Investing is not another video game
Investocracy, the raise of a new power
To make one thing clear right from the beginning, this is not an article in favor or against one of the sides in the recent “GameStop-Robinhood Saga”. That would be too easy and it would undermine the importance of the case at hand.
It reads like a Hollywood movie-story. After the 2008 financial crisis having caused major cost to taxpayers and in the midst of the economical crisis caused by Covid-19, David organized a plan and, backed up by his community, he strokes back and won a battle against Golliath. The weapon used was not a slingshot, but a Reddit social media group called “WallStreetBets” and discount brokerage accounts. In the middle of the turmoil is a company with the epic name of Robinhood and a much sought-after prey called “GameStop-shares”. So far to the big picture.
Around what has happened on Wall Street last week, there are different questions to be raised and potential aspects to be analysed.
Should short selling still be allowed in capital markets? How can it be that more than 100% of existing GameStop-shares can be short sold? Should there be regulation to prevent the outcome? Did so-called Wall Street really change the name of the game, because a herd of small investors were starting to cause major losses to big Hedge-Funds? Was Robinhood driven by a conflict of interest, when it suspended the buying of Gamestop-shares?
All those questions deserve for sure an answer; however, the recent events were resonating more with some of my personal thoughts on societal developments and the future of investment.
The Gamestop-story is the first sensitive expression of a possible investment “spring-revolution". The large public seems to disagree with existing capital market infrastructure on what is done with their money and how they are treated!
The activist part of the crowd was heavily driven by the spirit of inflicting a lesson to what they see as “diamond-handed heroes” from the hedge fund powerhouses. It appears that these autodidactic traders have built up a very good understanding of the technology of Wall Street. They were explaining to their close to 6 million Reddit-subscribed peers a plausible, but very aggressive, plan to take advantage of the short bet taken by Hedge Funds on GameStop-shares. They managed to organize what Wall Street establishment could perceive as a riot and what others might call a smart move along the given market rules.
All fine, and it is not important for me personally whether you are on one or the other side.
What makes me more thoughtful is that it looks as if, for a good part of the acting investors, it feels like playing a game. However, investing is not another video game? I am wondering whether they were more acting as a well-informed community or rather a large herd of followers, not really understanding the risks they were taking and partially still have in their portfolios. It is obvious that the actual share price will rather quickly land in more realistic fields also leaving some of these small investors with losses.
For those who were aware of the risks, they knew about the potential outcome, for the others it might just be another negative and painful experience in case they do not manage to sell at the right time. It brings me to another strong believe, education is the best consumer protection. And frankly there is still a lot to be done. Out of personal experience young people are interested and eager to learn about investing, even though not always out of books. If it has to be digital support, why not?
It tells us also another lesson, a large popular crowd has a strong desire for financial emancipation and will for sure find a way to express their views on trading and investing. And this is a positive development. If we manage to take up this trend and combine it with a proper ESG and investment education, we might see a new power in societal governance, the “investocracy”. In the long run investocracy could lead to reforms, actual law makers would not even dare to dream of. In the light of what has happened last week, imagine what happens to large companies’ stock prices, if some of their practices are not in line with the values and views of an empowered, reasonably educated and financial savvy crowd of investors. A reason more for managers to start to make efforts to understand what the end-investors really want to achieve. As disintermediation continues to progress, gaining exponential speed through new enabling digital technologies, economic decision makers might very soon see the day where they have to face investors directly. In the establishment of an investocracy, law makers and regulators will have to give a framework to the societal change and behaviours of investors.
I hope that in the future investing will not become a new bipartisan battle or a felt new video game, but a chance to steer our economies in a more consensual, sustainable, human and better future. In the interest of all, we do not need riots, but we need gradual and peaceful transition to a new market infrastructure.