Reddit’s r/WallStreetBets wasn’t always so militant. The forum was once a place for people to post their most ridiculous bets — a parody of the otherworldly gambles that Wall Street prop traders used to take.
But then something unexpected happened: Short-sellers started to get involved in a world they didn’t quite understand. On Jan. 21, when famed short-seller Andrew Left posted a $20 price target on GameStop (NYSE:GME), Reddit users took that as a collective slap to the face. No longer was this a fun game of moonshot investments. Out of nowhere, a “David versus Goliath” fight emerged. Suddenly, any attack on GameStop or other r/WallStreetBets favorite was an insult — not even to their collective intelligence — but their very core sense of being.
“To Melvin Capital: you stand for everything that I hated,” wrote one member of r/WallStreetBets. “This is personal for me, and millions of others.” Identity politics had suddenly spilled over into identity investing.
As investors steel themselves for a bumpy GameStop stock ride to $50 or very possibly to $500, they need to remember one thing: It’s supposed to be fun. And if you do lose money, make sure you don’t let Reddit’s r/WallStreetBets become your QAnon.
QAnon and Identity Investing
Last week, author Diane Benscoter gave her assessment of a recent American phenomenon. It “establishes this camaraderie and this feeling of righteousness and this cause for your life. And that feels very invigorating and almost addictive. You feel like you are fighting the battle for goodness, and all of a sudden, you feel like you are the hero.”
She wasn’t talking about Reddit’s r/WallStreetBets, though — the David versus Goliath stock market battle that brought at least two hedge funds to its knees. Far from it. Instead, she was referring to QAnon, an ultra-right group of conspiracy theorists.
Few would confuse the playful jousting of Reddit stock investors with a group of conspiracy theorists convinced that Democrats are collectively hiding a secret cabal of Satan-worshipping, baby-eating pedophiles. r/WallStreetBets, after all, started with retail investors showing screenshots of out-of-the-money options, some wins, and often devastating losses. It was much like a stock investor’s version of “America’s Funniest Home Videos” — painful yet impossible to turn away from watching. The forum also doubled as a gateway for new investors.
Not only did the subreddit get people involved in their finances — it taught that losing money is fine as long as you keep trying.
But the longer that young investors remain in a collective echo chamber, the harder it becomes to tell the difference between convivial and conspiracy.
Cult Members? Meet Cult Stocks.
In a broader sense, identifying with an investment style is nothing new. Value investors have always touted their ability to dig up diamonds in the rough, while growth investors have focused on finding big winners. Those wanting to sit at both lunch tables (like yours truly) have even come up with their own labels like GARP, or growth at a reasonable price.
Experienced investors will know that people can change investing styles as easily as they change clothing. Warren Buffett pooh-poohed the airline industry for years before snapping airline stocks up himself. And Phil Fisher, the father of modern growth investing, published a book toward the end of his investment career titled Conservative Investors Sleep Well. The market always tells you soon enough if you need to change your investment strategy.
Social media, however, has upended that notion. Today, investors don’t have to settle for broad investment theories; they can find supporters for their individual investments. Tesla CEO Elon Musk has almost 50 million followers on Twitter, while entire subreddits are dedicated to specific stocks. Studies have shown (unsurprisingly) that owning stocks magnifies retail investor reactions to these types of sites, which can cause people to get stuck in their ways of thinking.
Even apps like Robinhood unintentionally nudge investors into siloes by showing them only the top stocks of the day. It’s a curated world where stocks only go up, and you’re always right.
The Social Media Echo Chamber
Young investors were already more primed toward identity investing. A study by Ryan Wood and Judith Lynne Zaichkowsky published in the Journal of Behavioral Finance outlined how loss-averse young traders were far more likely than their older counterparts to personalize their losses. For them, buying a stinker isn’t just bad luck; it’s a reflection of their character.
But it took the Reddit GameStop saga to bring that to real life, particularly when Mr. Left of Citron Research first announced his bearish stance on GameStop shares.
In earlier times, investors would have shrugged. Mr. Left’s claims that GameStop was a company “pretty much in terminal decline” was a fair assessment of the stagnant video game retailer. The target price, while low, was still four times higher than GameStop’s price the summer before.
