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‘You never outwit Wall Street’: Journalist Spencer Jakab on GameStop, meme stocks, and the failed Reddit revolution

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Podcast & Video

This episode of Hub Dialogues features host Sean Speer in conversation with Wall Street Journal editor and journalist Spencer Jakab on his new book, The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors. They discuss GameStop and the meme stock revolution of 2021, the story behind how it took off and why it ultimately failed, and how to truly beat Wall Street at its own game.

You can listen to this episode of Hub Dialogues on Acast, Amazon, Apple, Google, Spotify, or YouTube. A transcript of the episode is available below.

Transcripts of our podcast episodes are not fully edited for grammar or spelling.

SEAN SPEER: Welcome to Hub Dialogues, I’m your host, Sean Speer, editor-at-large at The Hub. I’m honoured to be joined today by Spencer Jakab, editor of The Wall Street Journal’s popular Heard on the Street column, and author of the new book, The Revolution that Wasn’t: Gamestop, Reddit and the Fleecing of Small Investors. Spencer, thank you so much for joining us on the podcast, and congratulations on the book.

SPENCER JAKAB: Thank you very much. Nice to meet you.

SEAN SPEER: Let’s start with some basic concepts and facts before we dive into the book and its key insights. What is a meme stock and how did Gamestop, a pretty ordinary video game retailer, become one?

SPENCER JAKAB: So a meme stock I think, loosely defined—a meme is a symbol used to communicate online, which, the younger you get, the more popular it is—but a meme stock is a stock where the whole interest in it originates online, in social media, most likely on a subreddit on Reddit, like Wall Street Bets or Superstock. So that’s where the fascination with it is and that’s where it’s, at least temporarily, that’s what its value arises from.

SEAN SPEER: And again, just setting the context, why were major investors shorting Gamestop in the first place? What was behind the short positions of companies like Melvin Capital?

SPENCER JAKAB: Okay, so short selling—I know not everyone listening is intimately aware of short selling—and short selling is a normal activity that has always existed as long as there had been financial markets. You know, there are two things that you or I will do, or that any normal investor will do when looking at an investment, like a stock: you can buy it or you can not buy it. But short-sellers offer a third choice, which is they can bet against it. Because at any given time, that’s not a terrible bet. Some stocks are going to go down. Actually, most stocks do quite poorly. Most of the stock market’s performance is concentrated among a few stocks; stocks get too expensive, maybe they’re fraudulent, or some bad news is expected, or some bad news is expected about the overall market. So the way that they do that typically is without owning them, they sell them, they sell a stock by locating a borrowed share somewhere, they say, “Hey, I’m gonna borrow your share, you don’t need to actually do anything, you just need to pledge the share to me and say that I borrowed it. And I’m going to sell it. And I’ll sell it at $10. And when it gets down to $8, I’m going to buy it somewhere in the market, and then give it back to you. And I just made $2, everyone else lost $2. And I made $2.”

It’s a pretty tough bet to make. And if you think about, unless you use borrowed money or something like that, you as an investor, the worst thing that can happen to you is you lose all of your money in a stock or a fund that you purchased. You lose 100 percent. They’re not going to come to take your house or your car, you just lost your money. And the most you can make is infinity. Stock won’t go to infinity, but it can go very, very high. Some stocks have appreciated tens of thousands of percent over the years. For a short seller, that formula is reversed. The most that they can do, if they bought Enron the day before it went bankrupt, the most they can make is 100 percent very quickly. The worst they can do is lose infinity and their losses are unlimited. So they have to pick their spots very carefully.

