Over the holidays, I bought options for 2000 shares of GameStop for $20/share. Today, GameStop hit $467.50/share before the casino closed its doors.
We are witnessing an extraordinary event in digital history.
Individual investors led an insurrection on capital markets. Just like US Capitol insurrection a few weeks ago, we see a pattern of institutional rebellion in a technological perfect storm.
At the center is Robinhood, a mobile trading app at the intersection of Wall Street and Main Street.
I downloaded Robinhood this past summer to try and understand what made it so popular among new investors. I wanted to know…
- How did this upstart break into a space dominated by financial leaders like Schwab, Fidelity E-Trade and Ameritrade?
- How can I apply the investing lessons I learned in my 20’s for financial gain in my 40’s to hedge against the instability of a COVID job market?
My curiosity with an initial Robinhood seed round of $5000 earned a whopping 330% in just six months before the holidays.
Then I placed my monster GameStop bet.
Thoughtful mobile design
I discovered the answer to my first question rather quickly. Robinhood offers the best mobile trading experience for new investors.
Through a series of prompts and educational tool tips in plain language, Robinhood helps users understand the intricacies of placing complicated trades via options contracts. It begins by asking whether you think a stock price will go up or down. From there, the app guides the investor through a decision tree based on their appetite for risk.
One can easily track stocks, funds, commodities and digital currencies like Bitcoin and categorize them. Robinhood also sells access to Morningstar data for $5/mo and binds it to the stock along with your investing history. It surfaces similar stocks and tracks the Robinhood Top 100 list to help identify high volume opportunities.
Within the trading desk, the app presents realtime decision data like percentage probability of profit in buy and short scenarios. Option traders used to have to assemble this data via complicated tables, and then apply strategies with whimsical names like the Wheel, Iron Condor, Married Puts and Covered Calls.
It’s easy to understand Robinhood’s attraction to inexperienced investors in an era of pandemic boredom and free federal cash. In the same way Tinder has changed the way people select mates and date, Robinhood makes it very easy to enter into, ahem, a compromising position. Both apps provide superficial surface data that encourage impulsive decisions without understanding substantive fundamentals.
Robinhood may face legal challenges for being overly simple. Perhaps. Or perhaps legislation is being weaponized to prevent the masses from investing outside of institutions in the name of personal and market protection.
While smart design set Robinhood apart, the company’s biggest gain came in a much powerful external force: the Reddit Army.
r/WSB is a Digital Version of the Occupy Movement
The “Reddit Effect” is traffic brigading to unprepared websites causing them to crash sudden load. That’s effectively what happened with the GameStop stock today.
Wall Street Bets, self-described “Like 4Chan found a bloomberg terminal illness” is the principal subreddit leading the GameStop takeover.
As a long-time Redditor, I’ve been watching WSB grow to millions of users for more than a year. Like a digital anthropologist studying a strange tribe, I’ve learned their language and fascinating rituals.
The r/WSP culture is a hyper-masculine rebellion against the woke. Moderators are an active mix of seasoned investors and attorneys. The group feels like a middle school playground with its own language, put-downs and low-brow shitpost humor in stark contrast to popular cancel culture. Some choice examples…
- “Stonks” only go up. The belief that stocks always rise is held unironically by the same people that buy on the dip.
- Brrrrrr references the Fed’s money printing press and this particular opportunity to benefit during a period hyperinflation.
- DD is counter-intuitive WSB due diligence. Posts spike in karma points when reasonable analysis is countered with a YOLO bet of one’s entire portfolio.
- If DD is really sound, some smart aleck will inevitably reply, “Sir, this is a Wendy’s.”
- Tendies are profits. They could be 10-baggers (10x gains), but mostly reference pathetic ten-dollar profits as if they are massive gains. Same with declaring oneself a thousandaire. Tendies are also synonymous with chicken tenders, a staple childhood diet of today’s young investor.
- Diamond Hands are compliments to extraordinarily successful investors who publish their plays and earn a legion of followers seeking the next big play.
- Gay Bears is a pejorative for anyone shorting any position, especially popular stocks. Retards and Autists are epithetical salutations to the entire community.
- Gain Porn / Loss Porn are video proof of people’s actual wins and losses. These posts are always highly regarded. I’ve seen stunning market swings well into 9-figures on individual 401k accounts.
- People are constantly referencing their “wife’s boyfriend”, both as a cuck pile-on to Loss Porn, and as a personal admission they’re spending all their waking time in Robinhood and on Reddit while they neglect their responsibilities at work and home.
- Robinhood and the general market are simply “the casino.”
“Papa Musk” has long been suspected of watching the community when he tweets WSB codewords. WSB loves when Elon antagonizes competitors and makes wild predictions. There are many pictures of Tesla owners with vanity plates referencing the community. Indeed, WSB pressed Tesla and Apple to all-time highs following 2020 splits.
WSB memes are some of the most remarkable pieces of entertainment media I’ve seen online. They’re incredibly nuanced. One has to appreciate the many layers of the market and the WSB inside culture to fully appreciate their brilliance. The best ones are high quality productions referencing pop culture films and anime.
The overall effect of thoughtful design and the WSB mob is my investment strategy shifted to something much more intuitive. In 2020, I had big wins with the AAPL split, the Tesla run, AMD and Starbucks. I justified these bets by market cap and volume, but I have to admit a sense of FOMO, like a craps player eager to get into the action with a hot shooter.
Then I made a terrible play buying Pfizer in anticipation of a vaccine. I followed another loss on CRSR and stayed out of the PLTR run. I relived difficult lesson from years past. Smart investors buy on the rumor and sell on the news.
