There is a civil war happening in finance.
Normal people are sick of hedge funds and Wall Street taking money from them, as though they are stealing candy from a baby.
The rebellion started with Bitcoin in 2008. A few cryptographers were upset with the bailout of banks that led to the Occupy Wall Street Movement. In the first block of Bitcoin transactions was a hidden message, giving away the genius of his/her/their grand plan.
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This message created a Bitcoin movement. That movement is now worth $580 billion. There are several other examples of the internet becoming a platform to peacefully protest against the conventional way investing works.
The rebellion against Wall Street has been ignited further by a group of Reddit investors known as “Wall Street Bets.”
One user bought a stock called GameStop. They’re an old fashion bricks and mortar shop that sells computer games. With digital downloads being the rage, their future prospects seemed grim. One Reddit user bought $50,000 worth.
Then other users followed along. Everything was fine until hedge funds decided to short the stock. Instead of betting the share price would go up like Reddit users had bet, they placed bets against them, betting the price would go down.
This upset the Reddit users, so they began buying more GameStop stocks. Without getting into the technical side — a short squeeze was created. This meant the hedge funds started losing money quickly. They were forced to buy the stock to escape losing lots of money, which made the price go even higher. Now GameStop is up more than 1700%.
Twitter lit up when Wall Street started to complain. Hashtags like #Stonks, #TheBigShort (classic investing movie), and #HedgeFund continue to trend.
It doesn’t end there, either.
Reddit users have started using social media to pump up unsexy stocks like Blackberry and Nokia. They are purposely pumping unsexy stocks as a rebellion against Wall Street, to show the power of their voice.
The Unlikely Average Investor’s Hero
Chamath Palihapitiya is a billionaire who was an early senior executive at Facebook. He regularly appears on CNBC to talk finance. When asked to comment on this rebellion against Wall Street, he took a different approach.
He empathized with the average investor and reminded us they have been called “dumb money” for years by Wall Street. Retail investing apps have allegedly been helping hedge funds bet against their customers.
Chamath spent hours and hours going through the Wall Street Bets Reddit Group to analyze what was happening. The interview turned ugly. Chamath stood up for the retail investors.
Here are the lessons he shares.
1. Wall Street left many retail investors with nothing in 2008.
Many of the investors rebelling against Wall Street were starting their careers in 2008. The financial crisis, caused by Wall Street repackaging home loans into toxic investments, affected these investors.
They struggled financially. It took them longer to stop living with their parents. They had to take jobs they didn’t want to. While the average investor was left to suffer, Wall Street got bailed out.
There were protests for a little bit….even a Michael Moore documentary on what transpired. Still, nothing ever came of it. Nobody went to jail. Wall Street went back to creating complex financial products. Retail investors began the long process of rebuilding their lives.
Chamath says the average investor didn’t forget what happened. They’re staging a protest, twelve years in the making. They’re taking back the one thing that was taken from them: money.
2. They’re revealing the wild math of the finance world.
When you look at GameStop a normal person would say, “how can you have 136% short interest?
How can you be short 40% more shares than actually exist in the world?
To a normal person that doesn’t make any sense. But to a Wall Street mathematician, that’s the game that has been played for years. And that game came undone.
Much of the finance world doesn’t make a lot of sense. It can be hard to explain to people. The truth is hidden in complex terms and math that takes years to learn. The world of finance is a series of IOUs.
Much of the world’s debt will never be paid back. Complex financial products, known as derivatives, repackage the debt over and over. Chamath knows this. The average investors are beginning to understand.
Terms like quantitative easing, stimulus, and expand the money supply all mean creating money out of thin air. Bitcoin helped the average person understand monetary policy and the money supply.
Reddit investors are helping average people like me understand the false reality of stock prices.
3. Average investors can do the same quality of research as Wall Street.
Technology gave us data. You no longer need to be a sophisticated investor or work in a bank to understand the health of a business and invest accordingly.
Chamath became the people’s champion when he said, “They [Reddit Investors] are as important as any hedge fund.”
The movement is trying to destigmatize investing. Knowledge is what makes people rich in financial markets. Why shouldn’t average investors understand the power of learning about finance to grow their wealth, or protect it from Wall Street?
4. Investing should be a public conversation.
Chamath makes the point that the old world of finance talks about what they know over quiet dinners. Financial information isn’t transparent.
The Reddit investing group has birthed the creation of a public conversation on investing. They have the ability to share what they know and invite finance professionals into their group to help them make decisions. Those experts don’t get a huge bonus for sharing their knowledge, either.
They’re turning investing into a passion, rather than a game rigged against the average investor. Sharing information has the potential to restore faith in the financial system that hurt the average investor in 2008.
Wait a Second…there Is a Risk to This Game
After years of working as a banker, it’s time for me to look at this uprising with a different lens. What’s really going on?
Social media discovered they could manipulate stock prices.
The risk is if this movement catches on it could create all sorts of funny dynamics in financial markets. What caused the housing crash of 2008 was investment firms shorting the market. The Hollywood movie “The Big Short” tells the story in perfect detail.
The same 2008 scenario is happening here. Instead of packaged up home loans, we’re talking about individual stocks. This behavior could lead to average investors getting caught up in the rebellion game.
When reality sets in on the stocks being pumped up, those left in the game could have a lot to lose. The backdrop of the current economic situation makes the risks even higher.
I’m all for Redditor’s noble motto of “be on the right side of history.” But I am not sure where all this ends. The financial markets are upside down. A final piece of sage advice from Warren Buffet is worth remembering:
“Never lose money. Stay rational and stick to your homework when researching businesses in which to invest.”
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.