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As a fan of everything related to investing, I’ve always followed with special interest the events that occur in the financial markets. However, to be honest, my attraction to investing, as the stock market, has been fluctuating over the years. I guess that when you don’t have much money to invest, it’s less funny.
But something that happened during the last months made me focus on it again, and it was not that I won the lottery. I’m still as broke as a university student can be. So, you may be thinking: then, what has changed?
Picture this: a bunch of crazy particular investors – the majority of them from my age – buying GameStop shares as if there were no tomorrow just to piss off the big sharks of Wall Street (and, of course, some of them to make money, but that’s less heroic). It sounds like the plot of a movie, doesn’t it? And yet, this is exactly what happened just a few months ago in January.
The GameStop crash
If you are not really into investing, and you haven’t heard about it, let me make a little introduction. Let’s start with the company.
GameStop is a chain of physical stores selling video games that has been struggling during the last year due to the Covid restrictions and the rise of online gaming. Consequently, the GameStop stock has been going down. This was due to two different reasons: first, because the price is determined by supply and demand. As the GameStop business was suffering, investors didn’t find its shares attractive, and, therefore, the majority of them preferred selling the stock instead of buying. Second, some important institutional investors, due to GameStop’s problems, started short-selling the stock (borrowing stocks and selling them, expecting to repurchase them later at a lower price).
The thing is that some people knew about the short position of the institutional investors, and they managed to coordinate a critical number of people to buy the stock. And they bought A LOT of shares. They purchased so much that suddenly it became viral, and the price of the stock increased about 1,900% in less than a month, causing important losses to the institutional investors.
In my case, I had just arrived in Paris for an exchange and, even though I was quite excited about exploring my new city, I left my expedition for another day. So I locked myself in my room, revisited the YouTube channels of investing that I used to watch to see what they had to say about it, and I laid down in my comfortable new bed to enjoy the show that was happening in front of my eyes. It was incredible, and I must admit that I had mixed feelings.
On the one hand, the narrative of a group of young people trying to change the status quo and taking The System by defeating some of the biggest Hedge Fund firms sounds quite appealing. It is one of those things that you want to believe. Furthermore, it was also quite funny to read all the posts that they were publishing about it. On the other hand, the truth is that among all those investors, there were kids that lost substantial amounts of money as things turned ugly when GameStop stock started to go down. In that sense, I think that it’s hard to determine who lost more money: the particular investors or the Hedge Funds.
Although this action indeed contributed to taking out of business one or two Hedge Funds, I don’t think that this has caused serious damage to the business, as other firms will manage to fill the void. But, more important, I don’t believe that the fall of some Hedge Funds would solve some of the most crucial problems that our society is currently facing.
However, the most striking of all of this is that this was not an isolated event. Instead, it was the manifestation of a new movement that has been going on during the last months.
A new way of investing: Meme investing
By Meme investing, I mean the idea of investing in stocks that are popular on social media.
This trend has already manifested in other public market stocks such as AMC Theaters or Wendy’s and the cryptocurrency market. And if you are a crypto fan, please don’t hate me yet. Or at least, not for this reason, because I don’t mean that the cryptocurrencies are just a meme. I just can’t tell you which role they will play in the future.
What I want to say is that there are some common patterns among both price increases, especially with events like Dogecoin. Behind them, there is a vital group of young retail investors coordinated through the social media platform Reddit.
This group is mainly formed by young people (I would say between 18 and 26 years old) from the western world, many of them with no strong financial background who learn about the stocks thanks to YouTube videos, Instagram posts, and Reddit subforums. They invest with their smartphones through commission-free investing platforms such as Robinhood.
Oh, and I forgot this: they all love Elon Musk. He is their Yoda.
Gen Z is investing right now in financial markets – with caution
Personally, I know many people of my age that are currently investing in crypto and the financial markets. What I can say about them is that the majority are highly appealed by the get-rich-quick schemes, especially since some of the larger social media platforms such as Instagram or YouTube are filled with ads of online courses to achieve the desired “financial freedom.”
The creation of trading apps with no commissions has made investing attractive and easier than ever. This has turned us into a new target for their products, and they know it.
Besides this, they are people trying to find new paths for their futures, different from the ones offered by the universities, because most of them firmly believe that cryptocurrencies are the future. And I think that this goes way beyond the current exchange rate of bitcoin. I think it has to do with the desire of my generation to have a better future and that, somehow, these people are channeling that hope through cryptocurrencies.
What is the future of financial markets?
However, beyond the interesting lessons that all this offers about sociology, I think that it also raises some important questions about the future of the financial markets.
First of all, it shows how the creation of all these new platforms for investing and trading opens the door to new investors. The investment world has flattened as data and tools are more accessible than ever, so experts and portfolio managers are no longer the arbiters of the markets.
Moreover, all these platforms come with a less visible cost, which is the ownership of data. While all these Apps charge no commission, they earn money by selling their users’ data to the Hedge Funds, which gives them an important competitive advantage over retail investors.
In addition, it gives hints about the role that social media could play in the future of financial markets. Forums like Reddit provide the possibility for people from all over the world to exchange and contrast their investing ideas, but it also opens a new field to manipulation. The moderators of WallStreetBets, the online discussion forum where the Gamestop bubble was coordinated, reported that many of the bullish posts were coming from bots. In that sense, it is disturbing to think that bots could reconfigure investing.
Companies’ data have always been a crucial resource to analyze the attractiveness of a stock. However, it is possible to imagine a future where investors analyze the data of social media about the stocks instead of the financial statements in order to identify trends among investors and anticipate them.
I must admit that I have always been a firm believer in Value Investing (an investment strategy that basically focuses on the stock’s intrinsic value), so all these new trends caused me, at first, some rejection. However, I think it is clear the world is changing and that some of these reforms are coming to the financial markets. Of course, we don’t know their exact direction or their future relevance. All we know is that they are coming, and it’s better to be ready… Because who knows, maybe in a few years, I end up having some money in my portfolio.