Bitcoin just smashed 100k. That, combined with a large weekend away at a wedding, has made this week the perfect time to repost a piece I published last year, when this was much smaller. I’ll even add an audio track, because I know you enjoy my voice. What follows was written partly in 2021, and mostly in 2022. Next week I’ll be back with more originals to finish 2024 with power and energy.
All Aboard the Rollercoaster
In January of 2021 I was staying with my parents in their cozy house at the foothills of Mt Wellington. Summer in Hobart can charitably be described as lukewarm, but there was a fire burning inside me. Melvin Capital’s infamous short position on Gamestop – a prediction that it’s brick-and-mortars video game stores would run out of business – had come to the attention of r/wallstreetbets. The stock skyrocketed as thousands of anonymous investors wolfed up shares to short squeeze the hedge fund into oblivion. Pupils dilating, I teetered on the brink of throwing in my lot with the mob.
It was sweaty work to parse the volume of hot takes flying around the mediasphere. I rarely pay attention to the news, but got ironed in to the media cycle for at least a week that January. The grassroots investor protest resonated in my bones, and not because I gave a fuck about the stock. I don’t like the stock. The promise of the internet to coordinate the activity of millions of people and provide access to tools previously only available to the elites seemed finally to be consummating. I wanted to stick it to the man and show Wall Street the people could invest as they pleased, when they pleased. So I bought a single share of Gamestop, at around $60 AUD. I still own it [2024 update: I do not own this stock anymore].
Eighteen months on, and the world has largely moved on from the GME mania. What remains, though, is our reckoning with the ubiquity of financial access. Almost anyone in a developed economy can access the stock market, and even the poor, provided they have an internet connection, can purchase certain global currencies. Before we look at the retail minnows though, let’s understand the big fish.
Trust and Size
A reason that finance executives get paid outsize bonuses is that the fate of billions of dollars and hours of accumulated labor hinge on their decisions. It is difficult for an organization to find someone they trust to allocate such gargatuan resources. Good people are hard to find. In our normal lives we grant all sorts of special privileges to people we trust, and financial institutions have very special privileges indeed.
Banks, for example, are granted special privileges to hold deposits and issue loans. There is a scaling component to this. We allow banks to do this in part because they already hold custody over vast sums of money, and this wealth also facilitates fractional-reserve banking, one of the main drivers of economic growth. Investment banks have the privilege of facilitating complex services like mergers or IPOs. Their enormous size is a prerequisite to performing these, as investment banks need expansive global networks to match buyers and sellers. Even for a retail investor like me, I need enormous financial institutions to match my amusingly small GME buy request with a seller.
It is important to have large financial institutions in a developed economy because, by having such deep pockets and capacity to loan, they really do give little guys like me opportunities. Of course, there are moral hazards that accompany this privilege. Large financial institutions have an outsize influence on markets, for better and worse. Their actions can really rock the free market boat. The Lehman Brothers collapse was a major link in the 2008 chain reaction, the net result burning the retirement funds of millions of retail investors. Lehman Brothers collapsed because its method of securing short-term funding quickly dried up with the housing market, exposing management’s failure to make good on their privileged status as an investment bank and left the little guy holding the bag.
Echoes of this mistrust were everywhere in January 2021, particularly when Citadel capital seemed to jump in and give Melvin Capital a $3 billion lifeline. Suspicions and paranoia escalated among retail investors, and was exacerbated to a raucous din when RobinHood, the brokerage app, halted trading on GME. The Wall Street conspiracy was real. The institutions were conspiring against this movement, this movement that felt like a revolution.
Financial Inclusion Did This to Us
GME appeared to be on a terminal decline starting in late 2013. Melvin Capital had bet against GME since 2014 on the thesis that people were moving to digital buying channels for video games. Crucially, they advertised this position in their investment roadshows. Because Melvin Capital liked to publicly air their thesis, the death of GME seemed to go from possibility to inevitability as other investors followed the lead, knowing that a bet on GME would also be a bet against Melvin Capital. The power of the institution, with its impetuous air of invincibility, was back.
