A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
Say what you will about the GameStop mania. It does illustrate one positive thing about today’s stock market: There are still some people willing to invest in individual companies instead of merely tossing their money into index funds.
The rise of Reddit’s WallStreetBets crowd and others taking advantage of no-fee trading on brokerages like Robinhood is a sign that some investors aren’t content simply owning funds that track the S&P 500 and Nasdaq 100.
The GameStop surge shows that active investors and stock pickers are still alive and kicking. Cue the “I’m not dead” guy from Monty Python.
Active investors are making money from stocks like GameStop (GME), AMC (AMC) and BlackBerry (BB) instead of just throwing their lot in with the big blue chip tech stocks that dominate the major indexes.
Almost everybody already owns a small piece of Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Google (GOOGL) owner Alphabet, Facebook (FB) and Tesla (TSLA) through passively managed index funds. These companies have only gotten bigger as more money floods into passive exchange traded funds (ETFs).
But there’s more to the market than these stocks. And investors with more free time on their hands have discovered that.
“Part of this is a Covid phenomenon,” said Greg Martin, founding partner of Liquid Stock, a firm that helps employees of private companies manage money.
“People are sitting around at home and spending a lot less so they have more savings and more time. Robinhood has taken all the friction out of trading,” he added. “In this low yield environment you can throw money into an S&P 500 fund but that’s boring. So people are becoming day traders.”
Other experts also say it’s not a bad thing that individual investors are throwing their weight around. For too long, hedge funds and other large institutional money managers like Vanguard and BlackRock had too much clout, some argue.
“There is excitement about the democratization of investing. It’s about sticking it to the big guy,” said Christian Munafo, chief investment officer of the SharesPost 100 Fund, a firm that invests in late-stage venture-backed companies.
Still, the Reddit/Robinhood crowd is playing a dangerous game by going after stocks that hedge funds think are due for a fall. It may not end well.
“It’s great that we are seeing people actively participating in the markets,” said Derek Horstmeyer, finance professor at George Mason University’s School of Business. “I just wish they weren’t taking this much risk.”
“But I guess there’s nothing sexy about buying a boring stock with steady dividend growth,” he added.
Inside the Reddit army
As you’ve no doubt heard, last week was a banner one for investors on the Reddit message board WallStreetBets.
My CNN Business colleague Jon Sarlin has been tracking WallStreetBets for months, allowing him to write an amazing story on the group’s culture.
One particularly interesting aspect is the language used on the board. Users refer to themselves as “degenerates” and speak in their own memes and phrases, often borrowed from other internet subcultures.
Here’s a brief guide:
YOLO (You Only Live Once) - When someone risks their entire portfolio on a single stock or options trade.
Diamond hands - When a trader is prepared to hold on to their stocks or securities for a long time.
JPOW - Federal Reserve Chairman Jerome Powell.
$Becky - An array of stocks ‘loved by White college girls,’ like Etsy, Lululemon Athletica, Ulta Beauty and Starbucks.
To read Jon’s excellent feature story, click here.
Monday: ISM Manufacturing Index; Thermo Fisher earnings
Tuesday: Alibaba, BP, Marathon Petroleum, Pfizer, Sysco, Chipotle, Amazon, Alphabet and UPS earnings
Wednesday: ISM Services Index; AbbVie, Humana, MetLife, Qualcomm, Allstate earnings
Thursday: US jobless claims; Bank of England decision; CIGNA, Britstol-Myers, Ford, T-Mobile, Prudential, Merck and Royal Dutch Shell earnings
Friday: US jobs report for January; Sanofi earnings