WSB & GameStop: The Market's 'OK Boomer' Moment (#17)
A tale of tribes, networks, and a cultural divide
this week has been exhausting. It feels like there was only room for one topic: the r/wallstreetbets (WSB) GameStop short squeeze. The contrarian move would be to talk about something else. There have been short squeezes before, from the corners of old, Piggly Wiggly, Resorts International, to Volkswagen and Restoration Hardware. But I believe the trends behind this situation will continue and are worth exploring.
Reddit’s WSB is just one of many manifestations of the new world of networks and online communities. The GameStop short squeeze then is the collision of that new world with the old power structure. Swarms of self-organized traders, bound through a common narrative, are facing off against the embodiment of the old hierarchy: the faceless “suits,” the hedge funds high up in the their skyscrapers. The reality is of course not that simple. But no matter how GameStop will fare, the new cultural divide is evident: it yawns between those who are embracing the network world, as builders, creators, and community members, and those who are happy with the existing hierarchies. This was the market’s “OK boomer” moment.
Today’s email has my take on GameStop and WSB, followed by a brief personal note and finally a few fund letters and podcasts worth your time.
Slowly, then all at once
In 2019 some people thought GME was a good investment. Reddit user Deepf****nvalue (Roaring Kitty on youtube) made a $50k yolo bet on 2021 calls. Later that year, Michael Burry also invested (he has since sold). In August 2020, former Chewy founder Ryan Cohen took a stake. That fall, someone posted the short squeeze/gamma squeeze idea on WSB. In November, Ryan Cohen wrote a letter to GameStop which got attention and ultimately GameStop decided to give him seats on the board. WSB also discovered that hedge fund Melvin Capital had bet against the company. Meanwhile, short sellers still thought the company was a value trap. When Citron targeted GameStop (now no longer a short seller) the game was on. The WSB community rallied, the memes went viral, more and more people piled into the stock and options. Melvin was getting squeezed and needed fresh capital. The highly shorted stock, with its fundamental catalyst in the form of an activist, was like a puddle of gasoline, ready to be lit by the rapidly growing community of believers armed with memes and call option leverage.
The Stage 5 Tribe
“/r/wallstreetbets is a community for making money and being amused while doing it.” r/wsb faq
Wallstreetbets is a stage 5 tribe and that’s powerful, especially in combination with a network like Reddit.
It’s inherently positive and attractive: “life is great.” How great? “We’re all getting rich together.” Nice.
It’s inclusive: “we’re all great.” You don’t have to be able to build a DCF to join. You don’t have to read the Intelligent Investor. If you believe in the mission, embrace the community and vote with your money, you can be part of the tribe.
It has a common enemy: “the shorts.”
It’s not hard to see why it’s appealing: who doesn’t want to get rich, joke around and have fun with a global group of likeminded people? One can get baptized by buying stock and posting a screenshot. All you have to do is believe, buy, and hold.
“Is it better today to be in a network, which gives you influence, than in a hierarchy, which gives you power?” Niall Ferguson
“As systems grow more powerful, the price of not being inside rises rapidly.” Joshua Cooper Ramo
“Old-school campaigns are like old-school militaries in the face of insurgencies. Wrong weapons. No networks.” The Seventh Sense, Joshua Cooper Ramo
WSB demonstrates the power of the network age: the community can grow and attract new members (=raise capital) purely through the strength of its narrative and network for distribution. You could call it antifragile. More controversy, more pushback? Good for engagement, good for growth. WSB gains from volatility - up to a point.
Hedge funds were built as part of the old power structure. Secrecy and exclusivity are often part of the appeal. And while they may target each other’s trades, they’re now facing unconventional warfare. WSB is a network of insurgents targeting the hedge funds’ superior firepower. And hedge funds can be fragile, their capital bases like supply lines that can be disrupted: losses lead to forced degrossing, volatility can spook LPs.
WSB has a key weakness as well: it’s completely reliant on the networks, illustrating the immense power of the gatekeepers (the Network Caste as Cooper Ramo calls it). Discord took down the WSB channel (because someone “used bad words”). Reddit seems quote supportive, Ohanian: “I don’t think we go back to a world before this because these communities, they’re a byproduct of the connected internet.” Without access to Reddit - and adjacent networks like Youtube, Tiktok, Instagram - the digital tribe would whither.
In The Square and the Tower, Ferguson makes the case that we’re living through a revolutionary period, like the invention of the printing press, in which the new networks (the square) threaten the old hierarchies (the tower). And like a Russian oligarch-to-be, when revolution is afoot you have to update your playbook or you’ll go down with the old regime.
Pros vs. Flows
Matt Levine put it well here: “Financial markets exist to foster price discovery and capital formation, but the way they do that is mostly by letting smart people mess with each other all day. WallStreetBets is a new class of smart people messing, quite effectively, with the old ones.”