Now, why did they do that, you asked me? So there are some people who are dedicated short sellers, they’re looking for stuff that’s a dud. But that’s a minority. Most short sellers, and Melvin Capital you mentioned is the one that is played a starring role in my book but there are others, they do it as a course of business. So Melvin Capital, they invested in consumer and retail stocks and things like that. So I don’t know that this specifically was their position on that maybe they said Best Buy which was a big chain here and I think in Canada too. Best Buy, I like their business, I think it’s going places but instead of just buying Best Buy, I’m going to also sell short Gamestop, which I think is a bad business that’s been losing money, their business is very poor. Let’s say it’s a good year for all retailers, then maybe both of them will go up. But Best Buy will go up more. Or if it’s a really bad year, for the whole stock market or for retailers, then both will do poorly. But Gamestop will do worse because, in his judgment, it’s the worse stock. So it creates some sort of a buffer to his portfolio. And in addition to that, it creates a form of borrowing. Because if you sold a stock, then you have the cash that someone paid you to sell the stock without having owned it. And you can use that borrowed money and buy more of the stock you like. So it’s a way of making big, concentrated bets. Now, Melvin Capital, specifically, was very successful at this until this episode in which they had a really, really awful time, putting it mildly. So they earned above-market returns by doing this. So that was the setup going into this episode.

SEAN SPEER: That’s great, Spencer, thank you so much. If I can just ask one more contextual question and then we’ll move on to the book and its fascinating insights and analysis. What is a stock market corner? And why is it illegal?

SPENCER JAKAB: Okay, so in the bad old days, or good old days, whatever you want to—you know, I love financial history and I mean, the history of stock markets goes back to the Dutch in the 1600s—but as recently as the 1920s and 1930s here in the United States, you had all kinds of wild and wooly things happening in the stock market. It was mainly the province of rich guys competing with other rich guys. And they would try to outwit each other, it was a total battle of wits, often doing things that are completely illegal today, like watering stock, where they would take control of a company and then issue a whole bunch of stock without giving notice and then ruin somebody else. Or they would get voting control through some maneuver. And a corner is one of those things that you used to see happen that you never see happen anymore. Which is—there’s such a thing as a short squeeze, which does happen quite frequently, which is these short sellers, the stock starts going up for whatever reason, usually not any kind of a conscious decision by somebody, but it starts going up, they had good numbers, somebody wants to buy it, attitude changes, there’s some piece of news, and it starts to go up. These short-sellers are suddenly losing money, and they have to be very, very careful. If a lot of people have bet against a certain stock, and Gamestop was a stock that a lot of people bet against, then it’s like a whole bunch of people being in a theater and someone yells “Fire!” and there’s just one door, right? They need to head for that door, and some of them are gonna get trampled on the way out. So they’ll get hurt as they try to leave. Now, a corner is intentionally trying to do that, but it’s even more than that. A corner is when you try to buy up all the stock.

You could still do it in the commodity markets, although not very easily. There was a famous corner in 1980, in the silver market, where two of the richest men in America tried to literally buy up all the world’s silver over many years, and then also show up and say, “Haha, we have all the silver and you guys are selling silver short, and you need to pay us any price. You have to pay us infinite dollars, you know, for an ounce of silver and you have to pay us otherwise you’re bankrupt.” And they wound up going bankrupt. But that’s something that you cannot do anymore in the United States or really any developed market because it’s like ganging up on people and you’re doing it in secret, and it would involve collusion.

What makes this story so interesting is that it was an attempt at a corner, that, it’s a little bit of a fuzzy gray area, but as far as I can tell, was basically legal and you couldn’t crack down on it anyway. Which is a bunch of people individually doing it out in the open, just discussing it on this Reddit forum. And that’s crazy. I mean, how would you have ever gotten away with that? Well, the only way you could get away with that is if you’re discussing it on a forum that nobody on Wall Street takes very seriously they think is like a big joke. Maybe some of them even saw it and told their boss and their boss is like, “What are you wasting my time with? Like these guys who post memes and stuff like that?” But there were some people on these message boards who were pretty financially savvy. We don’t know who they are, but, probably, they worked in finance. They said “No, no, no, this is how you have to do it. This stock is sold so short, it’s more shorted than almost any stock has ever been in history, because it’s a loser. It’s GameStop, it’s been losing money for years.” And they pointed out other stocks too, later, that were in a similar position. And they said “These hedge funds, you can blow them up. And don’t you want to blow up hedge funds? Yes, because we hate Wall Street and hedge fund managers are like the cartoon villains of Wall Street, so let’s bankrupt these guys.” They were talking about it openly. And until it was too late, nobody did anything to stop them.

