GameStop, Reddit and the Small Investor Scam
Spencer Jakab is the editor of “Heard on the Street” at the the wall street journal. He previously wrote “Ahead of the Tape” for WSJas well as the “Lex” column for Great Britain FinancialTimes.
Below, Spencer shares 5 key insights from her new book, The Revolution That Didn’t Happen: GameStop, Reddit, and the Small Investor Scam. Listen to the audio version – read by Spencer himself – in the Next Big Idea app.
1. The stories of David and Goliath are crowd pleasers.
A big part of my job is to figure out which of the many story ideas journalists bring to me is going to be read. One morning in January 2021, I could tell I had a surefire winner of a story, and the person who brought it to me wasn’t even a journalist — it was one of my boys. Less than 10 minutes later, I emailed the publisher of my book who, like almost everyone, hadn’t heard of it either. Within a week, however, everyone had. Hundreds of articles had been written and four film deals were in the pipeline.
My son had told me that members (who call themselves “the monkeys”) of a Reddit forum he belonged to called WallStreetBets were piling up stock at a money-losing video game retailer called GameStop, causing it to skyrocket. This was not that unusual in itself, as I had seen them do the same with the stocks of many companies. However, this time they chose a company precisely because it was horrible. They were trying to do something that hadn’t been done legally in almost a century – stage a corner of the stock market – and they had it out in the open for anyone who bothered to read their site full of memes.
The big boys of Wall Street didn’t care. Some of the largest and most sophisticated investment funds had been so convinced that GameStop was shutting down that they bet on a deal that would allow them to profit from the demise, despite the theoretical possibility of losing some money. infinite if they were wrong. . Many of them had bet that it was like being in a crowded theater with a narrow exit door. The folks on the forum had figured out how to shout fire in the theater, douse the seats with kerosene, and throw a lit match, all while buying as many shares as possible and not selling them no matter how high they rose.
As the monkeys started making money and funds started panicking, the internet turned the rush into a rush by focusing on drama. WallStreetBets’ ranks quadrupled in a week to 8 million people. Millions of mostly young people created their first trading accounts with brokers, like Robinhood, which allowed them to have fun on their smartphones right away. Now it was like throwing lit sticks of dynamite into the theater, and with Robinhood giving its mostly inexperienced customers more for their money through the ability to use borrowed money and derivatives, they were allowed to pour nitroglycerin on top for good measure.
“GameStop has become the most traded stock in the world, appreciating more than 20,000% from what it was worth months earlier.”
Within days, GameStop became the most traded stock in the world, appreciating more than 20,000% from what it was worth months earlier. Large hedge funds would lose billions of dollars and some would go bankrupt. A trader with the alias DeepF**kingValue became the hero of the group as he earned up to 1,000 times his money.
2. Reality is more complicated, but sometimes much more interesting.
The headlines sounded like a sea change: “‘Dumb Money’ is on GameStop, and it’s beating Wall Street at its own game”, “GameStop is soaring again, Wall Street is folding under the pressure”, “GameStop Mania reveals a power shift on Wall Street and the pros are in shock. Hollywood was salivating, because their portrayal of role-reversing degenerates on Wall Street would look like a veritable “Trading Places,” where Eddie’s Billy Ray Valentine Murphy outsmarts the corrupt and greedy Duke Brothers.
But all was not what it seemed. The monkeys were so desperate to stick with the hedge fund bosses – the cartoon villains of Wall Street – that they made a bunch of wealthy Wall Streeters much richer by investing their life savings in the fight. By the time the smoke started to clear and the audience’s attention turned to the next thing, I saw it more like Star Wars: Attack of the Clones. The scenes were thrilling and there were lots of big explosions, but this was a prequel – we already knew how the story would end. A larger force was just happy to watch the fight. Who cares if they killed Count Dooku?
