If the stock market feels more like a casino to you these days, you’re not alone. The subreddit community r/wallstreetbets is being at the very least disruptive to conventional ideas of investing. This is a group of committed traders who identify stocks that they believe carry a high short selling risk.
Short selling, as we discuss later in this article, is a common practice. However, it does tend to benefit the institutional investors more than the little guy. And while sticking it to the hedge funds may not have been the original mission of the group, it has become its fixation.
This fixation is played out in the many “meme stocks” that have outperformed the market. This is despite the fact that many of these stocks offer little tangible reason for investors to buy shares. However, this group which colloquially refer to themselves as “the apes” are not interested in the old methodology of investing.
In this article we’ll provide a brief history of this group and we’ll provide a short list of some of the stocks that are currently capturing the group’s attention.
How did WallStreetBets get its start?
WallStreetBets was created as a sub category of the Reddit forum (otherwise called a subreddit) in 2010. The group’s founder Jaime Rogozinski was seeking to build a community who shared his passion for high-risk trades. In fact, Rogozinski says that one thing that inspired him to create WallStreetBets was because followers would say his investing style was similar to gambling.
However, until 2020, the group was largely a fringe group on the internet. In fact, it took until 2017 for the group to reach 100,000 subscribers. However, in 2020, a number of factors combined to take the group to where it is today at over 5 million subscribers.
First, the Covid-19 pandemic gave many would-be traders time on their hand and few entertainment options. Then, you had stimulus money that these investors could use as “seed money” for taking aggressive market bets. And these investors also had access to trading apps such as Robinhood and Webull that allow commission-free trading.
It truly was the perfect storm for WallStreetBets.
Understanding short selling
If you’re new to the WallStreetBets phenomenon, it’s helpful to understand the concept of short selling. In the investment world, short selling is a common type of trade. In a short sale, a trader sells an asset that they do not own. Specifically, an investor borrows an asset (e.g. shares in a particular stock) then agrees to buy it back on a specified later date and return it to the asset’s owner.
The expectation in a short sale is that the asset the investor is borrowing will drop in price. This means the investors can make a profit by selling their shares (which they don’t own) at a higher price and buying them back at the lower price.
Short selling is done on margin which makes it one of the riskiest forms of investing. This is because the potential for loss is nearly unlimited. Nevertheless, hedge funds engage in the practice of short selling quite often. And that’s where WallStreetBets enters this discussion.
Sticking it to the hedge funds
It has become the primary mission of WallStreetBets to “stick it to hedge funds” and they do this by creating what is known as a short squeeze. Here’s how that works. As we pointed out above, short sellers make money when they can sell stock at a higher price and buy it back at a lower price.
However, if the stock price starts to go up, short sellers will lose money. And if the stock continues to go up, the losses are potentially infinite. Plus, it can lead to other negative consequences. Fees can rise and/or the original investor (which can be another brokerage) will want their stock back. When this happens, the short sellers (i.e. “the shorts”) will have to cover their losses by buying the stock back at a high price. This of course is why certain stocks have gone “to the moon” in the words of the WallStreetBets crowd.
What stocks are capturing the attention of WallStreetBets?
GameStop (NYSE:GME) was not the first stock to capture the group’s attention. But it has become the symbol for the group’s mission. Although GameStop is pivoting towards an online model, there is little about the company’s fundamentals that suggest it will be a significant player in online retail. And it certainly isn’t worth the premium price that it has received from this group of traders.
Other stocks targeted by WallStreetBets include AMC Entertainment (NYSE:AMC), Clover Health (NASDAQ:CLOV), Blackberry (NYSE:BB), and Tilray (NASDAQ:TLRY).
But perhaps the most widely known stock owned by the WallStreetBets crowd is Tesla (NASDAQ:TSLA). This group is largely responsible for TSLA stock being up over 240% in the 12 months ending in June 2021.
The final word on WallStreetBets
You need to look no further than the words of founder Jaime Rogozinski who said he was looking to build a community, “a place for people to talk about high-risk trades in an unapologetic way for people to make some short term money with disposable income."
Two things in that statement jump out to me. The first is “short term money.” That fits what Rogozinski describes as an investing style that’s similar to gambling. Also, the emphasis is on disposable income. In the initial run-up in GameStop many investors professed that they knew exactly what they were doing and were willing to risk it all because the money they had put in was truly disposable income.
The bottom line is that groups like WallStreetBets may not fit your investing style, but they are likely to disrupt the market for years to come.