SEAN SPEER: That’s just a masterclass, Spencer, helping to situate the book in these complex financial structures and arrangements. So I’m very grateful.

Let me just take you up on the last point, though about the particular case of GameStop. A common narrative at the time was that this was about retail investors sticking it to hedge fund managers in particular, and Wall Street more generally, as you say. It took on a David versus Goliath quality. Why did that narrative first take shape? And kind of fundamentally, what was it speaking to?

SPENCER JAKAB: The generation primarily that took part in this—and I go into this a lot in the book, and I mean, the story is fascinating. But I think the economic and the social backdrop, and the industry backdrop, the social media industry, and the brokerage industry—it’s, you know, it’s not too complicated the way I describe it, I hope. But I think that that is just as interesting because the conditions were set for this. One of the conditions is that the generation primarily that contributes to this, their formative experiences as children, teenagers, maybe as young adults, was the financial crisis. I mean, it’s not totally untrue, but it’s not that simple, either. But they look at Wall Street, and they say, “Wall Street, that’s why my parents lost their house, or that’s why my dad lost his job, or that’s why my parents couldn’t pay for me to go to college, because they lost all this money in the stock market.” Or whatever. Or they know people who were in that situation, and Wall Street didn’t pay the price. “I want to extract my pound of flesh. I don’t have anything against rich people per se. But rich people on Wall Street, I don’t like that. I like Elon Musk and cool rich guys, but I don’t like rich guys who put on a suit and make money from other money.” So there was already an underlying resentment there, that is part of it.

Part of it, then, is that in the United States, sports gambling which was the one of the few areas of gambling that is more popular with young people and older people, was legalized in many states in 2018 and 2019. So you had a lot of young men—and I have three sons, two of them are young adults, and one as a teenager. I’m totally, just constantly shocked by by their friends’ behaviour and stuff like that. It is extremely widespread, extremely widespread. At first, it was daily fantasy sports. But then it morphed into using the very same apps for sports betting through their smartphones. It was a thing that probably most young men in their early 20s did. So this kind of gambling mentality was there. Then you had the stock brokerage commissions that were brought down to zero by Robin Hood, specifically. They weren’t the first to do it, but they were the first to really make a lot of success. Half of the new brokerage accounts in the five years leading up to the story in America were opened in this one really small broker, and it was small money accounts. Accounts that are way smaller than other people. How can they do that? How can they charge zero? And how can they have customers with so little money? Well, because they were very good at getting people to be really active in the stock market. And what wound up happening too is that every other broker in late 2019, every other discount broker threw in the towel and said, “Screw it, we’re charging $0 commissions too, and we make our money mostly other ways anyway, we’ll give up that income because we can’t compete with these guys.”

Much to their surprise, their turnover exploded, because their customers loved it too. Because it turns out, stock trading is fun. You know, if you take, and you’re from Canada, so this is a good example for you, a snow shovel. I don’t know how many snow shovels you have in your house, we have one. Maybe if snow shovels were free, I’d buy a second one because I have sons, and I’d like them to help me. I wouldn’t get 10 snow shovels, even if they cost a penny, because who needs that many snow shovels? It’s something that’s useful and boring. But stock trading, it turns out, is not something just useful and boring, it’s something that’s a lot of fun, especially for these young people, especially during wild times in the stock market. And so they should have known, but they didn’t understand their own business that well, and they saw an explosion in their business and they were delighted. Every broker saw an explosion in business, especially when the pandemic began because you had young people who all of a sudden had no sports to bet on, nothing else to do, no social outlets for a while, lots of unforced savings, and here in the United States stimulus checks from the government on top of that. That was more money than they really had ever had in some cases and they were bored out of their skulls.

