The revolution that was not: Gamestop, Reddit and the fleecing of small investors. 2022.James Spencer. Penguin Random House.
In The revolution that was not: GameStop, Reddit and the fleecing of small investors, james spencercurrent editor of the Wall Street Journal and former Credit Suisse stock analyst, outlines the real winners and losers in GameStop’s 2021 short-twitch, who aren’t the winners and losers we’ve been led to believe they are. He takes us through the fascinating events that led to the scarcity and explains how financial and technological mechanisms, like Robinhood’s “free” trading app, made it possible.
The financial media described it as a watershed moment when power returned to ordinary retail investors. Yet despite Wall Street heralding the “democratization of finance,” Jakab argues that it is still Wall Street, and not your everyday retail investor, who is the ultimate winner of the stock meme revolution.
The class of investors that became the primary target of intense contempt at WallStreetBets were short sellers, who may have taken a permanent hit. Because shorting on social media can now be made easier, for portfolio managers and traders, shorting has become much riskier. Short sellers now know that they can be “attacked” by a motley crew of retail traders. This development will likely reduce short interest in the future. And because short positions play a critical role in maintaining pricing efficiency, a reduction in short interest is likely to lead to more bubbles in the future, bubbles in which the most likely buyers will be everyday retail investors.
A mid-2020 estimate of the average time a stock is held, according to the author, dropped to less than half a year from the eight years of the 1950s. Stocks now change hands about 17 times more than in the decade. of 1950. Although each individual transaction is less expensive due to the elimination of commissions and a reduced gap between the purchase and sale price, the new crop of retail investors, including those who facilitated GameStop’s short adjustment, will leave a significant amount of money on the table as part of your active trading. The combination of more common retail investors in the market plus their belief that they can outsmart the market is probably a boon for Wall Street professionals.
According to Jakab, the democratization of finance and the retail rebellion was an illusion that the financial media accepted too easily. If you take into account people’s propensity to gamble when they first have money and tell them they can make 30 to 50 trades a day for no commission, but you’re selling their order flow, you’re creating a roundabout way for Wall Street earn money. Investor advocates like the Consumer Federation of America are pushing for rules to protect investors from gut betting and criticizing the free trade model.
Many of the new retail investors will learn their lessons by paying Wall Street tuition in the form of losses. One of the most pernicious effects of young retail investors losing a small sum of money is that they eventually become discouraged from investing. A dollar lost early can be more painful than one lost in midlife due to compound interest. Stock market wealth is already distributed wildly unequally by age, race, and income.
In summary, the author points out that competition and technology have made Wall Street a friendlier and more profitable place for people, as long as they play a game that is not too exciting. If commission-free trading had been around decades ago, Jakab estimates, Warren Buffett could have earned 150 to 200 times more than the broader market. Despite the meme stock revolution, the new boss in finance seems to be the same old boss, and Wall Street is still a place where investors lose too much money when they think they can beat the house.
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All messages are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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