By Jaxson Stewart
Printer go Brrrrr, Diamond Hands, Tendies: These seemingly random phrases lacked any centralized meaning just a few years ago. Fast-forward to 2021, and these phrases command the respect of millions of synchronized stock traders–communicating instantaneously through the online forums of Discord and Reddit.
Game Stonks
If you don’t follow financial news, GameStop, the blockbuster of video games, has recently dominated financial headlines. In January of 2021, GameStop’s stock increased 17X in 27 days and then plummeted, giving up more than 80% of those gains in 48 hours. Pump-and-dumps like the GameStop incident have become far more prominent due to the rise of individual investing and have compounded with the influence of Covid-19. GameStop-gate has highlighted how the stock market landscape has rapidly changed and has uncovered some of the weaknesses of the current system.
This article aims to explain what has changed the stock market landscape, why GameStop-like trends are dangerous, and how to incentivize safer stock trading.
Covid Trading
The GameStop bubble of early 2021 was primarily driven by a new type of investor the pandemic helped create: Young, homebound, more free time than ever, stimulus checks in hand, and easy access to new technology that has made trading easier. All these things have played into the changing market change, and the new technologies especially have given access to new approaches on the investing front.
According to the research journal, the McKinsey Quarterly, “The Internet has changed forever the behavior of investors and investment managers. Low cost, combined with free access to data and research, has made on-line trading a cheap thrill for millions of people.”1
This combined with the other factors mentioned above (many Covid-related) have come together in the last year. These factors have greatly increased the influence of the lay investor, also known as the retail or non-professional investor and the change has had a ripple effect through the market.
As these new investors have looked to educate themselves on the how, what, and why of investing, many have been drawn to pages, courses, and forums found on the internet. In particular, places like Reddit and Discord have become popular among aspiring traders. These forums have become a mecca for novice investors and are filled with both time-tested advice and risky get-rich-quick approaches that draw in those who don’t know what they’re doing.
Reddit and Discord are also where you’ll find the phrases “printer go brrrr,” “Diamond Hands,” and “Tendies” being used like some sort of code in a secret boys-only club run by elementary kids. They’ve become a way for Reddit traders to identify with each other.
Historically, the stock market has been a game for the in-man. A place where stocks move when billion-dollar funds decide to buy or sell stocks on a massive level. The individual investors with their thousands of dollars have never had much influence compared to the large institutions with their millions or billions. When the Covid-19 pandemic hit, though, much of this changed. For the first time, individual investors began pooling their money into stocks they believed in, and these stocks began to move. Enough people were piling into a stock that the price changed.
Reddit has since become a place where individual investors decide where and when to get into stocks, and it has been a serious driving force for possibly the first time ever. Although there have always been a large number of individual investors, they’ve never been synchronized enough to be the force they’ve been recently. This change has altered a good chunk of the investing landscape.
Market Collapse
By this point, you may be asking, “why does the fact that individual investors can change the market matter?” It’s a good question and one that many people have been asking. First off, it’s likely a good thing from a macro perspective, and it puts more control in the hands of the individual rather than the mass corporate entities that make up Wall Street. At the same time, having so many inexperienced traders comes with its own problems.
With the influx of so many new traders, there have been incidents such as the GameStop one where tens or hundreds of thousands of investors get behind a single stock – even if the stock has no fundamental business being bought to buy and sell in a short period of time, often one day.
According to Petri Kyröläinen in the Journal of Economics and Finance, “day trading by individual investors is positively associated with volatility even when general trading activity is controlled for.”2
In other words, day trading, or buying or selling a stock in a single day, causes increased market swings known as volatility. Many millennial investors are day traders, and it’s their day trading that causes these swings in stocks such as GameStop. This is a problem because most of the time the stock price can’t be maintained, and the stock comes crashing down.
Another problem is that investors don’t think they can lose; this is far from the truth. The most common statistic thrown around when talking about day trading is that 99% of day-traders (traders who buy and sell a stock in a short amount of time, often the same day) lose money.