They said, “Hey, why don’t you start stock trading?” The way that Robin Hood specifically and its imitators got new customers was that it wasn’t advertising. They did advertise. It was that they got their customers to recruit other customers. So if you open an account, you get a mystery-free share of stock, even if you just put 20 bucks into the account. It could be $100 stock, and then you made five times your money without doing anything. But it could be a $5 stock, which it usually was, but you got to free share of stock. It’s random. Then if you get a friend to sign up, every friend you get to sign up, you get a referral code for another free share of stock, another lottery ticket, and they get one too. So it spread like wildfire, through basically friendships. And when you open an account when you’re you’re like—I hate to stereotype, but I will—you’re drunk at a frat party and your friend says, “Hey, you should trade this stock and you should do this.” And you say, “I don’t have an account, dude.” “Yeah, just set up a Robin Hood account.” And five minutes later, even though with the other brokerage accounts, you had to wire them money from your bank and it was complicated, it was easy with Robin Hood because they gave you money right away. They said, “Yeah, we know the money’s coming. Listen, you can use our money for a few days, we know you’re good for the money and you can start trading right now.”

So five minutes later, you’re buying a stock. You didn’t even have time to cool down and stop thinking about it. All of that led to an explosion in activity, in terms of the overall turnover the stock market, you had an explosion, but then the share that was made up of small individual traders quadrupled, roughly, in the period of a year. It happened at a time where you had the most wild market ever. Remember that the stock market plunged; you had the most rapid ever fall from an all-time record to a bear market ever, ever, ever. Then you had, by an order of magnitude, the fastest ever recovery. And in that year, following the bottom of the market, 96 percent of stocks rose. So you know what? It wasn’t like sports betting where it’s kind of like a 45/55 wager, it was a 96/4 wager, and almost everything went up. The key wasn’t making money, the key was finding the things that made the most money. So everybody felt like a genius and success is a very bad teacher in finance; in anything, but it is a very bad teacher in finance if the first thing that you experience is an uproarious success. And you know, your parents or your parents’ friends, your parents’ stockbrokers saying “I wouldn’t do that.” You know, and he’s wrong and you’re right. And you got advice from some random person on social media, who turned out to be right, and your dad’s broker at Morgan Stanley was wrong. Well, guess what? You’re going to keep on trusting those people. So it was a perfect formula for an influencer-driven, crazy thing to happen in the stock market. And then we got to the Gamestop squeeze.

SEAN SPEER: So let’s pick up the story there. You’ve explained how meme stocks, in general, can take shape. How did Gamestop become a meme stock?

SPENCER JAKAB: So Gamestop had a few characteristics. One is that it was a very bad business, it had been losing money for years. It just reported earnings the day that we’re speaking, I know this is recorded, but it reported earnings last night and it reported its fourth consecutive year of losses. So it still is a money-losing business. That’s not, generally, a business you want to invest in. And it’s a business that’s been kind of digitized or was being digitized out of existence because people bought—and I know this very well because I made fewer and fewer trips there with my sons as they kind of weren’t buying discs—they were buying stuff online. They didn’t need to go to a brick and mortar store anymore. So people like Melvin Capital and Gabe Plotkin felt very safe betting against it. Too safe. And they felt very unsafe betting against other stuff, all kinds of other dumb harebrained stuff was going up, even if there was bad news. So if you’re in the business of selling stock short, or at least that’s part of your business, you’ve had an awful year in 2020, because all kinds of insane stuff went up a lot. But here was something no one was gonna get interested in right? There was GameStop, there was AMC, the movie theater chain that was months away from bankruptcy because it was a pandemic and people are streaming movies now. And there was BlackBerry, pride of Canada I know, but I have not had a Blackberry in a long time and you probably haven’t either. There was Nokia, you probably haven’t had a Nokia phone in a long time either. And there’s Bed Bath and Beyond, which is a retail chain here that was being Amazon-ed out of existence. So companies like that, they all had a lot of people feeling very safe betting against them.

