Financial markets and herd mentalities

Not since the collapse of Bear Stearns have the financial markets quaked quite like they did at the end of January. But the market disruption didn’t result from the demise of an outlaw investment bank. No, Wall Street shook because of the ascension of a bricks-and-mortar video game company called GameStop, all thanks to retail investors banding together through the social media platform Reddit. 

On Dec. 31, 2020, GME was listed at $18.84 on the New York Stock Exchange. By Jan. 28, 2021, the stock had soared to a high of $483. A movement to save the store from hedge funds shorting the stock began in a subreddit group called r/WallStreetBets. From there, it enveloped not only the hedge funds shorting the stock—most notably Melvin Capital Management and Citron Research—but eventually, the likes of Citadel and BlackRock were also pulled into the fray.

How this will all play out is anyone’s guess. Is it a larger trend that speaks to the power of retail investors when they pull their weight together? Will the US Securities and Exchange Commission have to step in and re-evaluate its rules and regulations? Or will this simply be a funny punchline a few months from now?

What has been most interesting to watch, though, are some of the ripples in the market resulting from the so-called GameStop Rebellion. Half-a-world away from Wall Street, a group of retail investors in Malaysia—taking inspiration from r/WallStreetBets—have established a new subreddit community called r/BursaBets, named after Malaysia’s stock exchange Bursa Malaysia.

As I write this, the group has grown to about 12,000 strong since it was set up on Jan. 28. So far, it has been using “diamond hands”—lingo that means there’s value in a stock (or person or thing) and it’s worth holding onto—on the stock of Malaysian glove manufacturer Top Glove. Top Glove’s short position of around 3% of its floated shares is a far cry from the 140% short positions in GameStop’s shares, but still, the group wants to fight back against the hedge funds that have taken a negative view of the company. 

Short selling is more heavily regulated in Malaysia, where Bursa Malaysia and the Securities Commission determine a list of securities eligible for short selling. Therefore, it’s unlikely that the war anthem for Top Glove will ever match that of GameStop. Still, there are posts on the subreddit group that say things like, “Strategy to TRAP shorties & make them BLEED.” Of course, other posts on r/BursaBets explain the “strong fundamentals” of Top Glove. 

What goes up…

I’m not here to give investment advice, as my fund accounting days are long behind me. Instead, I’d like to discuss the potential toxicity of herd mentalities, of which the subreddit communities r/WallStreetBets and now r/BursaBets remind me. There is absolutely value in these types of groups in that they help investors educate themselves and share ideas. But there’s also a danger. 

Yes, while the group was successful at sticking it to the “shorties,” every single investor that dumped their money into GME at $480 or $380 or $280 is likely going to see their funds disappear (assuming they’re still “diamond hands” and holding the stock) because there’s no real reason for that company to be priced so highly. It’s just the high of winning on a gamble and following the hot hand. 

My worry is that people, in general, are becoming increasingly prone to following their herd no matter the paths they’re led down. If 2020 taught us anything, it’s that strongly opinionated people will try to make their voices heard—and we’re seeing how technology greatly amplifies those voices, sometimes for better, sometimes for worse.

As a result, the loudest voices in the room reach the largest audiences, while the moderates and non-confrontational among us are content to retreat to the wings, where things are less exciting, but our thoughts are still our own. Following a herd isn’t always a bad thing, and often, many people flock to the right causes at once, just as they do to the wrong ones. The problem is, a stampede is always a stampede, and unintended targets tend to get flattened.