WallStreetBets Creator on GameStop and Meme Trading

Model portfolios have evolved from a one-size-fits-all solution. In a recent roundtable conversation, Jeffrey Safe of BlackRock and Alessio DeLongis of Invesco break down what's driving the next model moment, discussing how a deeper level of customization is producing a better alignment with investor goals and creating a practice differentiator for financial advisors. Nowadays, you have value and growth on one side and you have meme on the other side. And the joke that I tweeted out was, you know, the boomers say Says to the millennial, what are you, growth or value? And the millennial goes, I'm a meme investor and I'm kicking your ass.

Meta, did he just use the A-word?

I think he did, yeah.

Are you going to bleep that?

No, I think we're okay.

Wow. No A-word sound effects though, please.

You got it.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Jamie Rogozinski. He's the creator of WallStreetBets, a popular subreddit or online message board. And there, visitors discuss trading ideas and sometimes large numbers of them act on the same trading idea together and cheer each other on. That can cause massive gains for unlikely stocks like GameStop. In a moment, we'll talk about not company cash flows, not dividends, not how to spot value, but about the rise of meme trading and where it might lead. Listening in, as always, is our audio producer Meta. Hi, Meta.

Hey, Jack.

I have a game for you. It's called Meme or Not a Meme. I'll name 3 things, and I've either made them up or I've taken them from a list at Thrillist.com called the 100 greatest memes ever. You guess which is which. What do you say?

I'm in.

Okay, number 1 is Sarcastic Willy Wonka. Meme or not a meme?

I think that's a meme.

That is a meme. It's a photo of Gene Wilder as Willy Wonka leaning on one elbow with a sarcastic smile, and it's taken from the film Willy Wonka and the Chocolate Factory, the original one which just turned 50. So, for example, you might post that photo with the caption, "Wow, Jack sure knows a lot about memes," which of course I don't because I'm only a year younger than the movie, which means memes are not my native language. Number 2: Twizzler Cowboy. Meme or not a meme?

That is a meme too.

That is not a meme, but I feel like it should be. You're 1-1 so far. Number 3 is an opportunity for glory. It's Doge. Meme or not a meme?

I have no idea what that is, but let's go with it's a meme.

It is a meme. A kindergarten teacher posted a picture of her adopted Shiba Inu dog online back in 2005, and the photo began circulating with captions for the dog's inner monologue using quirky grammar like "so scare" instead of "so scary." Today there's even a cryptocurrency called Dogecoin with a market value of close to $1 billion, which I find so amaze. You got 2 out of 3, Meta. How do you feel?

I feel great about that.

I'm detecting a bit of sarcastic Wonka there.

Really? I've never felt better about that.

Okay, I think you mean it. We'll come back to memes in a moment and see if I can tie them into investing. Two things happened on Wall Street this past week that were absolutely bonkers. By now you've probably heard that shares of video game retailer GameStop soared to shocking levels.

To Main Street, it's the world's largest video game retailer, but on Wall Street, GameStop is the latest battleground between the financial elite and small investors. GameStop's rally has really been driven by a frenzy of traders on social media, kind of sticking it to the big institutional investors, the hedge funds, by basically forcing the big guys to lose money because they had been shorting or betting against GameStop. Shares of the company have soared nearly 800% over the past week, driven by anonymous posts on the Reddit forum WallStreetBets. One user here says about GameStop, Do not sell. We can keep holding our shares, but quote, they can't keep holding their shorts. Another says, bought mine today as well and holding. Good luck all.

GameStop sells video game discs through mall stores at a time when both discs and malls are dying, which is not ideal. Over the past decade, revenues have collapsed by 45%. And profits have turned to losses. The company had attracted heavy short selling, a type of bet that the stock price will fall. But there was a bullish case for GameStop too. It rested on the company trading at a depressed price and appearing fixable. That's why Ryan Cohen, a co-founder of Chewy, the online store for pet supplies, bought a big position in the stock and began arguing publicly that GameStop should transform itself into the Amazon of video games. Early this year, Ryan Cohen won seats on GameStop's board for himself and two associates. By then, the company shares, which had traded under $5 last summer, had shot up to $20. It was a big bounce, but otherwise a fairly normal case of a distressed company rebounding on the involvement of an activist investor. Then the stock price soared from $20 to over $400 this past week before tumbling back, and that part is less explainable with traditional approaches to investing. It might help to look for answers at WallStreetBets. That's a forum on Reddit, a website where users post messages and images for others with similar interests. In the case of WallStreetBets, that interest is investing and not the buy-and-hold type.

