The Wolf of Wall Street and the “Pigeon of San Francisco”

February 5, 2021

The biggest story on Wall Street for the last few weeks has been the dominance of the “little guy.” Stocks worth $6 per share a few months ago – most famously, GameStop – suddenly skyrocketed to over $360 per share. Incredibly, this had little, if anything, to do with a real shift in GameStop’s business or operations. GameStops are typically located in shopping malls; while malls were declining before COVID-19, the virus dealt a death blow. The video game retailer is closing much faster than it’s expanding. Traditional hedge funds have bet against them for years. So what happened?

Reddit Wins the GameStop Bet

In short, digital organizing on Reddit. A subreddit called “r/WallStreetBets,” comprised of over a million followers, decided to encourage its followers to buy GameStop stock. It seemed more based on principle than a money-making opportunity. Redditors believed “the pros” were betting against GameStop and were using gigs on CNBC to discourage buying. They accused hedge funds of creating a self-fulfilling prophecy that they’d always win the bet.

When the Redditors bucked all of Wall Street’s advice and bought GameStop, it snowballed. The more they bought, the more other people bought, triggering automated programs to buy too. And some Redditors “going to the moon” made thousands: one Atlanta resident has made $150,000 off GameStop alone. He’s paid off nearly $44,000 in student loans, with plenty to spare. Hedge funds, on the other hand, have lost big time. Melvin Capital lost a whopping 53%, though it received an influx of capital to close out its position.

Individual investors have arrived, and they’re stirring up the market. In fact, 2020 saw a massive increase in retail investors – skyrocketing from 10% of the market in 2019 to up to a quarter of the market on volatile days. Some of this resulted from cutting fees and commissions to purchase stock. Plus, apps like Robinhood and eTrade have made trading more approachable. “I’m trading sometimes at Safeway buying groceries,” one investor said. “I’ve traded at a traffic light.” The pandemic no doubt played a role too. With so many Americans furloughed or working from home, the barriers to the stock market have never been lower.

As the GameStop saga proved, when these investors move together, they can make an enormous impact. They might even sink multi-billion-dollar hedge funds. But despite the buying power of individual investors – also known as everyday Americans – the chasm between their interests and the interests of company leaders has never been larger.

Priority Check

As an example, just a few weeks ago, the CEO of BlackRock, one of the largest asset managers in the world, published his annual letter to clients and investors. Despite the immense challenges of 2020 – a global pandemic that has caused thousands of deaths and even more lost jobs, plus roiling social upheaval over the summer and around the presidential election – Larry Fink focused almost exclusively on climate change. “With the world moving to net zero [carbon emissions],” he promised, “BlackRock can best serve our clients by helping them be at the forefront of that transition.”

Mr. Fink addressed all of his “clients,” but in reality, he tailored his letter to a very specific audience. He’s writing to institutional investors living in New York City, San Francisco, Seattle, and other major urban metros, all of whom nod devotedly along to his singular focus on carbon, despite a mountain of more pressing challenges wrought by 2020. But Mr. Fink and the institutional investors represent only a segment of the stock market – particularly now. Climate change is probably not top of mind for many of Redditors who muscled their way into dominance last week. Individual investors probably don’t care much about corporate virtue signaling; they just want the companies to act in a way that keeps their portfolios healthy. Let’s put aside Mr. Fink’s priorities: what would happen if individual investors started talking about their priorities for companies whose stock they own?

Changing the Game on Shareholder Meetings

For now, individual investors like those on Reddit are not organized around shareholder priorities. Very few of them vote in annual shareholder meetings. There’s no massive movement to make CEOs like Mr. Fink pay attention to their interests instead of vague promises towards climate change that really only please Wall Street. But few people could have foreseen the weight these individual investors carried when they moved as a unit and rallied GameStop. They’ve been largely voiceless in the companies they own; maybe today, they will find their voice.