As we all know, a renegade group of reddit users, lead vocally by u/DeepFuckingValue did not like this. I think the improbable rallying of the GME stock started as a meme with several high-conviction buyers trying to offset the crushing short position of Melvin Capital. But, as these things do, it began to take on a life of its own. Certain in the knowledge they weren’t alone, and armed with $0 brokerage apps like Robinhood, over December 2020 and January 2021 the stock took off as thousands of buy orders poured in. It came across my path shortly before Christmas, and I was utterly taken. Now, it was about sticking it to the man; only later did the thorny issue of cashing in on a clearly overinflated stock surface, and the Hobbesian game of trying not to be last to sell began. The mania was here.
Really, this could be seen as a continuation of the extraordinary stock market rebound in March/April 2020. The financial cognoscenti were rubbing their eyes at the remarkable recovery the stock market displayed after Covid. Meanwhile, retail investors piled in on the opportunity. There is not one single moment, internet forum or meme that coordinated such a frenzy of activity. This was the convergence of years of development in the financial technology (FinTech) space, a space that had long known the underserved players, particularly in equity markets, were individuals.
Beyond GME
Financial inclusivity is often painted by commentators – particularly those already in finance – as dangerous. A gamble for those who don’t know better. Indeed, financial textbooks go to great lengths to differentiate between gambling and speculation, which to me comes across as a trifle over defensive. Similarly, the nomenclature in finance comes across as baffling to those on the outside, and deliberately so. You aren’t supposed to feel confident when words like ‘securities’, ‘call option’ or ‘derivative’ are thrown in your face. Leave it to the professionals.
And it is true that it is easy to lose money in the financial markets, whether you’re a retail or professional investor. In what must have been a humdinger of an afternoon, psychologist Daniel Kahneman analyzed the annual returns across 8 years for a notable firm’s wealth adviser portfolios. He expected correlations between each pair of years, existence of which would have indicated some skill in picking stocks, to be there. But it wasn’t. Correlations between skill and returns were 0. When he and Richard Thaler told the firm’s executives over dinner that they were paying outsize performance bonuses for, you know, no reason at all it was quickly and politely swept under the rug.
I am not insinuating that financial professionals are pointless. There are real benefits in providing financial advice and services, and people can use the skills they pick up from high finance to transfer to other fields like government or philanthropy. Society also genuinely needs willful optimists who are willing to make big moonshots and fail. Big bets – investments or otherwise – are an absolute necessity for societal progress, and these risks deserve to be handsomely rewarded when they pay off. We should also be able to recognize that in questioning the retail investor’s capacity for making their own willfully optimistic bets, we are imposing an arbitrary notion of who should invest and what it means to do so.
Crucially for retail investors, financial inclusivity also gives financial agility. The ability to interface with various financial markets with little friction means many can now capitalize on fleeting moments of opportunity. Open any investment forum on the internet, particularly around the winter of 2020, and stories of people parlaying investment wins into a first house, or paying off debt abound. This isn’t limited to the stock market. Crypto offers an investment and payments vehicle to anyone with an internet connection. Unlike stock exchanges, which are generally only available in wealthy nations, citizens in poor countries are leading the global adoption of this technology. Bitcoin in particular has been serving the underpriveleged well before the pandemic and has very low requirements to buy in. The wheels have been greased. The table is set. Financial inclusion is here to stay, and the trickle is starting to run.
The End of GameStop
At the heart of GME’s bizarre ride wasn’t a greedy race to the bottom, or a noble cause to be won. Beneath the hot takes and hand wringing is the ongoing story of financial inclusion. It was the influx of retail investors around the world that, with smartphones and internet forums, saw an opportunity for them rather than being gobbled up by Wall Street. The new world is a little scary. It’s volatile. But any paternalistic lecturing about the dangers of investing your money is missing the point. Life is risk, and it is the nature of any inclusive societal technology to give people a chance to take a shot on themselves.
The retailers won, by the way. Melvin Capital closed its doors in May 2022, 18 months after the short squeeze began. You’d expect the stock price to plunge; after all, hadn’t r/wallstreetbets done what they set out to do? But no, about a week after the news the price soared again by 30%. Something is keeping the stock afloat beyond the speculations of greedy retails and sophisticated institutions. Incidentally, I still own my solitary share of GME. I’m not quite sure what to do with it. I never bought it to make money and the ideals with which I did seem to have come to fruition, or faded into the background as these things do.
I suppose the whole point is that I got to make the choice in the first place.
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