I started WallStreetBets back in 2012. At the time, I was single. I had disposable income. I was working in the finance world and I was getting an interest in the trading world. And I was more specifically interested in the high-risk, high-return type trades as opposed to the typical buy-and-hold investing.

That's Jamie Rogozinski, who created the WallStreetBets subreddit. Or Reddit forum and has written a book about it called Wall Street Bets: How Boomers Made the World's Biggest Casino for Millennials. He says back in 2012 when he looked around to learn about investing, the things he found were focused on subjects like diversifying and controlling risk. And as he puts it, active trading is anything but that. So he started a community to discuss his type of trading.

We weren't shy about the fact that what we were doing is risky, but also okay with it. So giving it some of that lighthearted feel that continues to this day.

WallStreetBets users have their own customs language, lots of rocket ship icons and talk of things going to the moon. Plenty of acronyms like YOLO for you only live once. And there's insider lingo like the term tendies, which means chicken tenders, which means money, which is weird, but no weirder, I suppose, than saying clams or even bucks. Bullish cases have circulated on WallStreetBets for GameStop for more than a year. Some called it a candidate for a short squeeze. That's when a heavily shorted stock rises and the investors who sold short start losing money and they scramble to buy back shares to make sure their losses don't grow too large. That buying by short sellers to fix their problems can make their problems worse by pushing share prices even higher. As GameStop shares began rising, WallStreetBets users boasted about how many tendies they were making, and some taunted big known GameStop short sellers like Gabe Plotkin at Melvin Capital and Andrew Left at Citron Research. I've always thought of short sellers as outsiders attacking the establishment, But to these Reddit users, the short sellers were the establishment and they were the attackers. GameStop posts took over WallStreetBets, making up one quarter of its posts in January. Now, we can certainly attribute the stock's rise to over $400 this past week to a short squeeze. Melvin Capital had such big losses it accepted a cash infusion from rival funds. We can also mention call options. Those can be used as a low-cost risky bet on a stock going up, and lots of WallStreetBets users mention buying calls. One thing to know about that is that options trades are handled by market makers who tend to hedge call buying by purchasing shares of the underlying stock. That means heavy call buying can push share prices higher too. And this past week, call buying set records. GameStop became the world's most heavily traded stock. Some brokerage firms reported outages as they struggled to keep up with the volume. David, we do have now some statements from Robinhood and Interactive Brokers about restricting trading on some names. The statement out of Robinhood says our mission— Eventually, some brokers blocked buying of GameStop and other stocks. In light of recent volatility, we are restricting transactions for certain securities to position closing only. It wasn't just GameStop that took off. Other heavily shorted stocks soared too. AMC Entertainment, which owns a chain of theaters, multiplied in price. Even more remarkable, AMC Networks, a separate television business with a similar name, briefly jumped too. And tiny BB Liquidators, which controls the remnants of the fallen movie rental chain Blockbuster soared in price. By Thursday, these stocks had reversed course and begun sliding. How do we explain all of these? Maybe they're meme trades, transactions that go viral online and not for their obvious fundamental merits. Maybe the AMC Network's name mishap wasn't a mistake. It sounds a lot like an episode with Zoom video communications around a year ago.

Apparently people were not doing their homework when it came to tickers. There's a company called Zoom Technologies. The ticker is ZOOM.

When traders bought the wrong ticker symbol, ZOOM instead of ZM.

Not to be confused with Zoom Video Communications, ticker ZM. A lot of people apparently were making that mistake. Zoom Technologies shares were suspended by the US Securities and Exchange Commission today. Through April 8th after that stock had climbed in recent weeks on confusion perhaps between the two tickers.

The thing is, investors have made that same mistake months before. So when they made it again a year ago, it looked a lot like they were doing it on purpose. Here's Jamie, the WallStreetBets creator.

A lot of people saying, well, these fools, they don't even know what they're doing. They're investing in their own company. And my response to that is, who's the fool? They made more money than had they invested in the actual Zoom company because the properties of that particular one, it was a small company and the volume, the name of the game was making money. And these guys aren't gonna sit there and wait for dividends. You know, they're not investing in a longer term. They're doing these short-term gains and they did a great job.

Jamie says something similar happened with Hertz, the rental car company whose shares took off at one point this past summer, even though the company was in bankruptcy proceedings.

All the new investors who've been bidding up Hertz over the past week about to get a harsh lesson about who really owns a company.

It's tempting to think the Reddit traders didn't understand the implications of bankruptcy at the time.

