When Social Media Enters the Stock Market

Wall Street Bets

The Greater Fool

The extent to which the Reddit users discussing investments do good is proportional to their participation in the price-discovery mechanism. At its best, social media serves as a forum for retail investors to conduct and share research. Investors, acting on the profit motive, will attempt to discover discrepancies between the price and long-term value of a security.

If, say, a given security’s long-term value is greater than its current market price, investors will buy, raising demand and driving the market price up toward the long-term value. Minimizing price discrepancies encourages efficient allocation of capital, and collaboration through social media allows retail investors to take advantage of research otherwise available only to large institutions.

At its worst, social-media driven investors actively undermine the price- discovery mechanism. GameStop and AMC feature prominently in headlines, but BB Liquidating Inc. best illustrates the patent absurdity of Redditor investing. A remnant of the bankrupt Blockbuster Video, the firm’s latest Form 10-K states that it has “no ongoing business operations” and “will not have any operations in the future.” Nevertheless, in a few days in late January its share price rose 3,000%, giving the company an intraday high of $44 million in market capitalization.

This indicates egregious mispricing. Unlike in value investing, the winners of Reddit-led investing are determined by who gets out at peak speculative mania, a game of financial chicken that less sophisticated investors are sure to lose. There are plenty of retail investors who won’t dump at the peak—only some of the investors trolling Reddit profit. By exploiting the “greater fool,” Reddit users have employed an aggressive and manipulative investment strategy they might otherwise critique if employed by a hedge fund.

—Zachary Stone, New York University, law (J.D.)

Continue reading (Source: The Wall Street Journal)