How the Reddit mob could be good for shareholder capitalism

If you have spent any time following financial news on social media this week, you will have been told a fabulous story. Ordinary people have had it with establishment Wall Street. They’re furious at the way the banks were bailed out in 2008; they’re angry about the amount of money made by the hedge fund industry; they have had enough of inequality, crony capitalism and a world where there’s one rule for the rich and another for the poor; they’re taking action.

That action comes in the form of mass buying of shares that the hedge fund industry has bet against. It has all been loosely but effectively co-ordinated on social media chat groups – the key Reddit group, r/wallstreetbets, has 4.8 million users. And it has moved the price of r/wallstreetbets’ target stock – a failing computer gaming shop chain called GameStop – up by more than 1,000% this year alone.

It’s very clever. Once you’ve got the share price rising even a little, you force those who have bet against it – by borrowing some shares, and hoping to sell and repurchase them more cheaply – to buy them, too, to cut their losses. This pushes the share price higher very, very fast. Rinse and repeat.

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That means pain for the hedge funds or “Wall Street” (their trading losses are around $5bn so far); pain for the likes of share-dealing platform Robinhood (which provides a “free” trading service that many of the retail traders are using); and piles of money for the little man. How’s that for raging against the machine?

Reddit’s pursuit of Wall Street is a hopeless bet

It’s all nonsense, of course. As a fightback against Wall Street, it is hopeless. The money that banks and fund managers make comes from trading commission and fees – not from their investment performance. If they relied on that, there wouldn’t be a rich person left in New York or the City of London.

As a way to shift wealth, it is equally useless. At some point, fundamentals-based valuations will reassert themselves and the many small investors left in the game will lose a terrifying amount of money. I have no idea what GameStop is worth but I know that, unless the share price is a hyperinflation canary, it most certainly isn’t $13.5bn. Pushing up the price can’t change the value.

The truth is that, despite the passionate open letters on Reddit urging users to take a “once in a lifetime opportunity to punish the sort of people who caused so much pain and stress a decade ago”, the social justice story is probably just that: a story. The real drivers here – and in most market action, by the way – are the availability of money and the longing for more money.

According to a new UK survey by Find Out Now with Boscobel & Partners, 400,000 new accounts have been opened on the main trading platforms in the past year. The survey also found that these account holders are 50% more likely to get investing ideas from social media (“meme investing”) than established investors; they have a higher risk appetite (25% more likely to buy individual stocks and with a tech bias); and their other hobbies tend to include video gaming and online sports betting.

They also have plenty of time. Around 10% of established investors in the UK are furloughed, and 19% of new investors are. No wonder 20% of the trading volume in the UK and US last year came from the retail investors. In the dotcom era, you had to give up your job to become a day trader. Not any more. There’s a large group of people across the world with spare cash, spare time and a preset gambling mindset.

Throw in social media Fomo (fear of missing out), Reddit’s mantra of Yolo (you only live once), and a bull market driven by Covid stimulus, and the GameStop saga looks inevitable. It’s not about The Man. It’s about the money.

But small investors do have some power

Still, there is one story being told here that may endure. There are new investors in the market – and they are learning that, en masse, they do have power. Right now, this means they get to have a lot of fun (as do all of us watching – the whole thing has cheered up my lockdown no end). But there could be more to it in the long term. These investors might remind corporations, platforms and perhaps even fund managers where the money that flows so neatly into their pockets actually comes from.

They might also join together to make stands on issues that really matter. Imagine, for example, that a group called r/shareholderdemocracyaction on Reddit had noticed that GE chief executive Larry Culp was in line for an outrageous $47m bonus if the company’s share price hit $10 – and urged small investors to prevent it doing so. That would send a genuine message about social justice expectations to grotesquely overpaid CEOs everywhere. Or imagine if 4.8 million investors turned up at GE’s next virtual AGM to complain about the $230m Mr Culp will get if it goes to $16.68.

This might be hoping for too much. But the idea that small investors have power – and they can use it to make companies behave as they want them to – is not.

The financial industry will hope that the new energy of the locked-down retail investor doesn’t last beyond their first Covid jab. But it might be better for the rest of us – and for capitalism – if the energy is sustained, and used, in better ways.

• This article was first published in the Financial Times