The ‘David vs. Goliath’ myth of meme stocks
The ‘David vs. Goliath’ myth of meme stocks
The GameStop frenzy and others like it were never David vs. Goliath battles, because the bettors who won big were never David in the first place.
I might seem behind the times sharing a take on meme stocks mid-2023. But the idea was sparked by a recent Patreon episode of If Books Could Kill about the subject, so I feel in good company dragging us back to 2021 for a minute.
A meme stock is a low-cost company share that goes viral for some reason, spiking the value. Social media cabals on Twitter or Reddit or Facebook target a sleepy stock, nominally because someone the community sees as authoritative predicts it’ll go up in value. That creates a self-fulfilling prophecy: The push in demand for the stock pushes its value up.
If you’ve heard of meme stocks at all, it’s because of the GameStop frenzy that started on Reddit in early 2021. The IBCK episode lays out in detail what happened and why it was, in the hosts’ words, “stupid.” It was meant to be a scheme to foil greedy Wall Street hedge funds, but it ended in a loss for most of those involved, like much of our stupid economy.
Many of the investors who lost out blame Robinhood, the micro-investing app that blocked GameStop trading just when they were in a position to cash out. It made Robinhood appear to be siding with Wall Street institutions — a serious betrayal from a brand that was beloved for ostensibly democratizing investment.
The myth of the meme stock
The part that irks me is the narrative always tied to this story: It’s regularly referred to as a “David versus Goliath” event, where the little guy had an opportunity to outsmart the big Wall Street giants. Many investors believe it would have worked, too, if it weren’t for darn Robinhood blocking their efforts.
But meme stocks are no battle between David and Goliath.
The premise seems clever: GameStop was trading at $5 per share before the WallStreetBets sub-Reddit got hold of it. Hedge funds could make money betting against it, but little investors could sling a stone at their heads and take the bounty instead. By pumping up demand, meme investors briefly took the stock’s value to almost $500 per share — 100x growth.
Set aside the fact that most people don’t buy into a meme stock at its lowest point; most people buy in when the story gets popular and the stock has already gone way up in price, so they become pawns in the game of pumping the stock price for early adopters.
But set that aside. Even at the lowest price, the Davids don’t win this game.
GameStop started at $5 per share and made it up to about $500. If you bought in at $5, the most you made was $495 per share. $495 doesn’t make you rich. How many shares would you have to buy to come out “rich” on the other side of this thing? 300? 500? 1,000? 5,000?
How much money do you have available to risk losing on a stock bet?
The only way to make money through stock gambling — as with any kind of investing — is to have money to risk in the first place.
Davids don’t win in capitalism
Average Americans seem to always be looking for the fix that’ll let them break through the system’s efforts to keep them average. We love to hate the rich in this country, and we love to imagine we’ll someday be one of them.
Fintech preys on this cynical optimism. Micro-investing platforms like Robinhood and Public claim to disrupt Wall Street and make investing accessible to the rest of us. Cryptocurrency is supposed to circumvent corrupt gatekeepers. NFTs were going to be the secret to art collection for a new generation. DAOs somehow claim to be collectively governed…while their votes are literally bought?
None of this works unless you have money in the first place. “Start investing with just $5” gets you nowhere if you only have $5. (On a lucky long shot, it could get you to $500?)
The less you have to begin with, the less you can make, even if you buy in immediately and sell at exactly the right time.
The Redditors trolling for meme stocks might think they’re David taking on the big, bad Goliath of Wall Street by flipping a few hedge fund bets on their heads. But you have to start with a lot of money to walk away from a scheme like this with the kind of earnings that make headlines.
Anyone who gets rich off the latest investing trend was already a Goliath. The big guys always win this game.
Image by JJBers via Flickr (CC BY 2.0)
A few things you can do next…
📺 WATCH
How does the stock market work?
Economist Oliver Elfenbaum explains the origins of stock markets and how companies and investors use the market today. It shows you what it means to own a stock, and how investors make and lose money by owning stocks (because, did anyone every actually teach you??).
📚 READ
The wealthiest 10% of Americans own a record 89% of all U.S. stocks
Summarizing recent data from the Federal Reserve, this CNBC report describes the wealth inequality inherent in the U.S. stock market and how the market exacerbates that. It also touches on apps like Robinhood that claim to “democratize” investing but actually encourage new, small-dollar investors toward a risky trading mentality.
⚒️ USE
If you enjoy (or are curious about) active trading through an app like Robinhood, SoLo Funds could be a safer and more ethical alternative. This platform for peer-to-peer microloans lets funders lend money directly to borrowers in need and earn a return via a voluntary “tip.” It’s designed to serve those who are underserved by both lending and investing institutions.
💪 DO
Find out where your money is invested. Are you overpaying for risky managed funds or safely diversified in an index fund? Check with your employer (e.g. the HR department or rep) to get the right contacts to learn what you can about your company’s retirement plan, and talk with your financial planner (if you have one) about managing your other investments.
💡 REFLECT
Investigate our culture around investing. What are the benefits and drawbacks of our culture relying on investment accounts as the standard for planning for retirement and long-term financial security? What are the differences between investments as long-term saving and investments as a money-making strategy? Who benefits from these systems?