Hint: when that company is bankrupt, it's not the shareholders, it's the creditors, the bondholders who do the owning. So let me give you a lesson on the credit side of the business. Because I don't want you throwing your money away on a whim or a newsletter or a pump-and-dump scheme on Twitter.

But my guess is many understood it and didn't care. They were looking for a quick trade. If one hallmark of internet memes is that people who post them create their own variations on running themes, AMC the TV company and Zoom are variations on the meme of getting the ticker symbol wrong. And BB liquidating, AMC the theater company, GameStop, and Hertz are variations on the meme of written-off companies, often with plenty of well-informed short sellers, suddenly spiking in price. Remember when I said memes often involve humor? If a huge rally for a company that sells discs in malls is funny, then I guess one for a forgotten renter of movies on disc and tape must be hilarious. But not all investors are laughing. Some call what WallStreetBets traders are doing manipulation. Is it? Technically, stock prices come from information generated by trades, and trades affect prices. All buying and selling of stocks is price manipulation on some level, you could argue. During the global financial crisis, Warren Buffett bailed out Goldman Sachs by purchasing custom-made shares with huge dividends and warrants that would pay off if the regular shares rose. The shares rose, of course, because the company had gotten a bailout from Warren Buffett. No one calls that manipulation. Jamie describes what's happening now as a form of democratization.

No longer is it just the large institutions that control the seat at the poker table. It's now the collective effort a coordinated effort by a massive group of people that are, you know, they're all sharing a seat at the table as well, and to figure out a way to do it using a little bit of capital and actually pushing things around.

I hear a common complaint among millennials and younger investors that generations that came before them benefited from pensions and stable markets and job security and affordable housing, whereas young people today have lived through manic markets and little wage growth and periods of widespread layoffs, and that by holding interest rates so low for so long to stimulate growth, policymakers have fueled asset bubbles and pushed house prices out of reach. Viewed through that lens, maybe you could argue that young investors have figured out a way to monetize a hidden asset: their native internet fluency and their ability to spot memes including meme trades earlier than the rest of us. Tesla founder Elon Musk sure seems fluent in memes. This week he tweeted, "Game stonk!" with two exclamation points and a link to WallStreetBets. Now stonk is a meme where the user gets the word stocks wrong for ironic purposes. So Elon was using the stonks meme to celebrate the meme trade GameStop. It was a double meme meta. I think if there's ever a great milestone and memes documentary, that that one should be in it.

Do you really meme that?

I was gonna say it about 2 minutes ago. Now, if the significance of Elon's tweet doesn't make total sense to you, I guess that makes 2 of us. I'm still trying to figure memes out, but Jamie views meme literacy, like Elon demonstrated, as a vital CEO skill.

If you're a quirky CEO, which oftentimes is one of the common denominators that I've seen in these meme stocks, you know, that seems to be just as valuable as the product that they're doing underneath. A CEO's mandate is to maximize shareholder value, period. That's it, right? And they can do that a lot of different ways, one of which is producing goods and services, being profitable company, whatever, strategizing long term, or being good on Twitter. That seems to work too.

I asked Jamie if he thinks this frenzied trading will end badly for WallStreetBets members. He says maybe not, because when things turn lower, they could just change their trading strategies. We'll see. I asked Jamie, is there a way those of us who are not especially meme literate can tell when a trade on WallStreetBets is about to achieve meme status? He says plenty of people are working on that.

It's obviously new, so, you know, whatever the magic formula is, is still being developed. I know for a fact that there's been countless, endless studies into exactly this and counting the number of times that people are using certain words and using machine learning, natural language processing algorithms. There's a lot of people looking into this, and there's a lot of money that are going into this as well.

Jamie is no longer a moderator on WallStreetBets. I asked him Where does he think all this trading leads us? Does he see it as a sign we're in a bubble?

The word bubble really doesn't resonate much with me. In the long term, stocks do go up even if they take a temporary downturn. I think it's a byproduct of inflation and population growth and interest rate decisions or whatever you want to put into it. What I think is to some extent permanent lasting, yeah, I think that this is the new normal.

