By Andrew Keshner
Last Wednesday, Michael Farrar parked himself on his parents’ sofa, fired up the trading app Robinhood on his phone and kept Reddit’s WallStreetBets forum open on his laptop.
When he sat up four hours later, the Beaumont, Calif. man was more than $6,000 richer. The 23-year-old’s decision to sell AMC Entertainment /zigman2/quotes/200235402/composite AMC -5.76% stock he picked up at bargain basement prices in mid-March had paid off.
He filled out that profit with trades in companies including Nokia /zigman2/quotes/207421390/composite NOK +1.21% , BlackBerry /zigman2/quotes/202784246/composite BB -0.80% , Express /zigman2/quotes/210459169/composite EXPR -5.37% and yes, GameStop /zigman2/quotes/203755179/composite GME -1.12% , all buzzy tickers on the forum he’d just learned about days earlier.
Last week, investors based on the Reddit group WallStreetBets drove up the prices of shares in heavily-shorted companies, notably GameStop , forcing hedge funds to cover their shorts by selling big long bets. That, in turn, contributed to a selloff that saw major indexes slide.
“It’s obviously pretty exciting. That’s a good chunk of money I didn’t have before,” said Farrar, who skipped a day studying for an upcoming exam to get his accounting credentials.
He plans to re-invest the money in equities. Most of his approximate $62,000 in savings is already tied up in the stock market, much with airline and cruise-company shares he picked up in mid-March, but some with blue chip stocks.
“I’m young and it’s scary having it all in there.” Still, he added, “I feel it’s worth the risk.”
Stock markets are rebounding from Wall Street’s worst week since October 2020 , recouping losses caused in large part by a retail trading frenzy — but analysts warn of more turbulent days ahead.
It’s a dramatic start to 2021 after 2020 ended with consumers opening 10 million new brokerage accounts, according to the Wall Street Journal , leading to the popularization of the term “retail bros.”
The wild ride ultimately won’t end well for some novices, some experts predict, pointing to the late 90s dot com bubble . The frenzy is a “train wreck happening in real time,” according to WallStreetBets’ own founder.
One week before Farrar’s score, Philip Hoeck, 35, turned a more than $3,500 profit by selling 20 options of GameStop stock. He spent $1,240.75 on the play and came back with $4,779.25.
That’s a handsome return, Hoeck said, but a handsome return doesn’t feel the same in this frenzied moment for the stock market. If Hoeck waited a couple more days to sell at the options’ expiration, the returns could have made around $12,000 by his own calculations.
When the market closed Jan. 19, the day Hoeck sold, GameStop shares ended just over $39. Jan. 22, the day Hoeck’s options would have expired, the video game retailer’s shares ended at $65. On Friday, GameStop shares closed at $325, up 1,625% year to date.
“There’s a certain amount of hindsight being 20/20 and ‘man I wish I made this choice instead,’” said Hoeck, an Orange County, Calif. man with time to research and trade because his Disneyland /zigman2/quotes/203410047/composite DIS +0.72% job is furloughed as the pandemic continues.
Hoeck’s brokerage account is just shy of $200,000, which he attributes to the rollercoaster ride the stock market had last year due to the COVID-19 pandemic. “If you were investing, it was easy to make money. You were making money on everything,” he said.
But what happens when it stops being easy to make money? Who are the people primed for a fall if this social media-fueled asset bubble bursts ? It might be the people who can least afford it — especially during the pandemic — research suggests.
Farrar and Hoeck are some of the retail investors winning on the recent price surge from stocks like GameStop and AMC Entertainment. (MarketWatch reviewed data confirming their sales.)
‘I really haven’t seen anything like this’
Farrar and Hoeck are not professional traders, but they aren’t rookies. Farrar started trading at age 18. One of his earliest stocks was Tesla /zigman2/quotes/203558040/composite TSLA +0.13% , which he bought and sold weeks later, long before the electric car maker’s stock soared. “Obviously that sucks, right?” Farrar said.
Hoeck started around age 14 and 15, trading through his father’s custodial account. But Hoeck had to give his dad “at least kind of a good reason for making a choice.”
Both know they are taking on risk. “If everything went upside down, my family won’t let me go hungry,” Farrar said. Hoeck segregates money for his mortgage payments in a separate account.