What was the worst thing that was going to happen? Maybe somebody would show up and buy GameStop for 50 percent more than it was trading for in the stock market. And then you’d have a really bad day as a short seller. You wouldn’t be bankrupted, you’d just lose money, right? No one thought that, it would go up 2,000 percent, right? I mean, that was just not in your financial model. So that’s why those stocks. But also Gamestop specifically was, for these mainly young men, was a part of their childhood. They felt more emotional about it than they might have felt about a different stock. They were totally familiar with this business because they had been, just like my sons, they had been frequent visitors to it and there’s a very heavy overlap between gamers and people who are doing this; 100 percent, almost, right? They conflated hedge fund managers, who they already had an inclination not to like, betting against it with them wanting to put it out of business, which is not the same thing. Betting against a company is not trying to put it out of business. It’s betting that the stock price is gonna go down. It’s counting on it going out of business maybe, but it’s not causing it to go out of business, which is a subtle but important distinction. Anyway, so that’s why Gamestop came into this and Gamestop was the most heavily shorted stock out there. You had some colourful characters show up and make the opposite bet. Ryan Cohen, also Canadian, a lot of Canadians and Canadian stuff to talk about here. Ryan Cohen, who’s in the U.S. now, lives in the U.S., but he grew up in Canada, born in Canada. An entrepreneur who started Chewy.com, who is a millennial who showed up with a big stake that really lit the fuse in the late summer of 2020 for this episode that reached its crescendo in late January of 2021.

SEAN SPEER: So at that point, it seems to me it’s worth asking about the book’s title because it alludes to that crescendo. Why, in your view, did the revolution fail? Why was, in the end, the narrative about taking on the hedge fund managers and Wall Street wrong?

SPENCER JAKAB: I have to say that there are people who are gonna say, “It didn’t fail for me. I bought it, I made 10 times the money and I sold it. So you don’t know what you’re talking about.” When you’re talking about a group of a million or two people, you’re talking about them in aggregate, not individually. So just put that out there. Yes, I understand that, of course. But they had two goals. They didn’t all have the same goal, some had one, some had the other and some had both because this group is not a monolith. But basically, their two goals were stick it to the man by giving Wall Street a black eye and make a ton of money. As a group, they failed on both counts. And I’ll explain. The Wall Street part is very simple. Why they failed is because Wall Street is a really big place. There were a whole bunch of hedge funds that made money on this just by dumb luck, being in the right place at the right time or jumping on the bandwagon, or identifying this. There are a whole bunch of people on Wall Street, who are not in the risk-taking business, like Robin Hood, the main broker, that had a bonanza. There were a whole bunch of companies called “market makers” that specifically thrive from the surges and activity in usually thinly traded stocks that made billions of dollars during this episode. So the money made on Wall Street far, far, far eclipses the money lost. And I think that if you have a kind of a cartoonish version of Wall Street, and you watch Billions, and you think that it’s Bobby Axelrod, and that’s it and he’s Mr. Wall Street. No.