As for me, I apparently have a lot to learn about memes. Lately I keep asking myself whether what's happening now is wackier than what I saw on Wall Street in the late 1990s, and until recently my answer was no way. Now I'm not so sure. Back then, people were posting messages online, and I remember a subscription service called Jag Notes which would email stock tips including rumors that often didn't pan out. But people traded on the tips just the same because that's where the action was. We had young and inexperienced traders back then making fast fortunes. What we didn't have, of course, was the ability for everyone to enter their own stock trades using a smartphone. I find it interesting that this past Wednesday, when the meme stocks were racing higher, the broader stock market tanked. And on Thursday, when the meme stocks got hit hard, the broad market was up big. The Wall Street establishment seems to be saying, we're not quite sure what's happening here, and we'd be a lot happier if it stopped. Hang on, we should do a quick addendum. Earlier, I mentioned a cryptocurrency called Dogecoin, and I said it had a market value of around $1 billion. While we were recording, it got up to $8 billion. Why? Well, investors recognized the rich cash flows and inherent fundamental value. I'm kidding. A Reddit forum called SatoshiStreetBets began exchanging messages about Dogecoin and the price rose. And it might have achieved meme trade status when Elon Musk tweeted a parody cover of the fashion magazine Vogue. It was called Dogue, with a picture of a dog and the headline "The Goodest Issue." The Satoshi Street Bets crowd took that to mean that Elon was bullish on Dogecoin, or at least that others might interpret it that way. If memes are adding billions of dollars in value, do I have to start calculating price-to-meme ratios to figure out where the value is? Maybe that's covered in the next issue of Dogue. Meta, how about a listener question?

Sure.

Now, do we have any on memes? Maybe Grumpy Cat pictures or Chuck Norris facts? There was that viral photo of Bernie Sanders with those hand-knitted mittens. I've really been studying up on this.

We actually do have a question on mittens. Okay, hit me. No, I'm sorry, just kidding. We have one from Robert from Chicago.

Let's hear it. Hi, Jack. My name is Robert and I'm from Chicago. I have a question about structured notes. My advisor is suggesting that I consider investing in them because of the high rate of return. I'm confused though why I would want to buy something that's a derivative of a stock, say Apple, get a rate of return, probably get my principal back, but not necessarily, when I could just buy the stock, again, say Apple, and participate in the upside of the stock for as long as I want. Am I missing something here? I'm 30 years old and have a long investment horizon, so I'm just pursuing a buy-and-hold strategy. I love the show. Thanks so much. It's a great question, Robert. Thank you. Notes are loans, just like bonds. The investor lends money and generally gets a promise that the money will be repaid with interest. How safe the note is depends on a variety of factors, chief among them who's borrowing the money and how likely they are to make good on their promise of repayment. If the loan you're asking about is issued by a big financial institution, I'm guessing it's reasonably safe from a credit standpoint, Robert. But there's a catch. It's a structured note, which means it has been altered from the start with some type of added bet. The purpose of that is to give an investor hybrid exposure—the safety of the note plus something else. One common way to alter a note is to use options that pay off if the stock market rises. In that case, the structured note holder gets a boosted return, although probably not as high a return as if he or she had just invested in the stock market directly. Because remember, this is a hybrid investment now, part safe note and part bet on the stock market. If the stock market falls, the options might expire worthless, leaving the investor to fall back on the protection that comes from the note. Of course, the options cost something, so the note probably won't end up paying as much as the investor could have made buying notes directly, and there might be embedded fees that are higher than the investor could have paid going their own way. Structured notes are best for investors who know they should own stocks but can't bear the thought of the risk that comes with them. It reminds me of a strategy called a zero-coupon wrap. A zero-coupon bond doesn't pay interest each year. Instead, you buy it at a discount to what it will be worth at maturity. Suppose you have $100,000 to invest. You might pay $70,000 for bonds that will mature at $100,000 at some future point. Now that leaves $30,000 left over, and since you know you'll be getting your $100,000 back in the future, you can buy something risky with the $30,000 and still sleep at night. The truth is, doing that isn't any better mathematically than if you set up a diversified portfolio of stocks and bonds. It just provides a risk-averse investor with a simple guarantee and story that might help them come to terms with taking risk. I don't hear much about the zero-coupon strategy anymore because interest rates are so low that it would cost too much to buy the bonds, leaving little money left over for the risky part. Structured notes are similar, Robert. They provide a tidy story about risk, but it sounds to me like you can do just as well on your own. And I'm guessing better if you keep your fees down. I hope that helps. Thank you, Robert from Chicago, for sending in your question. And everyone, please keep the questions coming. Just tape on your phone, use the voice memo app, and send it to jack.how@barons.com. Thank you for listening. Meta Lutzow is our producer. Meta quick. Sneezing turtle, meme or not a meme? Not a meme. You're right, it's not. And it's a very serious condition. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's @JackHough, H-O-U-G-H. See you next week.

Model portfolios are no longer one-size-fits-all. In fact, 85% of investors want financial advisors to deliver models customized to their individual goals, investment preferences, and tax circumstances. Discover some of the top themes driving the shift in Seizing the Next Model Moment by BlackRock.