February Update, 2021: The Social Network Is Us

This one is not about Facebook. This is about the social network called the stock market, as seen through the lens of GameStop.

[Common sense says] that when people make decisions about what they like, they do so independently of one another. But people almost never make decisions independently — in part because the world abounds with so many choices that we have little hope of ever finding what we want on our own; in part because we are never really sure what we want anyway; and in part because what we often want is not so much to experience the “best” of everything as it is to experience the same things as other people and thereby also experience the benefits of sharing.

Duncan Watts

GameStop is a struggling business, not unlike many businesses that trade on the stock market. Unless you like to play video games, you have likely never heard of the company. I first learned about them when we were investigating the video game developer Activision Blizzard (ATVI). In the “old days” if you wanted to play one of their video games, you likely would have bought the game at a GameStop store. Today, you download the game over the internet. Good for ATVI, bad for GameStop.

In the end, the degree to which GameStop suffers or flourishes is subject to the same debate as any company. But the interesting stuff happens when a stock price (or tulips for that matter) starts to move up in an exponential manner. Before technology connected us instantly, we learned about the excitement in a newspaper, or maybe through a call from a stockbroker. The more brokers noticing and passing the story on to others, the more buyers there would be. Now we have platforms like Facebook, Instagram, LinkedIn, and Reddit (to name a few), where anyone can tell a story and potentially tens of millions of people can learn and play. We have apps on our phones (like Robinhood) that let us buy into that story and share the good news with our friends. Our friends see us making money and want to experience the same fun and reward. We join the movement. Positive feedback loops, and one event fuels the next. Social momentum is a powerful thing.

One of the interesting things about this recent social movement – or shall we call it a ‘campaign’ – is that the social network characterized it as a war of sorts, against Wall Street. Nothing is more powerful than an us vs. them, or David and Goliath, story. The pandemic has exposed the gaping hole between the stock markets successes and the state of economies. So, the Reddit Mob settled on uplifting themselves by boosting a downtrodden victim of progress (GameStop) and sticking it to ‘the man.’ That was the battle cry, and it was a fun narrative while it lasted.

Interesting narratives are being deployed by certain stock market multi-billionaires (one now needs to add qualifiers, as a mere billion is not what it once was), reaching out to the angry Mob encouraging them to follow them to the promised land and take over Wall Street. The Mob roars in approval sending the anointed idea soaring. Cellular phones alight, apps are opened, positive vibes are shared. It is great fun! If GameStop could put that in a box, it might have a bright future. But alas, that future has been passed on to the new age gaming company called Robinhood.

Meanwhile, the money printing machine rages on. Robinhood has joined the Wall Street club and is being introduced to Ms. Yellen and friends. Casinos are regulated businesses after all.

Wall Street is nothing if not adaptive to new trends, and the Street is printing as much new paper as the government and John Q. public will fund. The Fed needs to feed the Mob. And the Mob needs to be fed. It is just not evident who the Mob is anymore. The old definitions are being re-defined, and it is not clear who is writing the rules. The social networks are working overtime and Apple and Google are laughing all the way to the bank.

One of the new Wall Street inventions is the ‘Blank Check Company’, otherwise called SPAC (Special Purpose Acquisition Corporation). A well-known businessperson, but increasingly a socially well-known celebrity, lends his or her name to a SPAC. The company upon creation, has no business to acquire, but promises to find one soon. Wall Street advertises the SPACs existence and investors buy into it hoping that the celebrity does something smart and they receive a handsome return.

In the past, this act of faith was mostly done by private equity companies, like KKR, and was funded by investors like the Canada Pension Plan. But now we have democratized investing! You can fund a retired baseball player using an app on your phone. One might argue that this is all fun and games, but the dollars involved are real and are growing rapidly. In 2020 about $80 billion was raised via SPACs. A further $67 billion was raised via IPOs. So far in 2021, $26 billion of SPACs have been sold and an additional $67 billion in IPOs have been sold to an eager public. At this pace, $1.1 trillion in new paper will be created, an amount that is larger than all of the companies in America except Apple, Amazon.com, and Google. The poor private equity guys have had to join the SPACs fun for fear of missing out.

To take it back full circle, Watts wrote, “what we often want is not so much to experience the “best” of everything as it is to experience the same things as other people and thereby also experience the benefits of sharing.” Our social reflection as expressed through the stock market is in full regalia. It is times like these, that one best knows and understands, which crowd one joins and for what purpose. Sharing is one thing but investing should be to meet one’s individual needs and not play games with Mobs.

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