There are tens of thousands of people on Wall Street. They liked this, they always like it when lots of fresh money shows up and thinks it’s going to outsmart them. You never outwit Wall Street as a group. Individually, maybe yeah, but as a new group coming to Wall Street that thinks it’s figured something out? Never. That’s why I call it the fleecing of small investors. Because small investors are regularly fleeced on Wall Street. They’re fooled into thinking that they can beat it. That’s Wall Street’s marketing message is: “You’re an investor, you can do this, you should try this, you can outsmart us.” It’s playing to all kinds of human psychological foibles and flattery. The exact opposite is actually true. Not only should you not try, you really should not try. You are not a good investor. We humans are just not good investors. It’s the human condition. It has nothing to do with your smarts, it has to do with your wiring. It is the way that our brains are wired through thousands of years as hunter-gatherers, that we are fearful when we should be greedy, and we’re greedy when we should be fearful. It’s very difficult to overcome. Even if you intellectually understand that you should behave the opposite way, in the heat of the moment, it’s difficult to act that way. So most people are very bad investors and Wall Street doesn’t care. They want your money. They want to bring you in. They want you to be as active as possible in the highest cost thing possible. And this was the most lucrative way to make money from young people with not very much money: to get them to be very active. They weren’t going to pay you a lot of fees because they didn’t have a lot of money to pay in fees. But if there was a hidden cost to their activity, which was hyperactivity, then that was great, and they really perfected it with these brokerage apps like Robin Hood.

SEAN SPEER: Let me take you up on the point of Robin Hood. One of the most contentious developments in the entire episode was the suspension of trading GameStop on the platform. It led to claims that the market was rigged, and even for a while, achieved a degree of bipartisan consensus, which is hard to do in the United States these days. 

SPENCER JAKAB: Yes. 

SEAN SPEER: What led to this suspension? And in your view, were investors right to be angry? 

SPENCER JAKAB: So, if you were getting very excited about this fun new game and making a lot of money, and all of a sudden your broker told you, “You can’t buy the stock, you could only sell the stock.” Yeah, I guess you have a right to be angry. The thing is that it seemed very suspicious. I mean, there’s a lot of circumstantial evidence there that would lead one naturally to be suspicious, okay? It was kind of like the JFK assassination-type stuff where there are all these coincidences, but not a conspiracy probably, right? And in this case, definitely not a conspiracy. When you had all these hedge funds on the ropes, you had Robin Hood come out and say, “You can’t buy.” What do you mean you can only sell you can’t buy? That’s never been done before. And they didn’t do a good job of explaining it. They were really in a quandary because they were hours away from going out of business. And when you’re a financial firm, you don’t say, “Hey, we’re actually hours away from going out of business, and this is why and here’s a technical explanation.” They were initially vague until they raised some money later that day. So they didn’t do a good job initially of communicating because they’re they were in a difficult position.

But then you had Robin Hood’s main counterparty, who was Citadel Securities. Well, Citadel Securities is controlled by the same man who controls Citadel LLC, which is one of the biggest hedge funds in America. We don’t know what that hedge fund does, it’s secretive. Maybe they were losing a bunch of money. What we do know is that Citadel gave a bunch of money, $2 billion, that week to Melvin Capital, which was losing a ton of money, lost almost $7 billion for its investors. It almost blew up. You know, $7 billion in a few days, it’s crazy to lose that much money on these stocks that aren’t even major stocks. They weren’t even a big part of their portfolio. But it’s just the losses were just so devastating. And there was so much borrowing, effective borrowing, built into it. So hey, Citadel gives money to these guys to bail them out. And Citadel is doing business with them. And we know that Citadel is talking to Robin Hood, a normal course of business, but whatever. And they stop it. And they’re kind of rescuing these hedge funds. The fix is in. Its heads, you win. Tails, we lose, basically, that’s the way they saw it. That’s how every politician saw it, whether or not they understood it. Maybe they had some staffer whispering into their ear “No, actually, let me explain what a clearinghouse is and this is what happened.” They didn’t care. You’re not going to win any political points by giving some nuanced explanation. You were like, “This is an outrage.”

