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Reddit's r/WallStreetBets wasn't ever and so militant. The forum was in one case a place for people to post their virtually ridiculous bets — a parody of the otherworldly gambles that Wall Street prop traders used to take.

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But then something unexpected happened: Brusk-sellers started to get involved in a world they didn't quite sympathise. On Jan. 21, when famed short-seller Andrew Left posted a $20 price target on GameStop (NYSE: GME ), Reddit users took that as a collective slap to the face. No longer was this a fun game of moonshot investments. Out of nowhere, a "David versus Goliath" fight emerged. Suddenly, any attack on GameStop or other r/WallStreetBets favorite was an insult — non even to their commonage intelligence — just their very core sense of existence.

"To Melvin Capital: y'all represent everything that I hated," wrote one member of r/WallStreetBets. "This is personal for me, and millions of others." Identity politics had suddenly spilled over into identity investing.

As investors steel themselves for a bumpy GameStop stock ride to $50 or very peradventure to $500, they demand to remember one thing: It's supposed to be fun. And if you lot practise lose money, make sure you don't permit Reddit's r/WallStreetBets become your QAnon.

QAnon and Identity Investing

Last week, writer Diane Benscoter gave her assessment of a recent American phenomenon. It "establishes this camaraderie and this feeling of righteousness and this cause for your life. And that feels very invigorating and almost addictive. You feel like you are fighting the battle for goodness, and of a sudden, y'all feel similar you are the hero."

She wasn't talking about Reddit'due south r/WallStreetBets, though — the David versus Goliath stock market battle that brought at least 2 hedge funds to its knees. Far from information technology. Instead, she was referring to QAnon, an ultra-correct group of conspiracy theorists.

Few would misfile the playful jousting of Reddit stock investors with a group of conspiracy theorists convinced that Democrats are collectively hiding a undercover conduce of Satan-worshipping, infant-eating pedophiles. r/WallStreetBets, later on all, started with retail investors showing screenshots of out-of-the-money options, some wins, and ofttimes devastating losses. Information technology was much like a stock investor's version of "America's Funniest Home Videos" — painful yet incommunicable to turn abroad from watching. The forum also doubled equally a gateway for new investors.

Not just did the subreddit get people involved in their finances — information technology taught that losing money is fine as long as you keep trying.

Merely the longer that young investors remain in a collective repeat bedchamber, the harder it becomes to tell the departure between convivial and conspiracy.

Cult Members? Meet Cult Stocks.

In a broader sense, identifying with an investment style is nothing new. Value investors have e'er touted their ability to dig up diamonds in the crude, while growth investors take focused on finding big winners. Those wanting to sit down at both lunch tables (similar yours truly) have even come up with their own labels like GARP, or growth at a reasonable toll.

Experienced investors volition know that people can alter investing styles as easily equally they change article of clothing. Warren Buffett pooh-poohed the airline industry for years earlier snapping airline stocks upwards himself. And Phil Fisher, the begetter of mod growth investing, published a book toward the finish of his investment career titled Conservative Investors Sleep Well. The market ever tells yous soon enough if yous need to change your investment strategy.

Social media, however, has upended that notion. Today, investors don't have to settle for broad investment theories; they can find supporters for their individual investments. Tesla CEO Elon Musk has almost 50 meg followers on Twitter, while entire subreddits are dedicated to specific stocks. Studies have shown (unsurprisingly) that owning stocks magnifies retail investor reactions to these types of sites, which can cause people to get stuck in their ways of thinking.

Even apps like Robinhood unintentionally nudge investors into siloes by showing them only the top stocks of the mean solar day. Information technology'southward a curated world where stocks only go upwards, and you lot're always right.

The Social Media Echo Bedroom

Young investors were already more than primed toward identity investing. A report by Ryan Wood and Judith Lynne Zaichkowsky published in the Journal of Behavioral Finance outlined how loss-averse young traders were far more likely than their older counterparts to personalize their losses. For them, ownership a stinker isn't just bad luck; it'due south a reflection of their grapheme.

Only it took the Reddit GameStop saga to bring that to real life, particularly when Mr. Left of Citron Research starting time announced his bearish opinion on GameStop shares.

In earlier times, investors would take shrugged. Mr. Left's claims that GameStop was a company "pretty much in concluding decline" was a fair assessment of the brackish video game retailer. The target price, while low, was still four times college than GameStop's price the summer before.

Instead, Mr. Left suddenly plant himself the target of a massive hate entrada. Not only did the famed short-seller receive online death threats. "1 dark pizza he hadn't ordered showed up at his door and someone had created a fake Tinder account in his proper name," according to Reuters reports. It was a campaign of intimidation.

