I was a bored freshman procrastinating on a fateful night in the middle of the treacherous winter when I came across a humble subreddit named Wallstreetbets. Naturally, I had been on the hunt for a respectable introduction into the stock market, and, like those before me, I had been seduced by pundits who claimed to have secret knowledge about the market.
Surprisingly, after hours of reading, it appeared that the populace of the subreddit weren’t as incompetent as I had assumed. It had a humble following of a few thousand, yet the level and accuracy of the research was unmatched. In fact, every single stock recommendation operated more as a defense for why the poster had decided to stake their hard earned money in a specific stock. Fundamentals of the companies were the bread and butter of these investors, and should any poster attempt to use ‘gut-feeling’ as a reason for purchase, they were torn apart by fellow community members and had their posts removed.
To be completely honest, every single profitable investment I ever made originated from a post on this subreddit. Their emphasis on fundamentals was so unwavering, I can claim with utmost confidence that Adam Smith would have teared up at sight of average, untrained investors being so careful and rational in their investments.
Currently, the subreddit boasts a membership of nearly six million registered users, not including the unregistered users who view the page periodically for advice and guidance. The surge of readership was not accidental or random. Earlier in its lifetime, the page became renowned for promoting stocks that were undervalued such as $AMD, $SGBY, and $EVIO to name a few. Most early moderators of the page are now millionaires who flaunt their wealth on the page every day. Yet, the page no longer boasts the economically robust models of fundamental analysis and chooses the route of pure speculation and entertainment.
For example, the other day I came across a post by a wealthy man who had invested $15,417.59 into the following portfolio: $RICK, $AN, $D, $MORT, $Y. He had captioned the image of his portfolio as, “intelligent investor.” As you can see, the ‘investor’ had put in thousands of dollars to spell out ‘Rick and Morty’ with his portfolio. He had carelessly shifted thousands of dollars in order to create a meme.
Unfortunately, the golden age of this subreddit was not to last, and a disturbing trend in the subreddit points to an extremely devolved stock market fueled by speculation instead of fundamentals. Every day, every hour, a new meme of sorts is posted on the subreddit. The problem with memes in the context of the stock market is that these memes are backed by millions of dollars which have a very real and noticeable effect on stocks.
One of the most troubling trends is the spread of the ‘YOLO and trust WSB’ movement, also known as “You Only Live Once and trust Wallstreetbets.” The premise of this movement was to ignore all rational thought and to invest into all stocks promoted by posters on Wallstreetbets as a joke. Amazingly, people loved this idea and millions of dollars flowed into random stocks suggested by uninformed speculators. Random stocks in random sectors of the economy received unexpected volume week after week.
The most unfortunate part of this was that the boost in volume and speculative price tended to boost stock prices very quickly. Large movers then quickly gained attention from investors who weren’t even part of Wallstreetbets. They, seeing a volatile stock quickly gaining popularity, hopped on the trend and even more money swamped into stocks whose fundamentals had barely changed. In this sense, artificial value was added to stocks. This happened with most notoriously with a small company by the name of Signal Bay.
Signal Bay was a relatively unknown penny stock trading at below one penny. In fact, it was trading at $0.001, a tenth of a cent, until a user on Wallstreetbets found it and decided to have some fun. The original post about the company is now deleted, however I was fortunate enough to be on the subreddit when it was posted. Almost comically, there was zero mention of the companies’ fundamentals and the justification for ‘going all in’ was that there was ‘tremendous upside potential.’ That roughly translates to, “I think it’s going to go up, so you should buy it too.” In a week, the stock was trading at $0.16. The stock underwent a 1600% increase because of a joke.
This pattern of speculation is both troubling and nefarious. Normalizing speculation, especially as a joke, floods the market with millions of artificial dollars. These funds then create grossly overvalued stocks in multiple sectors across the market, creating a market that is shockingly susceptible to massive corrections. The overvaluation of stocks has even seeped into the more typical mainstream market.
Frankly speaking, Tesla should not be trading at $316.16; it is a company that has less than 8 months of operating funds left, and the company has never made a profit. And yet the personality of Elon Musk keeps the stock afloat. Belief in the company has outshone its fundamentals, and billions of dollars rest on the relatively weak companies’ shoulders.
Another prominent example is $GE, whose shady accounting history is finally catching up to it. Over the last year alone the stock has corrected by dropping 50.64%, and as a stock primarily owned by ‘institutions,’ the damage of the stock is primarily affecting mutual funds, pension funds, and other ‘safe’ funds. The dangers of overvalued stocks saturating the market are becoming more and more apparent every day, and should this trend not stop, there is a very real threat of an economic meltdown.