‘Like a Drug’: Redditors’ Stock Mania Fueled by Gambling High
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Much has been made about the deeper meanings ofGameStop and this week’s market mania: How it reflects the profound inequalities festering in American society, how it’s aclarion call against the Wall Street establishment, or how it’s even the beginnings of an extremely online populist movement ready to take down the powers that be.
But what’s been obscured of late by the morality tale over the unalienable right of Redditors to pump up meme stocks as a way to redistribute wealth is this: that many of these mostly young men, cooped up with little else to do during the pandemic, have banded together for the pure, unadulterated rush of gambling and hitting it big, again and again.
Encouraged by Robinhood’s addictive gamification of day trading and egged on by like-minded Redditors on WallStreetBets, these traders have rejected the tedious, long-term view of the passive-investing crowd. Instead, many are chasing the dopamine high of going all in and getting rich quick on increasingly absurd ’90s-era nostalgia stocks — all while giving the collective middle finger to the Wall Street pros and their valuations.
Granted, this democratization of the markets — billed as a fun and easy way for millennials to accrue wealth — has led to some stellar gains. Yet there’s a fear the freewheeling camaraderie, built upon taking bigger and bigger high-risk gambles in fringy, oddball stocks, is fueling a recklessness toward investing that will ultimately leave most with less money, not more.
“It’s very much like a drug,” Kelly Mothner, a licensed clinical psychologist in Hermosa Beach, California, who specializes in gambling and addiction, said of the stock frenzy. “It’s big and it’s strong and it’s powerful and you want more of it. The thrill of it is creating a dopamine rush, which is pushing people to be very impulsive, with the notion that there’s something really big on the other side if they just keep at it.”
Whenever Robinhood sends confetti to app users who place a trade, for example, it’s “kind of like with slot machines, they’re so colorful and loud and noisy,” Mothner said. “Those little jolts feed the desire to keep going.”
Robinhood didn’t immediately respond to requests for comment.
Of course, there’s always been a certain casino-like quality to investing. It’s precisely the kind of critique those on Robinhood have leveled at high finance: That when pedigreed hedge funds risk it all and win, it’s savvy investing, but when ordinary investors hit a big number, it’s gambling.
Yet it’s hard to ignore this week’s sheer extremes and the way these retail traders, 10 months into the pandemic, are plowing en masse into a variety of obscure names for maximum rush and volatility. And it’s no coincidence the gambling craze in financial markets emerged after the pandemic shutdown sports and the booming business of online sports betting.
Read more: In 11 Hours of Pure Mania, 100% Rallies Popped Up Everywhere
“What we saw when the sports stopped in March, it was like a petri dish for this,” said Ed Miller, a poker author and co-founder of Deck Prism Sports. “There is definitely clearly gambling energy, for lack of a better term, that when certain outlets are cut off gets re-funneled into others. I think it’s clear the markets have taken that.”
Those forces came to a head this week in GameStop. Its shares, which fell as low as $2.80 in April, had been slowly and steadily rising in recent months as users on r/wallstreetbets, the profane and meme-driven Reddit forum for stock tips and speculative trading, began to coalesce around a longshot bet that the mall-based seller of video game discs was actually deeply undervalued.
Soon however, fundamentals took a backseat. Last week, the WallStreetBets crowd began to wage a campaign to push GameStop shares higher after a critical tweet from noted short-seller Citron Research. Melvin Capital, which was also betting on GameStop’s decline, soon came into the crosshairs. GameStop meanwhile soared to stratospheric heights.
Read more: How WallStreetBets Pushed GameStop Shares to the Moon
By the end of the week, Citron and Melvin had both capitulated, serving as a proof-of-concept of sorts for WallStreetBets’ buy-and-never-sell mob strategy. All told, GameStop’s astronomical 1,625% rally this month to $325 a share has inflicted nearly $20 billion in losses for short sellers, according to data from financial analytics firm S3 Partners. Many of the WSB “degenerates,” as the users are called, crowed of the small fortunes they made squeezing the shorts.
The mania quickly spread to other meme stocks like BlackBerry, AMC Entertainment and Express, which each soared to highs unseen in years. The surge in trading activity, and the tremendous volatility it caused, prompted Robinhood and other online brokerages to restrict purchases of some of the Reddit-fueled names, sparking outrage on both sides of the aisle in Congress, and sowing darker, conspiratorial motives among WSB users.
As the GameStop saga seeped into the public consciousness and the mainstream media began to pick up on the seemingly unbelievable turn of events in one corner of the stock market, the focus turned to trying to understand how it all happened and explain what it all meant.
Some pundits saw shades of the original Occupy Wall Street movement. Others viewed the episode as a symptom of the frustrations of the millions of have-nots created by late-stage capitalism in the U.S. Many on WSB even cast themselves as righteous populists who saw GameStop as their Rubicon and claimed to be willing to burn it all down to expose the hypocrisy of the 1%, losses be damned.
But trying to find a deeper meaning masks a basic and undeniable fact: gambling is fun — and addictive, especially when you win. What’s more, forums like WallStreetBets provide a much-needed sense of community for young, lonely, and arguably financially insecure bros (and by all accounts these are overwhelmingly men) during an interminable lockdown.
“People are looking for social connection and being part of something,” said Dan Egan, managing director of behavioral finance and investing for robo-adviser Betterment. “This is a really interesting participation sport. You can cause the price to move, you can help your team win. The ability to do that is very, very attractive.”
If the stock market has become a game, apps like Robinhood are its arenas — and tickets are free. Robinhood was already under scrutiny for “gamifying” trading. In addition to the confetti, members have a chance of being awarded shares of companies like Apple if they can persuade a friend to sign up. A list of the app’s 100 most-popular stocks are published on the website.
All that fanfare serves to make investing seem more exciting than the droll advice typically shelled out by financial advisers: diligently set aside a portion of your paycheck each month into index-tracking funds and forget about the market’s ups and downs.
While the goal is to accumulate wealth over the course of a decades-long career, it requires a certain discipline and a modicum of financial stability many ordinary Americans simply don’t have. Long-term investing also lacks the lottery-esque appeal of a stock like GameStop popping 134% in a single day.
“It’s not WallStreetInvestments — it’s WallStreetBets,” said Eric Mintz, co-portfolio manager at Eagle Asset Management. “There’s a gunslinger mentality. Making a lot of money is a sexy idea.”
That type of fervor was on full display this week. Redditors not only pushed up shares of Tootsie Roll and a handful of stocks that have tickers starting with “BB” (in a seemingly ironic and goofy WSB homage to BlackBerry), but also caused shares of an obscure oil company called New Concept Energy, which employs just five people and appears to produce negligible amounts of oil and natural gas, to skyrocket almost 1,000% in a single day. YOLO indeed.
Unsurprisingly, the degree of speculation in GameStop and other meme stocks has Wall Street warning that the end will be painful. And popularity also doesn’t guarantee profits. One academic paper on the Robinhood phenomenon last year concluded intense buying on the app was linked to future negative returns.
“The reality of the matter is that over a long period of time, long-term investing is frustratingly boring,” said Ben Johnson, director of global ETF research at Morningstar Inc. “The outcome of this is that a lot of these people are going to learn probably painful lessons and have a moment where they’re going to rethink their approach to investing.”
— With assistance by Vildana Hajric
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