3. There are two sets of rules in America.
The monkeys were from a generation struggling to buy homes and pay student loans, and they watched their parents lose their jobs or homes during the financial crisis. They were seen as the digital vanguard of generational and class warfare. So it was fitting that the main brokerage firm they used was called Robinhood, named after the mythical figure who stole from the rich to give to the poor.
“The founders of Robinhood in Silicon Valley, who raced to democratize finance, had somehow become incredibly rich while charging nothing for trading stocks.”
But the monkeys were suspicious of Wall Street, not all of them had much more money than them. Seriously, who wants financial advice from a poor person? Elon Musk, the richest man in the world at the time of GameStop mania, poured oil on the fire that week with a single incendiary tweet to his tens of millions of followers with one word – “GameStonk ” – and a link to WallStreetBets. The founders of Robinhood in Silicon Valley, who raved about the democratization of finance, somehow got incredibly rich while charging nothing for trading stocks.
But just when it looked like the financial guillotines were coming for high finance, Robinhood appeared to stab them in the back. The broker told its clients that they could no longer buy GameStop shares. They were outraged. Three weeks after the Capitol Riots, political figures from AOC and Bernie Sanders to Ted Cruz and Donald Trump Jr. immediately saw which way the wind was blowing and sided with populists online. Congressional hearings were called within hours of Robinhood’s announcement. Reporters shouted GameStop questions at new President Joe Biden. Either he didn’t hear them, or he wisely pretended not to hear them.
Here are the big cats changing the rules just when they were about to lose. It looked like a conspiracy, but it wasn’t. What really happened was that Robinhood was too successful in getting its customers to speculate, and it temporarily ran out of money when so many of them made the same bet. The real scandal was that the billionaires who founded the brokerage, and the market makers who willingly pay it for trades, had made their fortunes on a flurry of speculation from young people bored during the pandemic and new to the market.
4. Silicon Valley has our number.
They say the four most dangerous words in investing are “this time is different”. Every time a new generation of investors thinks they’ve found a way to get rich by beating the house, it turns into a boon for Wall Street. And this time has been a little different. People were crippled by the same old psychological weaknesses of fear, greed and overconfidence, but social media companies and a new generation of brokers with roots in Silicon Valley have put these trends on steroids. so they can make more money. Robinhood customers checked their accounts seven times a day on average, while seven times a year is probably more than most people.
“They say the four most dangerous words in investing are ‘this time it’s different’.”
The algorithmic nature of social media allowed a new generation of financial influencers to get rich even as most of their followers lost money, then convinced them it was because the system was rigged. And the makers of gamified smartphone trading apps have denied encouraging customers to gamble, even though they’ve borrowed techniques from real-world betting sites, such as the near-miss effect and intermittent rewards (known to trigger gambling addiction).
For example, the first thing a Robinhood customer sees are stocks others are watching or stocks that are moving a lot. Is this useful information? It’s to a generation that wants to know what everyone is doing and experiencing FOMO. By making their app nearly frictionless and charging no commission, the amount of time their clients thought about buying or selling a stock was minimal. And by making it fun, it became entertainment, in the same way that spending time in a casino hoping for a big score can be. His most enthusiastic customers would trade more than 10,000 times in as little as six months.
5. There East a way to beat Wall Street.
Reddit revolutionaries thought they were getting a double iron during the GameStop craze: sticking it to the man while making a bundle themselves. They have mostly failed on both counts. The good news is that compared to the bad old days, Wall Street has truly democratized. The same technology that allowed Robinhood customers to open accounts with just $50 and pay zero commission means almost anyone can climb the financial ladder and start building a nest egg.
The secret to doing better than 85% of your fellow individual investors, and even 80% of seasoned pros, is to not try too hard and recognize the difference between speculation and investing. Enjoy zero-dollar commissions, but don’t let nifty technology or marketing messages trick you into becoming hyper. Buy a few stocks – or better yet, cheap index funds – and leave them alone. Your broker will hate you, but you’ll probably like the results.
To listen to the audio version read by author Spencer Jakab, download the Next Big Idea app today: