Inside r/wallstreetbets
Inside r/wallstreetbets
The Hangover, but for investing
Last week, we got into why it’s tough to be like Robot Warren Buffett. This week, we’ll get inside the minds of the exact opposite breed of investor.
Behind the sleek screens on the stock trading app Robinhood lie a wolfpack of (mostly) millennial men who eat, sleep, and breathe the words of r/wallstreetbets.
1.2M+ strong, these thrill seekers treat the stock market as their casino. They discuss wild stock trades, celebrate gains, more often share their losses, and meme stock current events.
Everything goes in this subreddit. It’s a lewd and crude crowd.
I’ve been following r/wallstreetbets (WSB, for short) since December 2018.
This is their story
Black sheep refuge
In 2012, Jamie Rogozinski was looking for an outlet for sophisticated investors to share strategies about high-risk, high-reward, short-term trading.
“All the talk was about long-term investing and index funds,” Rogozinski told MONEY. “Whenever I would go on Reddit and post a comment or question, I would get berated for not being a good investor.”
Before WSB, it was only acceptable to talk about low risk plays openly.
Flood of the millennials
Shortly thereafter, non-professional traders began to flood the subreddit. The millennial “live fast, die young” personal finance ethos was taking shape. This ethos was driven by government policy and the millennial craving for instant gratification.
We grew up in a ‘lower for longer’ American monetary era. Low to zero interest rates have killed savings accounts and bond yields. This has pushed investors into riskier, higher returning instruments like stocks.
The past 10 years we’ve also become addicted to our phones. The immediate dopamine hit we get from social media is bleeding into our once long-term decisions. Retirement feels like a galaxy far, far away. So why bulk up an IRA when you can short Tesla and see results in a snap?
Volatility explosion
When the world gets wonky, fuel gets added to the WSB fire.
In the past two months of the corona-conomy, the markets have been more volatile than the 2008-2009 financial crisis.
WSB has become the recluse for pride and greed within all of us. ~400k of WSB’s current ~1.2M subscribers have joined in the past three months.
Who joins WSB?
If Warren Buffet is a robot, WSB members are the second coming of Leslie Chow from The Hangover – passionate, resilient, and determined to keep the party going.
There are three types of people in this subreddit:
The Good: Most members who tend to avoid the “hyped-up meme stocks” and only dabble in the dangers of short-term trading a few times per year
The Expected: Members who definitely have a gambling problem
The Bad: aka trolliest of trolls–these members try to get others to buy their trades so their stocks go up
What WSB bets on
Even though we love stocks, WSB goes for a harder drug. They even say if you want to learn about stocks, ask your grandpa.
Like Leslie Chow, WSB members want the thrill. They play with options and futures.
What are options?
Simply explained by WSB itself, options are “like lottery tickets that you can pay a flat price for a defined bet that will expire at some point.” When you buy an option, you buy the right to buy or sell a stock at an agreed upon price and date. You don’t buy or sell the stock itself.
There are two types of options:
Calls: If you want to profit from a stock going up, buy calls
Puts: If you want to profit from a stock going down, buy puts
Options are normally used to limit downside - hedge existing bets. In true WSB fashion, they found a way to weaponize it instead. They use it to speculate on the direction of the stock.
The thing about options: they’re complex.
When you buy an option, you need to call out three things:
The direction you think the stock will move (aka call or put)
The time frame for the bet
The price you predict the stock will be at the time
Options are only valuable if you are right on all three. With stocks, you just need to be right on the first one. Because of that, most options end up expiring worthless. Those value of those that do are based on the odds of the bet.
In the vein of instant gratification, WSB focuses their time frames on the short term - usually days or weeks.
What to learn more about options? Here’s WSB’s guide.
What are futures?
Futures are contracts that require a buyer and seller to exchange shares at a specific price on a specific future date (usually in a month or two). Parties can agree to close the position before the expiration date.
Futures focus on commodities (e.g. oil, corn, and soy) or indexes (e.g. S&P 500 index).
Like options, investors use futures to hedge existing positions or speculate on the price of commodities or indexes. Again, WSB focuses on the latter.
The Holy Grail
There’s one commandment when it comes to WSB: Find bets that seem too good to be true.
Thing is, unlike Alan’s blackjack card counting, they almost always are.
In this vein, hacks are what keeps this community going. Here are two of the most infamous events in WSB lore.
Infinite leverage
The first is the ‘infinite leverage hack.’ Through a loophole in Robinhood’s premium feature, Robinhood Gold, users traded with theoretically unlimited borrowed funds.
Here's how the typically-unauthorized trade worked:
Robinhood Gold users could buy and sell options with money borrowed from the app
Robinhood, incorrectly, added the value of the options sold to the user's cash pile
Because of that, users got more funds to trade with
Users would keep on borrowing to add to their Robinhood buying power
The Robinhood team must have been inspired by Mean Girls. There was no limit to this hack.
The most-YOLO of the subreddit decided to play the hack. It led to vastly different outcomes.
On one hand, u/MoonYachts made over $1M by only investing $4k.
On the flip side, u/controlthenarrative lost ~$60k in seconds off of a $2k deposit. He was 25 times leveraged. He expected Apple to announce worse than projected earnings results. That didn’t happen.
He streamed himself and his Robinhood account as earnings were being announced. You hear him gasp at 43 seconds into the video when it doesn’t go his way. GUH, indeed.
Funny enough, WSB is purposely this stupid.
u/controlthenarrative wrote, "Why did I do this? Because I could. And if you don't, then you necessarily don't win.”
Robinhood closed the loophole, but it didn’t matter–WSB bettors were already on to the next hack.
“We are on path for the 4th time Robinhood has to release a patch/implement new rules to their platform due to one of y’all. I’d be lying if I said I wasn’t proud,” said moderator u/TheDrallen.
Masters of disguise
The second hack is through a game of influence.
If an option bet is a winner, a middleman has to pay out the earnings. Now, to reduce their risk, when an option is bought, a middleman buys or sells the stock in the same direction as the option. The middleman wants to reduce their risk.
If shares keep going in the direction the option predicted, the middleman buys more shares to continue reducing their risk.
In a vacuum, this is a self fulfilling prophecy.
That’s where the WSB bettors see weakness.
To game the system, WSB bettors swarm the market with early morning call purchases. This forces middlemen to buy stock. It looks like everything is going up, but, as the stock price rises, the value of the calls follows (and often by a lot more). As the price goes up, middlemen buy more stock to hedge risk, pushing the prices even higher.
Benn Eifert, chief investment officer at QVR Advisors, was initially skeptical that the money behind these online message boards could sway anything. He looked into it and changed his mind. He told Bloomberg, “At least from the dealers”—the middlemen—“flows are substantial, and it’s moving things.”
Smaller stocks are particularly sensitive to these quick spurts of attention. A key example of this was the Lumber Liquidators stock. One latent member explained a polished, positive case for the stock, promising an additional pick would come the following morning. Call volumes in Lumber Liquidators jumped to 73 times the previous 20 day average, with shares rising 18.6%.
While the user was quickly banned from the subreddit, this event showed WSB’s true colors.
WSB Culture
For the lulz
Those that persist in WSB do so because they realize these trades are for entertainment.
If you trade like this for gains, you’ll most likely be washed up quick. 70-80% of traders who use options or futures lose money.
WSB members lean into the entertainment aspect. Some are willing to lose tens of thousands of dollars just to make their fellow members laugh.
This happens all the time. This month, post the corona crash and market recovery, aggressive bets against an improbable immediate crash began popping up.
One user blew through $21k. Another, in a disputed bet, supposedly lost $780k(!).
WSB bettors can’t be blamed for bad luck, but they can be blamed for pure stupidity. As one member put it:
Lingo
This is no longer the “serious forum for learning” as originally intended.
If you spend time on the subreddit, you’ll find the language to be the opposite of politically correct. The ways of their words is best ironically explained in the ivy league-esque voice of Bloomberg’s Luke Kawa:
“It’s frequently both juvenile and objectionable. For Reddit’s band of self-styled “autists”—a term of endearment, relatively speaking, that crudely leans into stereotypes surrounding extremely online people—the chief prize is “tendies” (chicken tenders, the treat an overgrown man-child receives for being a “Good Boy”). Figuratively speaking, tendies are the financial rewards that follow from a successful bold wager. Bears are usually referred to in homophobic terms.”
WSB has its own dialect.
Memes
They say a picture is worth a thousand words. Memes in WSB are worth a million. Users share constant stream of nuanced memes that capture both stock market and member sentiment. Here’s a recent favorite:
What to make all of this
WSB is purposely stupid. There’s gambling, obnoxious language, boastful beginners, and mere thrill seekers. It’s a good place to go to lose money.
WSB is endearing. At the end of the day, it’s a wolfpack coming together about a single (out there) idea. These underdogs are simply trying to “beat the system”, one meme at a time.
WSB isn’t going anywhere. While I don’t suggest YOLO-betting, I do recommend to sit back, relax, and watch madness unfold.
Sometimes the best tendies are the laughs you get along the way.
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