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  • Thematic Investing

    Investing Behavior Illuminates Online Communities

    VanEck
    September 16, 2021
     

    Retail investing surged in 2020 and continued into 2021. As individual investors’ interest in the markets grew, they began to seek out information on companies and investment insight from peers. Online communities gained following, providing not only discussion forums, but also a means for education on companies and market movements. Most notably, some Reddit forums have been popular platforms for individual investors to connect over investment ideas and questions, with some forums gaining millions of followers worldwide in January 2021 alone.1 This connectivity aided in the meme stock following, as it allowed a multitude of users to collaborate over shared ideals.

    The Growing Impact of Retail Investing

    The meme stock was previously unheard of before early 2021. Since the beginning of the year, we have seen meme stock trading take off. Measuring collective sentiment in investing has been done by institutions and hedge funds for several years now with tech and artificial intelligence. Recently we have seen hyperactivity by individual investors in collaborating over these platforms to share ideas in a greater way around these handful of stocks that grabbed the market’s attention this year.

    Companies with high short interest, rising stock options, heightened attention on social media and price targets that seem unrelated to research typically characterize meme stocks.2 Investor interest around these names has grown, resulting in investors turning to online forums as a space to gather and discuss the stocks. Communities have gained traction within Reddit, rallying behind these companies and providing research. Members seek to support these names that otherwise have been heavily shorted by hedge funds looking to profit from their downfall and pending bankruptcy. Two of the more noteworthy meme stocks this year that benefited from these community movements are GameStop (GME) and AMC Theaters (AMC).

    Similar in name, meme coins have risen in the growing crypto space. Dogecoin, named after a meme of a Shiba Inu, began as a parody designed to serve no practical function and has since gained a mass following. The price of this coin tends to fluctuate based on its mentions in social media. More recently, Mark Cuban announced that Dogecoin would be accepted for Mavericks tickets and merchandise. Elon Musk tweeted a faux “Dogue” (i.e. Vogue) magazine cover, and referred to himself as the Doge Father when announcing his SNL appearance. These celebrity social media statements caused a surge in Dogecoin, driving its price up 20% in April.3 Some people tend to invest in these types of coins with the hope that others will pile in and drive up the price, rather than for the coin’s actual value. The influence on price from social media and celebrity mentions, with little to no utility for some coins, can make these types of coins relatively volatile.

    Evolution of Communities Around Investor Interests

    The communities centering on meme stocks have grown into a large and powerful online presence. The more recent purchasing of GME shares had driven up the price from $17.37 in mid-January to a peak of $347.51 by the end of January and the price remains elevated; a similar story for AMC, whose shares were valued at around $2.20 in mid-January up to a peak of $62.55 in the beginning of June.4 GME’s market cap recently increased to the largest in the Russell 2000 Index at $11.2B, which moved GME into the Russell 1000 Index in mid-June,5 and a further increase moved GME into the S&P 400 in August.6 Recently, there has even been discussion of a possible move into the S&P 500 later this year.7

    Members of these communities provide research on a daily basis, by voluntarily (noting that they are not financial professionals) analyzing these stocks in order to provide insight to fundamentals and market movements for the community. As the communities have grown, new jargon has evolved within discussions and is used in common conversation among members. Members encourage each other to HODL (hold on for dear life) their positions, despite price movements. Those who are committed to buying and holding regardless of drastic price movements claim to have “diamond hands” – unshakeable hold despite uncertain or volatile price movements. As these communities are open to the public, there has been some speculation by Reddit members and those at Coindesk over whether or not hedge funds have infiltrated forums looking to manipulate retail investors and spread “FUD” (fear, uncertainty and doubt).8 When investors tried to move into meme stocks earlier this year, many faced complications within their trading platforms. Easily accessible platforms, like Robinhood and TD Ameritrade, that position themselves as user-friendly quickly shut down trading, halted trade requests and even closed out some positions of meme stocks without warning to investors.9 Individual investors saw this as a violation to their trading freedom and abilities, and thus sought out investments that could not be so freely controlled by financial institutions. Decentralized finance (DeFi) apps gained even more attention following this event, furthering the crypto adoption among investors.

    Communities in the crypto space have since evolved as investors try to better understand DeFi apps, this newer asset class, and its price movements. Online education often found on YouTube focusing on Bitcoin, Cardano, Ripple and Ethereum, to name a few, continues to gain traction. Many YouTube crypto educators provide daily commentary and carry a significant following, some with hundreds of thousands of subscribers; for example, CryptosRUs and Crypto Banter, two popular YouTube crypto education channels, each have over 300,000 subscribers.10 They seek to track the price and historic trends of these coins to help crypto investors understand the market and make informed decisions about crypto investments.

    With increasing digital connectivity, investors have greater access to each other on a global scale as online communities grow in reach. People are finding creative ways of connecting over these common topics of interest and distributing insight and research. These mass behaviors in investing could continue to appear occasionally as conversations and communities develop; this suggests the importance of paying attention to investor sentiment.

    DISCLOSURES

    1 Source: Reddit & Washington Post Jan. 2021 (https://www.washingtonpost.com/technology/2021/01/29/wallstreetbets-reddit-gamestop/)

    2 High short interest: Short interest is the number of shares that have been sold short, but have not yet been covered or closed out; high short interest indicates investors are pessimistic (Source: Investopedia)

    3 Source: CNBC Apr. 2021 (https://www.cnbc.com/2021/04/28/dogecoin-price-surges-after-tweets-from-elon-musk-and-mark-cuban.html)

    4 Source: Yahoo Finance

    5 Source: Barron’s June 2021 (https://www.barrons.com/articles/gamestop-amc-russell-1000-51623883459)

    6 Source; Seeking Alpha July 2021 (https://seekingalpha.com/news/3720168-gamestop-makes-a-move-into-midcap-400-index-bel-fuse-and-spok-slip-on-index-exits)

    7 Source: Wall Street Journal Sept. 1, 2021 (https://www.wsj.com/articles/gamestop-stocks-possible-return-to-s-p-500-in-hands-of-anonymous-committee-11630494001)

    8 Source: Coindesk Feb 2021 (https://www.coindesk.com/podcasts/coindesk-podcast-network/hedge-funds-infiltrated-reddit-wallstreetbets)

    9 Source: CNBC Jan 2021 (https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html)

    10 Source: YouTube

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    Russell 2000 Index is a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.

    S&P MidCap 400 Index refers to a benchmark index comprised of 400 companies that broadly represent companies with midrange market capitalization between $3.3 billion and $11.8 billion.

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