Much was made of the WallStreetBets meme trading movement, where a group of social media traders banded together in a "Kum Ba Yah" moment to take down the dark lords lurking inside giant hedge fund firms.
The mass media latched on to the movement, portraying the Reddit traders as the Robinhoods of finance, metaphorically slinging well-aimed arrows through Wall Street’s concrete canyons, striking down the hedge fund short specialists in the process.
It’s a nice story and one that’s tailor-made for today’s 240 character-driven social media movement. The fact is, as James “Rev Shark” DePorre notes in Real Money, the meme trading movement is hardly new and not nearly as efficient as the mass media has led average investors to believe.
"Learn how to pick your own stocks. Social media trading is surprisingly uncreative in finding new stock ideas." Read more from DePorre in his Real Money columns about how become what he calls a 'real trader,' to profit from the upside and steer clear of the risks.
This from DePorre:
"The business media likes to portray meme trading as something new, but this sort of trading has been part of markets from their very beginning hundreds of years ago. There will also be groups that question the conventional wisdom of the professionals that control the market. It is no surprise at all that there are small traders with limited capital who have no interest in the idea that they should hold a diversified portfolio of stocks for the long term."
The recent surge in social media trading was caused by a perfect storm of circumstances, according to DePorre. "The pandemic created a combination of more free time, a need for entertainment, free cash payment, and better social networking. Trading hot stocks was a great way to spend some time, and brokers like Robinhood made it extremely easy to trade small accounts money," noting there aren't even commissions or transaction costs to create friction and slow things down.
While the meme investors were able to change the arc of stocks like GameStop (GME) - Get GameStop Corp. Class A Report (down 21% in the past month) and AMC Enternatinment (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report (down 30% in the past month), they haven’t had much luck elsewhere.
In fact, the now-deflating meme investing movement is both understandable and predictable, DePorre writes -- it’s a product of the time, especially with the persuasion power of social media to drive the “meme themes,” he says.
"Social media is going to exist in various forms as long as there are markets. This is not some new idea that is going to create a steady flow of easy profits. It is a cutthroat business, and if you want to make money trading these stocks you must recognize that other traders are your competitors and not your friends," he writes.
DePorre advises smart investors not to fall for the meme trading grift. He also offers some “red flags” for investors to watch out for as they engage in social media trading channels, including folks bragging about their success and the higher levels of volatility.