps they will disappear.
Much of this feeling has been fueled by others doing the same – and in some cases screenshots instead of duplication. (Whether all these images are 100% real can be discussed). The rest, however, comes from younger investors’ natural tendency to personify losses. If you lose stupidly, never realize the losses. It is a centuries-old strategy of short-term self-care with long-term costs.
Older investors may view this mental gymnastics with a sense of shame; all experienced investors have seen their share of battle scars. But this time is different. As the Reddit echo chamber reinforces these practices, these investors risk blaming everyone (including themselves) for their losses and do not continue.
Wall Street also learns the wrong lessons
The Reddit machine also has real consequences for experienced investors. Consider Andrew Left, CEO of Lemon Research. Mr. Left has cherished exorbitant Wall Street foundations for years, and he has worked in Hawks for the drug markets and the price tag. His willingness to fight the Wall Street institution earned him praise from academics and experienced investors.
But then he made the mistake of calling GameStop’s absurd valuation right when Reddit investors were coming in. While death threats and random pizza orders at the door of Mr. .
Reddit’s cooling effect has since spread to other financial areas. Talks that support short selling, an essential mechanism for a well-functioning financial market, have mostly come to a standstill. And investors can probably expect higher premiums the next time they want to trade a share in the potential of meme.
Where to go from here
Never before have so many investors identified stocks as their identity. Telling these investors that they do not like Tesla’s shares is almost like spitting in their face. (Older investors, meanwhile, can see Tesla as another threat). And the GameStop bubble confirms the myth that someone’s stock portfolio represents their character.
Against this background, we are now facing a decision. We can choose not to say anything; few want to speak out against the madness of crowds, especially if they can yell back at you.
Or we can continue to reach out and help the next generation understand the world we have built.
After all, millennial investors are not going away anytime soon. By 2030, young investors will have inherited $ 68 billion, making them one of the most important financial forces of our time. And if we forget to give them the manual, what does that say about us?
At the date of publication, Tom Yeung held no (direct or indirect) positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor who wants to promote the simplicity of the investment world.