Joshua White, a finance professor at Vanderbilt University who used to work at the Securities and Exchange Commission, worries about the people who don’t appreciate the risks but still pour in money.
For White, there’s troubling parallels between the price jumps on GameStop and the price jumps, and eventual falls, on promoted penny stocks. “I really haven’t seen anything like this in the listed stock space,” said White, who teaches at Vanderbilt’s Owen Graduate School of Management.
Companies with penny stocks, trading on the OTC bulletin board, don’t have the same reporting requirements as companies traded on major exchanges, White said.
There’s a very rare chance for a lottery-like payout on a win, he said. The investing public has less information to work on, making penny-stock shares more susceptible to market manipulation and artificial price increases that aren’t pegged to the company’s fundamentals, he said.
While at the SEC, White studied the outcomes for more than 200,000 people making 1.8 million trades on over 500 penny stock companies in 2014. He analyzed demographic data on trade orders, like the person’s address, and merged that with Census ZIP code data.
Though two-thirds of all investors lost money, the median losses were deeper for lower-income, older, less sophisticated investors, White concluded. Overall, investors lost a median $89 on shares worth $2,293.
Investors from these less wealthy ZIP codes had a 14.1% median loss, compared to the 13% loss for investors in more wealthy ZIP codes. The people in places with a lower likelihood of a bachelor’s degree had a 14% loss compared to the 13.1% loss for people in places with a greater chance of college education.
Almost 20% of the sample traded out of their IRA account, and they had a 13.2% median loss, compared to the 11.6% loss for people trading out of non-IRA account, the study said.
Almost 8,000 people said they were retired in the trade order’s data on employer information. These investors had a 14.65% median loss, compared to the 11.65% median loss for investors who said they worked.
White found two types of people in his research. “There’s a gambler,” he said. “They see red flags as green flags.” But White added, as the famous Kenny Rogers song goes , they “know when to run.”
And when the music stops? The people still around are those vulnerable investors. The people burned by price spikes and plummets are also less likely to jump back into the market, another study suggests .
“Harmed investors appear to reduce their equity-market participation. In contrast, investors who fared better in such schemes continue to seek risky and lottery-like investments,” said researchers looking at more than 100,000 German investors over a 13-year span.
On Friday, the Securities and Exchange Commission said it had its eyes on “the extreme price volatility” and it would “protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”
‘A lot of WallStreetBets is based on investing feeling’
When Farrar spent hours trading with WallStreetBets on his computer, it was actually one of his first times on the forum. He made his buy-and-sell decisions watching where the rapid-fire posts were focused, he said.
It’s a free market, and “ of course, there will be people that get hurt,” Farrar said. In this context, however, that may be hedge funds shorting stock that now need to unwind those bets at a loss, he added.
“They have a different definition of being hurt,” he said. On the other hand, for “the little people down here” making a profit for now, “it’s a once in a lifetime opportunity,” Farrar added.
Hoeck has been skimming through WallStreetBets for years, though never posting. He doesn’t pretend to give a comprehensive say on what the forum looks like, but he sees a range of characters.
There are the savvy players, like a poster who convinced Hoeck with a good argument on why to buy Callaway Golf /zigman2/quotes/204245174/composite ELY +0.83% shares or another prominent forum member with an unprintable username .
But then, Hoeck added, there’s also some who are “YOLO-ing the $1,200 from their stimulus check.” (In WallStreetBets speak, “YOLO” is shorthand for a big, there’s-no-tomorrow, bet.)
Compared to other Reddit investing forums digging into data, “a lot of WallStreetBets is based on investing feeling,” he said.
GameStop shares are overvalued in Hoeck’s opinion, but he believes that enthusiasm for the stock counts for something. “There’s something there. Maybe it’s right, maybe it’s wrong,” he said.
Fundamentals like price-to-earnings ratios are important, but harder-to-measure buzz and enthusiasm clearly play a role too. That’s what some naysayers get wrong about a stock like Tesla, Hoeck added. “They didn’t account for the hype,” he said.
When it came to his GameStop options, Hoeck had “paper hands.” That’s another WallStreetBets phrase for people who sell as risk grows before a big-time profit.
“It’s kind of disappointing,” Hoeck said. “But at the same time, there’s always another GameStop.”