Instead, Mr. Left suddenly found himself the target of a massive hate campaign. Not only did the famed short-seller receive online death threats. “One night pizza he hadn’t ordered showed up at his door and someone had created a fake Tinder account in his name,” according to Reuters reports. It was a campaign of intimidation.
As more people jumped on the GameStop train and losses mounted, conspiracy theories got more intricate and outlandish. One idea — that hedge funds colluded with Robinhood to halt meme stock trading — gained so much traction that even Washington politicians had to ask. (It was supposedly caused when Robinhood fell short of on collateral with the Depository Trust & Clearing Corporation, or DTCC).
Meanwhile, the uglier side of the echo chamber started to emerge. Gabe Plotkin, the head of Melvin Capital, received anti-Semitic posts that he later shared in open testimony to Congress.
And the hate speech wasn’t only to intimidate – it was to organize. 4chan.org, the anonymous imageboard website where QAnon theories originated, had users claim that Melvin Capital investors “are probably close to the top of the zog hierarchy,” the conspiracy theory that a Zionist Occupation Government secretly controls much of the Western world. Far uglier language was also used to weave even more complex narratives, but deserves no re-printing.
Turning Regular People into Believers
Every conspiracy theory plays on people’s sense of justice. And it starts with something people want to believe. In the case of QAnon, Democrats are inherently evil and that President Donald Trump’s master plan was to stage a countercoup against members of the deep state.
In GameStop and other meme stocks, a similar “good versus evil” narrative has emerged. If short-selling hedge funds are inherently evil, their goal of bankrupting individual investors must also naturally hold.
Was any of it correct? Indeed, unfalsifiable claims always hold some potential for truth. There could be some Democrat politicians who distribute child pornography, just as there have been Republican ones caught in the heinous act.
Short-selling hedge funds, too, might have tried reaching back-room deals in their moments of desperation. But does that make the entire conspiracy real? If you think so, then I’ll never convince you otherwise.
The Collateral Damage of Conspiracies
Identity investing has cast a long shadow across the world of investing. Michael Burry, the investor who famously bet against big banks in the 2008 financial crisis, deleted virtually all his investment-related tweets last week. Citron’s Andrew Left, meanwhile, has vowed never to write short-selling reports again, ending a stellar 20-year career of calling out corporate fraud.
Self-censoring has reached even the biggest names in the business. Mark Cuban and Jim Cramer — market personalities with histories of being just as bearish as bullish, have turned decidedly positive on meme stocks and investments. And Warren Buffett has remained unusually quiet even as his trusted partner, Charlie Munger, gets skewered by the public for his anti-Robinhood comments.
The results are exactly what you would expect. With no one to warn them otherwise, retail investors have stuck with GameStop and other meme stocks as prices have yo-yoed.
“Sold everything and went all in GME. I LIKE THE STOCK!,” wrote one member.
Some might see this as a good thing. Bearish investors have always been derided for pushing down stock prices — potentially sapping investment in otherwise phenomenal deals. GameStop itself might find a second life as an online gaming company.
But it’s also a dangerous path. Who knows how many more billions of dollars Enron could have destroyed if whistleblower Sherron Watkins never took a stand? And at a certain point, buy-and-hold strategies turn into ostrich-in-sand — the willful ignorance of any bad news.
“Getting ready for the Friday FUD and dumbasses in the comment sections,” a Reddit user wrote. “If I see you I will downvote you. Who’s with me fellow apes?”
What Can Investors Do?
It’s easy to blame social media companies for perpetuating these echo chambers. But leaders are also occasionally at fault. Just as Donald Trump encouraged QAnon theories, corporate leaders like GameStop’s Ryan Cohen and Tesla’s Elon Musk relish publishing mysterious tweets that send forums ablaze with speculation.
Older investors often recall how buying great American industrials didn’t involve being a member of an investment club. But today, you’re in it, or you’re out. There’s no middle ground for people who want to trade in and out of perceived good and bad value.
So, what should investors do? Simple. First, understand the difference between using emotions to help invest versus getting emotionally invested in a stock. There’s a big difference.
Second, understand the ease at which people can create false narratives. We all love simplicity, and a “good versus evil” story is certainly an easy one to make. But just like QAnon, unchecked echo chambers can warp these well-meaning stories into something far more harmful.
And finally, understand that everyone plays a part. All great theories start as a healthy questioning of the status quo. But it doesn’t take much to warp it into something far more destructive.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.