Every bit more people jumped on the GameStop railroad train and losses mounted, conspiracy theories got more intricate and outlandish. One idea — that hedge funds colluded with Robinhood to halt meme stock trading — gained so much traction that even Washington politicians had to ask. (It was supposedly caused when Robinhood fell short of on collateral with the Depository Trust & Immigration Corporation, or DTCC).

Meanwhile, the uglier side of the echo chamber started to emerge. Gabe Plotkin, the head of Melvin Capital, received anti-Semitic posts that he later shared in open testimony to Congress.

And the hate speech wasn't only to intimidate – it was to organize. 4chan.org, the anonymous imageboard website where QAnon theories originated, had users claim that Melvin Uppercase investors "are probably close to the top of the zog hierarchy," the conspiracy theory that a Zionist Occupation Government secretly controls much of the Western world. Far uglier language was besides used to weave fifty-fifty more than circuitous narratives, but deserves no re-printing.

Turning Regular People into Believers

Every conspiracy theory plays on people'south sense of justice. And it starts with something people want to believe. In the case of QAnon, Democrats are inherently evil and that President Donald Trump'south principal programme was to stage a countercoup against members of the deep state.

In GameStop and other meme stocks, a similar "good versus evil" narrative has emerged. If short-selling hedge funds are inherently evil, their goal of bankrupting private investors must too naturally hold.

Was whatever of it right? Indeed, unfalsifiable claims always hold some potential for truth. There could be some Democrat politicians who distribute child pornography, just equally at that place accept been Republican ones caught in the heinous act.

Curt-selling hedge funds, too, might have tried reaching back-room deals in their moments of desperation. But does that brand the entire conspiracy real? If you think and so, then I'll never convince yous otherwise.

The Collateral Damage of Conspiracies

Identity investing has cast a long shadow across the world of investing. Michael Burry, the investor who famously bet against large banks in the 2008 financial crisis, deleted nearly all his investment-related tweets last week. Citron'southward Andrew Left, meanwhile, has vowed never to write brusque-selling reports again, ending a stellar 20-twelvemonth career of calling out corporate fraud.

Self-censoring has reached even the biggest names in the business. Marking Cuban and Jim Cramer — market personalities with histories of beingness just equally bearish every bit bullish, accept turned incomparably positive on meme stocks and investments. And Warren Buffett has remained unusually quiet even every bit his trusted partner, Charlie Munger, gets skewered by the public for his anti-Robinhood comments.

The results are exactly what you would expect. With no one to warn them otherwise, retail investors accept stuck with GameStop and other meme stocks as prices accept yo-yoed.

"Sold everything and went all in GME. I Like THE STOCK!," wrote ane member.

Some might see this equally a good affair. Bearish investors have always been derided for pushing downwards stock prices — potentially sapping investment in otherwise phenomenal deals. GameStop itself might find a second life as an online gaming visitor.

But it'southward also a dangerous path. Who knows how many more billions of dollars Enron could have destroyed if whistleblower Sherron Watkins never took a stand up? And at a certain signal, buy-and-concur strategies plow into ostrich-in-sand — the willful ignorance of whatever bad news.

"Getting ready for the Friday FUD and dumbasses in the comment sections," a Reddit user wrote. "If I see you I will downvote you lot. Who's with me swain apes?"

What Can Investors Do?

It'south like shooting fish in a barrel to arraign social media companies for perpetuating these echo chambers. But leaders are also occasionally at fault. Only every bit Donald Trump encouraged QAnon theories, corporate leaders like GameStop's Ryan Cohen and Tesla'southward Elon Musk relish publishing mysterious tweets that send forums ablaze with speculation.

Older investors oft recollect how ownership not bad American industrials didn't involve being a fellow member of an investment social club. But today, you're in information technology, or you're out. There'southward no middle ground for people who want to trade in and out of perceived good and bad value.

So, what should investors do? Simple. Kickoff, understand the difference between using emotions to help invest versus getting emotionally invested in a stock. In that location'due south a large deviation.

2nd, understand the ease at which people tin create false narratives. We all dearest simplicity, and a "proficient versus evil" story is certainly an piece of cake one to make. But just like QAnon, unchecked repeat chambers can warp these well-meaning stories into something far more harmful.

And finally, understand that anybody plays a part. All great theories start every bit a healthy questioning of the status quo. But it doesn't take much to warp information technology into something far more subversive.

On the date of publication, Tom Yeung did non have (either straight or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the globe of investing.

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Source: https://investorplace.com/2021/03/dont-let-reddits-r-wallstreetbets-become-your-qanon-reddit-stocks-gme-stock/

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