E-Trade, Hollywood Park, and the MGM Grand Sports Book
In my 20s, like Redditors today, I dabbled in three other games of chance. In each one, I had spectacular early wins followed by crashes.
Hollywood Park
At a 4th of July catfish fry in Compton in 1998, I jumped at the chance to join my dear friend Nigel’s uncles to go bet on the ponies. They took me to Hollywood Park, the same track Charles Bukowski won and lost small fortunes. At their behest in the betting window, my $2 trifect hit for a $147 win. The winning rush took hold. I still enjoy the racetrack, but I’m sure I’ve given more back over time. I’ve certainly never bagged another trifecta.
Lesson: Lady luck is fleeting.
The MGM Sports Book
In 1999, my friend Javier and I paid $1000 for a full season of sports tips from a shady guy in New Jersey. We found him through the local AM sports talk station. Each week, we called Guido, he’d give us a hot sports tip, and one of us would go to the MGM in Las Vegas to place the bet.
We did quite well until our mutual friend Smokey absconded with a $750 in winning tickets. I moved my bets to offshore websites hosted in the Caribbean and lost a huge bet on Gozanga in the second half of some random game. I finally abandoned the experiment as US laws became more aggressive about online betting within the States.
Lesson: Tips are not dependable. Platforms are not stable.
E-Trade
I rode the rise and fall of the Dot Com boom-to-bust bubble with $3000 in an eTrade account. I spent hours studying business fundamentals, but I ended up making rash bets. In some cases, I lost money just because I couldn’t figure out how to set a stop.
Most importantly, I learned I’m paying retail prices without access to wholesale markets. I could see I’m subject to the whims of market movers, and Uncle Sam always took a rake.
Lesson: Learn the game. And know it’s rigged.
Institutional Crackdown is Inevitable
I worked at Charles Schwab for five years as a marketer in a high-growth enterprise professional services group. I am intimately familiar with institutional culture within the Financial Services sector. It’s a highly regulated industry, and those regulations are interpreted conservatively.
There is a reason banking and investing brands are so damn boring! Legal fine print accompanies every piece of marcom. Banks have to track all pieces. Given the fluid nature of the web, and slow adoption of innovative tech like blockchain, digital preservation is Draconian.
Financial empires are built on the principal of capital preservation, they’re highly motivated by risk mitigation, even over profit. They play a long never-ending game. And they’re right to do so. Economic stability and trust are bulwarks against the tide of social fads and personal greed.
GameStop feels like a power shift. I’m not so sure. Look how quickly Congress acted to build a fence around the Capitol insurrection in response to a mob. Why wouldn’t they do the same for Wall Street? The crash of 2008 taught us our political heroes believe select firms are too big to fail.
In the same fashion, Robinhood took the extraordinary measure of halting the purchase of new shares of GameStop. This is undoubtedly a complicated decision because hedge fund managers with fiduciary responsibilities had shorted the stock and were facing bottomless. Stop losses would’ve been triggered, and I imagine price impacted by supply and demand for stocks.
Then there is also the problem of green investors purchasing on margin, which is credit Robinhood may not be prepared to extend given the volume and volatility.
I have a major concerns with Robinhood’s infrastructure too. In one particular high volume transaction, I could not exit a position after Apple split because the app crashed. When it came back online, my account balance showed a temporary balance worth double. That incident, plus the lack of access to after hours trading, led to serious reservations. I parked cash during the entire month of September.
All of these are mere growing pains. Robinhood’s decision to halt trading on GME today had a disastrous effect on the stock’s value. It immediately plunged to the low $100s. Redditors are furious, they are abandoning the app in droves in search of more stable platforms. I suspect trust in the brand may be irreparably harmed.
The clash of web culture and financial institutions has been fun to watch. And in my case, profitable. However, I am staunchly Gen-X and highly suspicious of institutions hell bent on protecting themselves in a counter-intuitive way.
I expect opportunist politicians to proclaim protection of the proletariate while introducing legislation that protects institutions. Indeed, ambulance chasers are already pitching a Robinhood class-action suit, and the Reddit Army crashed the site.
We see the same “protective” walls in fields of math, biology, journalism, politics, travel and finance. I know one law of money is that it is attracted to more money. It’ll be interesting to see what becomes of all the players in this saga.
I had the good fortune of learning these lessons before my Robinhood experiment.
I foresaw the intersection of several trends. I understood the power of Robinhood and saber-rattling Redditors. I respect the pent up frustration of Millennials who are facing the terrible prospect of less earning potential than their parents. I watched the spike in e-commerce and online gaming during the pandemic. I saw limited supply for the Sony Playstation 5 console coupled with extremely high demand over the holidays. All of this led me to GameStop where analysts predicted trouble.
So I YOLO’d my portfolio on the kind of DD that makes WSB salivate. Profits are made on secrets and going against the flow.
In two separate tranches in late December and early January, I purchased options contracts to acquire 2000 shares of GameStop for $20 a share. With today’s spike, 2000 shares of GME hit $935,000 in value which would make me another Robinhood millionaire.
And yet, there is the most important lesson of all: It is very VERY difficult to accurately time the market. I sold my options contracts three weeks ago for a $1200 loss. I have nothing to show for it except the kind of opportunity loss porn WSB loves to punish.
My ability to see trends does not mean I can predict the future!
Feature image is The Cardsharps by Caravaggio (c. 1595) at the Kimball Art Museum in Fort Worth. Once owned by Cardinal del Monte, the image depicts an early version of poker. It’s part of the Kimball’s permanent collection, a must see when visiting DFW.