You have people on the far left, and the far right, and the middle, and talk show hosts and everybody going crazy about it that day. Congressional hearings were called that day. And the justification for calling hearings was this outrageous thing that happened. The explanation, I can go into the explanation, it’s in my book. I think that the whole story is interesting, but I think the one sort of, I had to put it in there, the one possibly boring chapter is explaining how this happened and why this happened. To explain it, you know, for the record. The explanation is boring. But basically Robin Hood did too good of a job. Robin Hood got its customers so excited about such a narrow group of things, that the formulas that its broker had, which is a clearinghouse—which is actually not even a private company, it’s part of the government, a quasi part of the government—said, “We assessed your risk, and you need to come up with $3 billion in three hours,” which they could not do. And then the only way that they could stay in business and avert a kind of a cascade—which would have been bad for its customers anyway, the same thing would have happened, but their money would have been frozen for weeks, not days—is that they said, “You know, you can’t buy these 13 stocks. Sorry.” And then they explain themselves. But to this day, it is the shooter on the grassy knoll that people will not let go of the conspiracy theory, you know, conspiracies cannot be killed online.

SEAN SPEER: I’m just going to ask two final questions, one specific and then one kind of big picture looking into the future. The specific question for which I don’t have a good answer and I’d love to hear your thoughts, is why do you think GameStop share prices remained over $100 since this experience? Why hasn’t it fallen back to pre-meme stock levels? 

SPENCER JAKAB: Well, two reasons for that; one that’s very straightforward and one that’s not so straightforward. One reason is that Gamestop and also AMC, which was another meme stock, they went out and they said, “You know what? We have all these enthusiastic investors. Basically, every investor that knows how to value a company, every investment fund, everybody else, basically, has left. All we have left are insiders and index funds that have to own this and a bunch of retail investors and we’re going to take advantage. This company is in trouble. This company has been losing money for years. But maybe if we went out and raised money, we could go and pivot and do something else and do digital stuff or NFT’s and we have all these ideas. Let’s go out and raise money at this very high price, strike while the iron is hot.” So when you bring a bunch of money into a company at a very high price, it becomes self-fulfilling because that money is the company’s money. So Gamestop raised much more money than the company was worth before this whole episode. So that money is money, whether it’s in the bank, or you pay off your debt, or you buy something good with it, that money has value to the company. It won’t go down to what it was worth before, because it’s raised this money. Probably not a very good investment for the people who gave it that money, but that’s a different story. They raised that money, that money’s in the company.

The boring, or not the boring reason, the more ephemeral, harder to really quantify reason is that people are very excited about it. When people get excited about something, its price stays high. You remember the Beanie Baby bubble? Remember Beanie Babies cost like $3, $4, $5, then they were worth three, four, or five thousand dollars for several months, right? There was this mania around—it was the same thing, it was the same stupid doll, but it was worth one thousand times as much as people had paid for them. What’s the intrinsic value of a Beanie Baby? I don’t know. Now, that bubble has deflated. But even today, there are people who will pay more for a Beanie Baby than it was purchased for. So there, you know, there’s that memory of it having been worth that, and that creates an anchor in people’s minds. If it was worth that once that maybe, maybe it could creep back just a little bit towards that thing. So, bubbles deflate very slowly for that reason, because people have this anchoring effect, it’s a psychological foible. They look at what something was worth, not what it is worth, but what it was worth, and they use that as the basis of, “Well, it’s, it’s less than half that now, it’s gotta be good, right?” And so those are the two reasons.

Right now, GameStop is, I don’t know, in the eighty-something dollar range. It got as high as $483. So it’s well below what it was worth, but it’s well above the four dollars and change that it was worth before this really started to inflate. The correct price is probably somewhere in between. Also, you have new management, and you have this guy, Ryan Cohen, who’s now the chairman of the company and talking about NFTs and what have you. And who knows, you know, maybe he’ll figure something out; he was a very successful retail entrepreneur, so maybe he will figure something out. He just hasn’t shown it yet. But maybe he’s really smart and he’ll turn the ship around, you know. So there are all kinds of stories you can tell and all kinds of anchoring. And that’s a long answer to your question but that’s why.

