Angry herd on the street

If you’re wondering what has happened in the financial markets in the past two weeks (and you should), the answer is that the politics of anger is catching up with global finance.

The story of how a little-known video game retailer GameStop touched highs of USD483 a share (almost four times the price of Apple), and then plunged erasing billions of dollars in value, is not just the usual tale of greed. A band of largely inexperienced, and self-described misfit investors (i.e. a lot of kids in their basements investing their savings), took it upon themselves to bet money on a stock partly to inflict pain on large institutional investors like hedge funds (i.e. the big money on Wall Street).

This is why the little guys are angry: Large investors often look for and bet against companies with poor management or overhyped business models and make money once the market recognizes how bad they are, and their stock price declines (a practice known as short selling). This is perfectly legitimate (some would argue necessary), even if it angers a lot of folks who don’t have the time, money, or ability to do the same thing. After all, in capitalism creative destruction is how bad ideas fail, and good ones succeed (at least in theory). In fairness, some short sellers are also known for badmouthing companies and trying to make their share prices tank, hence why many people hate them.

This is what the little guys did: The worst thing that can happen to a short seller is to see the stock of its target company increase instead of fall (also known as a short squeeze). This can cause heavy losses for those betting that a company belongs in the dust bin. So instead of protesting capitalism with picket signs, the misfits in the chat group “WallStreetBets” on the Reddit social media platform, decided to buy GameStop shares en masse to push the price way up and punish big investors.

Has this happened before? Not quite. Wall Street has seen its share of activism, including the Occupy Wall Street movement which brought dozens of bohemian-inclined folks to camp in tents to protest inequality back in 2011. Plus, shareholder activists have for many years been putting pressure on company executives to improve bottom lines. This time is different, however, because activists successfully used Wall Street’s trading activity to make a mess of things.

How can this happen? This is where trading platforms like Robinhood (I know, you can’t make this up) play a role. These brokers which charge no commissions for trades (a relatively recent phenomenon) make it possible for small investors to buy shares affordably (a good thing). The downside is that it also makes it viable for well-funded activists to do their thing on the cheap. Similarly, the emergence of social media democratized free speech, but also gave us fake news.

So, what’s the takeaway here? This is just the beginning. Future activist herds can buy or sell shares to disrupt mergers between companies, hurt share prices of companies they consider evil, or punish investors they believe hurt the cause of environmental, social, and good governance practices (known in corporate speak as ESG). The pandemic will make radical activists angrier, more determined, and more devoted to their cause. Take it from Evan Oosterink, a 19-year-old, newbie speculator who lost his savings, and told the Washington Post: “Being part of WallStreetBets, it’s like a religion you’re devoted to.” Where have we heard that one before?

Warning to the big guys. Established investors now have something else to worry about other than beltway politicians, taxes, and regulators. From now on they will have to map out potential activist adversaries and their intent and capability to upend their investment strategies. Understanding these rogue actors will become part of the cost of doing business.

Warning to activists. The pendulum of history can go too far on either direction. A focus on wokeness, and being good can hurt innocent people too. And if you happen to think that collateral damage is a natural result of doing what you think is right, welcome to the dark side.

Bottom line, if you think angry kids with some money and time to spare will go away, you’re not understanding human nature. Political extremism, religious fanaticism, and speculative mania have a way of churning out converts by the millions, and leaving a mess in their wake.

What I’m (Re) Reading 

There is no better read to understand how financial speculation can make people lose their minds than “A Short History of Financial Euphoria” by John Kenneth Galbraith, originally published in 1990. At 110 pages, this little gem delivers a lot of wisdom and is written as a warning that “not only fools but quite a lot of other people are recurrently separated from their money in the moment of speculative euphoria.”

For Galbraith, the only failsafe to protect people from themselves was not regulation but helping them identify moments of “mass insanity”. Galbraith takes us through such episodes as the 1637 Dutch Tulipmania – when people paid fortunes for tulip bulbs convinced their price could only go up -, the railroad stock speculation in the late 1800s, the Charles Ponzi scheme of the 1920s, all the way to the junk bonds of the 1980s. Yes the tech and housing bubble may be missing, but Galbraith shows us there is nothing new under the sun.

Galbraith’s delightful writing also leaves us with two simple lessons: 1) the “extreme brevity of financial memory” that prompts people to forget about past bubbles and fall for them again, and 2) the “specious association between money and intelligence” that makes speculators think they’re smarter than everyone else. Or as he puts it: “financial genius is before the fall”.