As Meir Statman said during an interview with ThinkAdvisor, “If you give people the sense that stocks and options are easy and that you can simply use rules to figure out when the market is going up or down, lots of people will think that it is so. They’ll think it’s a game in which everyone has the same chance, like a lottery. But of course, the people who make money are the Robinhoods. They tell you that they’re doing it to help you, but Las Vegas wasn’t built on [casino] winners.”3
Statman’s comment highlights much of what is driving the current market conditions: not logic, but hope.
The GameStop problem wasn’t a problem with GameStop, but the wave of investing driven by young inexperienced traders playing the stock market “game” based on feelings and favorites rather than facts and financials.
As Mike Kerins, founder and CEO of Lambertville-based RobustWealth, a well-respected digital wealth management platform, put it, “The decisions to buy and sell are made based on investor instinct or attractive domain names rather than on a careful evaluation of company fundamentals.”4
They were buying because Reddit told them to rather than because they believed in the economic outlook or believed evidence that the failing business model was about to change.
A look at GameStop’s financials shows that the company loses money every year, with revenues falling at least 15% a year (although that has been much higher in recent years). The company is closing more and more stores and has recently needed to speed up the closures to help slow the cash loss. There is no evidence that the company has a plan to stop the decline, and the evidence suggests that they’ll follow the example of Blockbuster and disappear entirely.
Despite some of the most destitute financials and outlooks in the entire stock market, GameStop went from being worth just over 1 billion to be worth 22 billion in 3 weeks. The drive behind it was Reddit users who decided to make it happen. Reddit users wanted to show the big institutional investors that they had a voice, and they did—at least for a while—cost the large institutions money. In the end though, and due to the unprecedented demand, the market had to take action to protect the financial system. When this happened, Reddit traders couldn’t sustain the growth, and the stock came crashing down—costing individual investors untold amounts of money.
Although GameStop is just a small stock that carries very little value in the grand scheme of things, the rise and fall of a stock not backed by any fundamentals put massive pressure on the financial system. Mike Swanson, the CEO of Interactive Brokers—the largest electronic trading platform in the world—said,
“The GameStop [issue] could have crashed the financial system.”5
The fact that this was on the table is concerning and highlights the problem behind the young investment movement when not backed by investing fundamentals. If the financial system had crashed, we could have seen damages worse than in 2008.
Future Solutions
The rise of individual investing is a good thing. It puts financial power and decision-making in the hands of individuals. It can become a problem, though, when the masses team together to manipulate the market regardless of financial fundamentals. Identifying ways to incentivize market stability are within the best interest of the general population.
Some ideas to incentivize smarter investing include tax initiatives that motivate intelligent trading, trade limiting for both individual and institutional investors to promote market stability, and better education on the realities of day-trading. Taking just the last point in that list, huge steps could be taken to ensure safer trading. By teaching that 99% of day traders lose money, aspiring traders will learn to avoid trend investing. Action needs to be taken so that the market power of day-trading youth is minimized while still supporting a free stock exchange so that illogical trading doesn’t continually pose a long-term threat to the health of our financial system.
Bibliography
1. Klein, Christopher J., Nick Malik, and David Warren. “Beyond Day Trading.” The McKinsey Quarterly no. 3 (2000): 34–41.
2. Kyröläinen, Petri. “Day Trading and Stock Price Volatility.” Journal of Economics and Finance 32, no. 1 (2008): 75–89.
3. Kerins, Mike. “The Dangers of Day Trading.” New Jersey Business.
4. Jane, Wollman Rusoff. “Meir Statman: Day-Trading during Crisis ‘Perfectly Normal,’ Doesn’t Drive Markets.” ThinkAdvisor (2020).
5. Swanson, Michael. “Interactive Brokers CEO Says Gamestop Short Squeeze Could Have Crashed The Financial System.” WallStreetWindow (2021).