How Stock Influencers Are Revolutionizing Individual Investing
“Gamestonk!!!” - Elon Musk, Tesla CEO
“$PENN TO THE MOON” - Dave Portnoy, Founder of Barstool Sports
“Tell me what to buy tomorrow and if you convince me I’ll throw a few 100 k’s at it to start”- Chamath Palihapitiya, Venture Capitalist and Former Senior Executive at Facebook
“If I had to choose between buying a lottery ticket and #Dogecoin .....I would buy #Dogecoin.” - Mark Cuban, Billionaire Entrepreneur and Owner of the Dallas Mavericks
Tweets from icons and celebrities, as shown above, are the new foundation behind recent stock surges in Gamestop (GME), Penn National Gaming (PENN), and Dogecoin (DOGE). They are the new stock influencers. All it took was an eleven-worded tweet from Tesla CEO Elon Musk to spur a 150% increase of GME back in January (Atani 2021). While analysts were shaking their heads and throwing their hands up in agony, Musk and his devout Reddit following laughed behind their screens. Musk is not the only public figure soaking in the internet limelight by using social media as a means for stock manipulation - Dave Portnoy, Mark Cuban, and Chamath Palihapitiya have all managed to guide their millions of followers to follow their market predictions as well.
Gone are the days of Warren Buffet, Bill Miller, and Peter Lynch, who encouraged young investors to stay up to date on shareholder letters and read educational investing books. Today, “Wall Street gurus,” like Dave Portnoy, have little to no financial reasoning behind their irrational investments and instead rely on their humorous efforts to capture the hearts and minds of young investors (Atani 2021).
“It doesn’t matter what your investment skills are. Because of social media, it’s never been easier to become a promoter.” stated Ben Carlson, director of institutional asset management at Ritholtz Wealth Management (Atani 2021).
This is the exact reason why these internet icons have become so appealing to young investors. They see themselves in the ‘Dave Portnoy’s’ of the world by having strong aspirations to make a killing off of the stock market, despite possessing no fundamental analysis to substantiate their investments. Nonetheless, in recent months, public figures such as Elon Musk, Mark Cuban, and Chamath Palihapitiya have gathered an army of young, ambitious investors to back their “Wall Street bets.” Their loyal followings and witty online presence have formed a unique relationship in which any market advice they throw at their supporters is taken as gospel.
So what is the ultimate impact of market influencers on young investors? Zero-commission brokerages such as Robinhood, Fidelity Investments, and E*Trade Financial Corp. have experienced a massive growth in new accounts mostly by first-time or young traders (Osipovich and McCabe 2020). An upstream of new investors helps to stimulate the overall growth of the stock market as both the S&P 500 and Dow Jones have risen 4.2% and 6.6% respectively (Atani 2021).
However, beginners’ luck can only last so long before the stock market writes a story of its own. Although investing in market indexes like the S&P 500 may reap consistent, passive returns, individual stocks are at a higher risk for extreme volatility. For example, on January 27th GME reached a record high of $347.51 before plummeting to the $40 range just weeks later (Atani 2021). “In between all of that, people get hurt,” articulated Chief Investment Officer of Laffer Tengler Investments Nancy Tengler. These rapid fluctuations in stock prices may devastate new investors who have no prior investment experience and may not be aware of this volatility (Atani 2021).
While it may seem as though young individuals are using emotion more than background research to make investment decisions, only the future holds the answer in regards to the long term value added to individual stocks by internet icons. Cryptocurrencies such as DOGE have seen a shocking upward trend thanks to many celebrities ‘hyping’ up their worth. These recent surges are making us question what really determines the value of crypto, as well as individual stocks and commodities. Of course, supply and demand form the price of these assets, but to what extent do financial analysts and fund managers predict stock market performance better than the general public can do?
Investing has always been compared to Hollywood (Zweig 2021). Portfolio managers and strategists act as the prophetic stars, when in reality they are just guessing like everyone else. While they may have more insight, given their use of data analytics, at the end of the day they are speculating. Furthermore, returns on an investment are seen as “performance” measures (Zweig 2021). Analysts tend to blame the volatility of the market when a fund’s returns do not equate to a positive gain. While Wall Street may have a head start to achieving unthinkable gains, given their years of stock market experience, who is to say whether or not young, aspiring investors can do their own due diligence?
“The internet has democratized information. So the edge has shifted to analysis. Everyone has access to the same information, financial disclosures and general data,” said Chamath Palihapitiya (Zweig 2021). As much as first-time investors may be more uneducated about the stock market, the necessary information and financial data are out there for people to consume and gain valuable market insight.
So who is the better predictor of stock market performance, Wall Street analysts or the average individual investor? Although it is safe to say that investment strategists have had a long history of making considerable long term returns, young investors have an opportunity to disrupt “Wall Street Bets” in the short run. Mark Cuban states, if young investors group together, “aggregated capital and targeted actions can be very powerful (Zweig 2021).” Young individuals have shown “strength in numbers” as of late by forcing price increases in GME, PENN, and DOGE. However, the long term value of these surges has yet to be decided by market forces.
What steps should young individuals take towards building a successful investment portfolio? For starters, begin investing now in mutual funds or passive securities that will yield long-term wealth and mature throughout one’s lifetime. While investing in individual stocks may give you higher returns, given their volatility, it is never a “bad bet” to put aside a small sum of money each month into an ETF or index fund. Securities, like the S&P 500, that follow the 500 largest companies in the United States, give you broad exposure across the American stock market. Since its inception in 1926, the S&P 500 has had an annual return of roughly 7%, given inflation. This means that, if you were to invest $100 dollars a month for 50 years with 7% interest, you would receive a sum of $462,000 (Stoffel 2018). By earning continual interest from your first investment, your money increasingly compounds every year. But who am I to give you stock market advice….
Sources
Osipovich, Alexander, and Caitlin McCabe. 2020. “Coronavirus Turmoil, Free Trades Draw Newbies Into Stock Market.” The Wall Street Journal. Last modified April 29, 2020. https://www.wsj.com/articles/coronavirus-turmoil-free-trades-draw-newbies-into-stock-market-11588158001.
Otani, Akane. 2021. “The New Stock Influencers Have Huge-and Devoted-Followings.” The Wall Street Journal. March 21, 2021. https:// www.wsj.com/articles/the-new-stock-influencers-have-hugeand-devotedfollowings-11616319001.
Stoffel, Brian. 2018. “How to Invest $100 a Month and Why It Can Be Life-Changing.” The Motley Fool. May 4, 2018. https://www.fool.com/ investing/2018/05/04/how-to-invest-100-a-month-and-why-it-can-be-life-c.aspx.
Zweig, Jason. 2021. “How the Stock Market Works Now: Elon Musk Tweets, Millions Buy.” The Wall Street Journal. February 12, 2021. https://www.wsj.com/articles/how-the-stock-market-works-now-elon-musk-tweets-gamestop-millions-buy-11613147654.