Rumors and market agitprop are not new on Wall Street. In the 1920s, short sellers would spread malicious rumors in coordinated “bear raids.” A century later, 1) Information travels many times faster; 2) Photoshop, deep fakes, site hacks and other digital chicanery allow the creation of highly realistic counterfeits; and 3) Coordination among participants via social networks with significant firepower—capital—gives these actions market-moving heft.
4. Work from home: Many stuck at home because of the pandemic and denied their normal distractions, have turned to the stock market for entertainment. This has had a real impact on volatility and prices. Take the crew at r/WallStreetBets, throw in Twitter, add free trading apps and you have the perfect formula to launch a new generation of day traders. Having already seen this movie many times, we know how it ends.
5. Passive indexing: We had been repeatedly told pre-pandemic that the huge sums of money going into funds that mimic the performance of some benchmark was dominating everything; it was an antitrust threat, a means of price-fixing collusion, a destroyer of price discovery and spelled the end of active investing.
As it turned out, absolutely none of this was really true. Active investing remains the dominant style of investing for stocks, bonds, real estate and commodities. And the lack of active investment on the part of retail investors created a form of pent-up demand for the thrill of trading. It will be interesting to see if this continues once the pandemic is over.
There is no small irony in these observations: We live in a golden age of journalism, content and commentary—an embarrassment of riches that is eclipsed by the dire financial conditions of old media and the worst elements of social networks. This era is fraught with misinformation, driven by social networks that iterate algorithms to expertly manipulate dopamine-driven human behavior. It presents a clear and present danger for investors.
Think before you retweet, and think twice before clicking that “buy” button on your trading app. Your future self will thank you.
Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of Bailout Nation.