SEAN SPEER: Let me wrap up with a big picture question, as I said. This whole episode, for better or for worse, has contributed to the perception that the market is shaped by these big players behind the scenes, and retail investors are sort of pawns in a game. To the extent that that perception has now particularly shaped the view is of this particular generation, what do you think the long-term consequences of this experience will be in terms of people’s trust in investing and the stock market?

SPENCER JAKAB: Yeah, it could be very costly. If you look at times when there have been devastating losses, then it’s been very costly. And the cost has not been the money lost in the episode, necessarily, although that is a loss. But it’s the fact that people then didn’t invest. I mean, for example, buying stocks in the 1930s. If you were a pretty young person, and you bought stocks in the 1930s and held them and didn’t do anything too wild, didn’t buy some real clunker, you got very, very good returns. That was one of the best times ever to be invested in the U.S. or the U.K. or the Canadian stock market, right? But people thought you were crazy if you invested in stocks because the memory of the losses in 1929 to 1932 was so fresh, it was so devastating. Why on earth do you do that? And this is a bit different. I mean, we’re in the middle of a kind of a bit of a downdraft in the market. But this is “The markets rigged, the markets crooked, I don’t trust it.” That can be very costly too because it’s not just the money that you lost. Maybe you’re 25 years old, and you lost your savings of a couple of thousands of dollars or a big chunk of it, it is the fact that over all those subsequent years, you will not compound your wealth and trust the stock market and engage with it in a kind of a more sober way than you did at first. You view it as a fundamentally corrupt, dangerous place.

So I think that some group of the people who got involved in this, they opened financial accounts and it’ll wind up being a good thing in the long run because they’ll be like, “You know what? I kind of learned my lesson and this is really not the way to do it. I’m gonna buy a book, you know, about how to do this and I’m going to engage with the stock market in a kind of a sober, long-term way.” That’s going to be a minority. Then there’s going to be a small, I hope very small, minority that’s conspiratorially minded, that continues to engage—there are people who keep putting their life savings into these meme stocks because they believe that there’s going to be another short squeeze that’s like the coming of the Messiah. Look at AMC 500k; they think that AMC is going to be five hundred thosuand dollars because there’s going to be a massive short squeeze. Then you point out to them, “AMC is gonna be worth three times what the entire U.S. economy is worth? Like you really believe that?” “Yes, because of this…” So obviously, that’s a crazy expensive thing to believe in. And then in the middle, yeah, you have what you describe where people who are just bitter. I hope that people take the correct lesson from this, which is that the harder you try to beat Wall Street, the worse your results tend to be. The less you try to beat Wall Street, you kind of engage with it in a very kind of passive, cheap, and lazy way, basically, the greater your chances of beating Wall Street.

That’s the real paradox of investing, which is that the less effort you put in, and the less you pay up for good advice, the better you tend to do better. In fact, if you were just a passive, regular rebalancing index fund investor, over a couple of decades, you will beat 85 percent of other individual investors, and you’ll beat 80 percent of professionals. You’ll beat Wall Street, that’s what you want it to do? You’ll beat Wall Street and as a bonus, if you don’t like Wall Street, you’re also starving Wall Street of money because they make so little money off of you. You buy a bunch of exchange-traded funds. Here in the U.S., you can beat the whole stock market for 0.03 percent a year and just put it in a drawer and forget about it. You don’t have to do anything, right? They’re not making a lot of money. 0.03 percent does not make these companies rich. It makes them like a little bit of money, it covers their expenses, and then a little bit more than that. It’s not a bonanza, you don’t have guys driving Bentley’s because they’re getting 0.03 percent of your savings. Okay, so do that, you know, you will have accomplished both of the goals of these revolutionaries by doing that. It takes a while to play out that way, but the evidence is very strong that it does. 

SEAN SPEER: Those in search of the evidence should read Spencer Jakab’s book, The Revolution that Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors. Spencer, thank you so much for joining us today at Hub Dialogues.

SPENCER JAKAB: Thank you. 

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