By Danny Toe, ADDX Founder & CEO
Many headlines, pixels and ink have been generated from the GameStop short squeeze, with much debate as to whether it is good or bad and what, if anything, it means for the markets. To my mind, however, much of the debate has missed a deeper point. Like it or not, these recent events have shown that a new generation of investors are emerging with radically different ideas and expectations about what investing should be. It should also be very clear that this new generation of investors will not be content to play by the old rules.
I’m going to talk at length about this new generation of investors and what they want in this article. But first, since there has been a lot of misinformation surrounding WallStreetBets (WSB) and GameStop ($GME), let’s briefly review the facts of the case.
In 2018 Michael Burry, the investor made famous by The Big Short, identified the shortsqueeze potential in $GME and began buying shares through his private investment firm, Scion Assets Management. Scion continued to focus on $GME through 2019 into 2020.
In 2019, retail investors on Reddit began taking notice of Scion’s $GME position. It caught the attention of Keith Gill, a redditor and Youtuber, who purchased his first lot of $GME options on June 7th, 2019. One year later Mr. Gill posted this now famous video detailing his $GME play. Mr. Gill shared his thesis on Reddit’s WallStreetBets forum and posted regular updates of his PnL. Slowly, as more attention coalesced around $GME, additional WSB members joined the trade, and the stock began to rise. This attracted even more attention, starting an accelerating cycle that culminated in the short squeeze.
At least some retail traders (potentially) made millions while hedge funds lost billions.
How Did This Happen?
In short, this happened because the financial world is changing.
Hedge funds and other institutional investors have traditionally had two advantages over retail investors: information asymmetry and capital influence. Information asymmetry means that Wall Street (or the City of London, or the Hang Seng) traditionally had more useful information than retail. Institutional players used Bloomberg terminals, retail read Forbes.
Just as important were the social circles of people in finance. People normally have social groups based on their occupation. A teacher is probably friends with many other teachers. They talk about teaching, seek advice, offer help, and share new teaching methods. The group can pass around useful information very quickly. Wall Street social groups naturally passed around high quality up-to-date financial information unavailable to retail investors.
Capital influence means the ability for a person or organisation to influence a market simply by the size of deployable capital. When a billionaire appears on TV stating personal opinions about their own business, or a Wall Street fund cuts a stock, the market takes note.
The internet has partially erased these two advantages.
Ordinary investors now have access to high quality, up-to-date information. Watch Mr. Gill’s analysis of his $GME play to see the quantity and quality of financial information available. Chamath Palihapitiya told Scott Wapner on CNBC’s “Halftime Report'' that, “we’re seeing sophistication in retail trading.” Mr. Palihapitiya went on to say that some of the research he has seen on WSB is better than managers he has worked with.
Mr. Gill and others have shown that main street investors’ opinions can now move markets. Platforms like Reddit have given exemplary amateur traders tools to reach large audiences. Young investors are using online gathering spots like WSB to form ad hoc groups whose aggregate capital cannot be ignored.
The new generation of investors are engaging in tactics that were only available to Wall Street players.
What New Investors Care About
Many traditional financial pundits have misunderstood how young people approach investing. Pundits claim that $GME was grossly mispriced far above its fair market value. Author and senior advisor at MIT’s Media Lab Michael Casey disagrees. He recently said, “the whole concept of a market is that there is a collective consensus of what a price is. There is no such thing as a fundamental price. [It’s] a battle of narrative.”
The information age has made young investors keenly aware of narrative. They trade on narrative. Companies with environmental or "green" narratives have performed well, Tesla being the preeminent example. At 1,325x LTP P/E, no traditional investor would have touched such a supposedly overvalued company. A traditional investor would have missed out on the 808% share price increase over the past 2 years.
Mr. Palihapitiya excoriated traditional investors, saying, “who was right on Tesla? I'll tell you who was right: every single retail investor. I was right. Elon Musk was right. Let me tell you who was wrong: every single hedge fund.”
Rightly or wrongly, posts on WSB elevated the $GME squeeze from mere economic gain to question of economic justice. Of the little guys versus the big guys. Of David taking on Goliath. This is a powerful narrative for a generation that was disproportionately impacted by growing economic inequality compounded by the world Financial Crisis in the early aughts as well as the pandemic-driven economic slowdown today.
With information so widely available, this new kind of investor can see clearly the opportunities denied to them. Young investors see traditionally out-of-reach investments like fast-growing, pre-IPO unicorns such as Grab and Robinhood other forms of private equity and they want access too. Likewise, they see and read about hedge funds and other financial industry insiders shorting companies (or shortsqueezing) companies like GameStop and they see no reason why they should not be able to do the same.
It’s worth remembering that the meteoric rise of cryptocurrencies has largely been spurred by younger investors, partially on the belief that they can invest on the ground floor – something traditionally denied to them in the traditional investing world. Blockchain and Decentralised Finance (DeFi) provide opportunities for young people to invest in pre-IPO-like companies.
New Investors, New Opportunities
So what to make from all this?
The new generation of investors, shaped by the internet, is going to have radically different expectations and ideas about investing. The internet has already transformed other industries. Expect shifts in finance on par with those experienced by the music industry and news media and in line with the wants and desires of this rising generation of investors. Entrenched financial players who refuse to change may need to move aside for those that can. New players no one could have imagined will rise up too. We at ADDX are excited to help you navigate the pitfalls and opportunities such dynamic times bring.
ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.