Another important check on speculative excess, the short-sellers who think a stock is overvalued, had a difficult year. That’s not to say they didn’t enjoy some successes — former SPACs have been particular fertile ground for the shorts — but the market’s relentless rise and the danger of being caught up in a GameStop-like squeeze convinced some to give up the game entirely. To cap it all, much to the delight of the Reddit crowd, short-sellers now face a U.S. Justice Department criminal investigation into their activities.
The GameStop saga and similar events also torpedoed a key theoretical foundation of Wall Street — the notion that markets are efficient. Securities prices are supposed to reflect all known information and the discounted value of expected future cash flows. If prices rise more than is justified by financial fundamentals, more sophisticated investors should sell.
An emerging theory, the Inelastic Markets Hypothesis, postulates that retail buying is able to warp prices for prolonged periods because so much of the market is now passive, not actively managed, and is therefore insensitive to changes in prices.
“Demand shocks and inelastic markets are the tissue that connects the meme stocks, Tesla and even crypto” says Philippe van der Beck, a researcher at the Swiss Finance Institute. “Bitcoin can be seen as an extreme version of today’s stock market: it’s almost entirely detached from fundamental value as there are no cash flows for investors to discount. People are just betting on how they think demand for the asset will change in the future”
When flows trump fundamentals and financial prophets, not accounting profits, drive investment decisions, attention becomes the only trading currency that matters.
True, retail investors are a heterogenous bunch, and include green eyeshade value investors who pore over spreadsheets. But increasingly, the hallmarks of the retail investing world have been dizzy-eyed techno-optimism, tear-it all-down nihilism and cult-like fanaticism.
This transition shouldn’t come as a surprise. Not only have markets been roiled by the same events and forces that stoked fear, division, turmoil and mistrust in society at large, but the 2008 financial crisis set back a generation’s earnings prospects and engrained a feeling that Wall Street always wins. Politics appears irredeemably broken, mainstream media is no longer trusted, and technology upstarts that once promised a better and more equitable world have become impregnable behemoths.
And that was before Covid hit.
Young people are starting careers with massive student debts and housing has again become crazy expensive: It’s no wonder they dumped their stimulus checks into the stock market and gamble to keep up. The FOMO is real.
Those who now proclaim a new financial dawn find a receptive audience. Hence the excitement around decentralized finance (who needs bankers?!), and the collective elation during the GameStop phenomenon: Ordinary investors suddenly feel incredibly powerful. “Professional investors would never have paid attention to Reddit boards two to three years ago,” says Tabb. Now they do.
Of course it’s hard to fully rationalize buying a joke dog token or one named after a coronavirus variant — but you only live once (YOLO). And as long as the prices go up, who cares why?
Memes and in-group language foster a feeling of togetherness that people have missed during an insolating pandemic.
Online forums like r/wallstreetbets help day traders to share sophisticated ideas, champion the little guy (it’s often men) and humorously commiserate about spectacular losses.
Users of YouTube, TikTok, Discord, StockTwits and Twitter also push out a wealth of financial information that theoretically enables better investment decisions.
But there’s a catch. The retail investor commandment to “do your own research” sounds responsible, but financial influencers often hold positions in the assets they’re touting. A lot of digital financial content is little more than shilling.