It’s easy for institutional investors to dismiss WSB as “mindless retail money” and sure, with a few exceptions there doesn’t seem to be much interest in “real” (fundamental) research. However, their big insight was to “play the player,” the overly exposed shorts. As a onetime fintwit legend said, “the best traders … listen for the pain of the other traders, and then they go in.” Given the extreme volume in GME and other stocks I think it’s fair to assume the squeeze has been “weaponized” and WSB serves as signal for HFTs and other funds to participate. Apparently retail traders even became net sellers last week. In other words: the swarm of WSB piranhas got the first bite, then the blood attracted sharks.
The extreme volatility led to a liquidity crisis at Robinhood (which they denied at the time) at which point they restricted trading in a number of stocks. This prompted accusations of collusion and nefarious schemes and seems like a clear failure in communication and crisis planning (background threads on broker requirements and financial plumbing). This was the trigger for outrage far beyond those involved, or even interested in, financial markets. Once again the common woman and man were being f****d over by the system. Which brings us to my final point.
“The illusion of freedom will continue as long as it's profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.” Frank Zappa and all the commentators on Thursday when trading was restricted.
I was amazed at how many people outside of finance became focused on the situation. From Elon Musk to Alexandria Ocasio-Cortez, from Jon Stewart to MrBeast (who bought out an entire GameStop store), from Ethan Klein to Mia Khalifa. (I also saw some highly questionable suggestions).
The situation was a Rorschach test. You could pick your own narrative to fit your priors: brave retail traders sticking it to the man? Evil short sellers colluding with brokers? A Fed-induced bubble mania? Market manipulation?
The tech and “creator ecosystems” rallied in support of WSB. Of course that’s just good business sense: it drives engagement and some share of the followers is part of WSB already. But the story also hit a sore spot, that festering resentment not just of Wall Street but of the status quo in an ailing and increasingly unequal society whose sclerotic political caste has failed to address a laundry list of pressing issues.
And that’s the market’s “OK boomer” moment, pitting those eager for change against those comfortable in the old structure. The new cultural divide is between those embracing the network world: by building companies, content, commerce, and communities in public. And those who think that the status quo was working well enough and that if you want to buy a house and get rid of your student debt you should keep your head down and “eat less avocado toast.” I’m joking. But only a little.
“When will you know you have the Seventh Sense? It will be at that instant when you feel you have no choice but to move to shape and use some element of this new network world, not simply to have it given to you.” Joshua Cooper Ramo
As much as I hate to admit this, I’ve felt extreme FOMO this past week. I’m under no illusion that I would have yolo’d this trade since 2019 to make tens of millions like DFV/Roaring Kitty. But paying attention this year would’ve been enough to feel good about the whole thing and turn “$600 into $130,000 in 16 days.” Which triggers a critical voice in my head: “How the hell did you miss this?” I hate to say it, but it gets to me.
The one thing that irks me about WSB is the sense of entitlement: “it’s my turn to become an overnight millionaire.” It’s naked greed dressed up as memes. There’s nothing wrong with wanting to make money. But I think if the $1,000 squeeze doesn’t work out some people will feel like they’ve lost money that they’ve never had.
I felt lucky to take some extended walks in the snow this week. The pristine blanket smothered out all noise and left me in a meditative state. This week was also the first time in more than a decade that I could be with my mother for her birthday. Health and family are everything, as I have to re-learn every so often. There’s always tomorrow to earn money.
Signs of times
There’s no bigger sign than GME but here we go, briefly: EV/sales>20 as share of trading volume, SPAC mania continued until the degrossing, squeezes all over the place, Tobias on small call volume, unprofitable stocks, and heavily shorted names.
Letters & Ideas
Ensemble Capital on Ferrari (RACE) and NVR. “The most difficult part of my job is to say no.” (Enrico Galliera, Ferrari Chief Marketing Officer). The $1.8MM La Ferrari Aperta, was “a gift” to Ferrari’s best customers… The result of this demand management is a highly predictable, resilient, and profitable business model even during recessionary periods.”
“Like another one of our holdings, First Republic Bank, there’s a cultural reason why competitors can’t fully replicate NVR’s strategy.” Ensemble was on Bill Brewster’s podcast for a good chat about identifying quality companies.
JDP Capital on STNE, ROKU, SPOT.
ICYMI, I tweeted about Bob Wilson’s Resorts International short squeeze, Silicon Investor and Tokyo Joe, Jeffrey Katzenberg (if you need inspiration to go networking), shorts and Jim Chanos in the 80’s.
David Rubenstein of Carlyle Group was on Tim Ferriss. He’s been very successful as a fundraiser and talked about his background, his early days in Washington as a lawyer, about pivoting to dealmaking, and fundraising. Only listen if you’re interested in Rubenstein as a person or the history of PE, not for investment insights.
20VC had Alfred Lin from Sequoia talking about their initial Doordash investment. An interesting episode about the early stages of finding a deal (founder market fit, focus on unit economics, scrappiness, attention to details of the business, thinking about TAM).
Maybe check out this free Pinker Harvard lecture: “what could be more interesting than the human mind?” (I know what - watching stock prices go up and down)
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