Book Review: The Revolution That Wasn’t

The revolution that wasn’t: Gamestop, Reddit and the aging of small investors. 2022. Spencer Jacob. Penguin Random House.

In The Revolution That Wasn’t: GameStop, Reddit, and the Aging Small InvestorSpencer Jakab, current editor of the Wall Street Journal and former Credit Suisse stock analyst, outlines the real winners and losers of the 2021 GameStop short, which aren’t the winners and losers we’ve been led to believe they are. He takes us through the fascinating events leading up to the short squeeze and explains how financial and technological mechanisms like Robinhood’s “free” trading app made it possible.

The financial media described it as a key moment when power was put back into the hands of ordinary retail investors. Even as Wall Street heralds the “democratization of finance,” Jakab argues that it’s still Wall Street, not the everyday retail investor, who is the ultimate winner of the meme-stock revolution.

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The class of investors that became the primary target of intense disdain at WallStreetBets were short sellers, who may have taken a permanent hit. Because short buying can now be facilitated on social media, it has become much riskier for portfolio managers and traders to go short. Short sellers now know that a diverse group of retail traders can “stick” them. This development will likely reduce short interest in the future. And because short positions play a critical role in maintaining price efficiency, a reduction in short interest will likely lead to more bubbles in the future—bubbles in which the most likely buyers will be everyday retail investors.

According to the author, a mid-2020 estimate of the average holding time for a stock dropped to less than half a year from eight years in the 1950s. Shares now change hands about 17 times more often than in the 1950s. Although each individual trade is less expensive due to the elimination of commissions and a reduced difference between the bid price and the offering, the new crop of retail investors, including those who facilitated GameStop’s short squeeze, will leave significant money on the table as part of their active trading. The combination of retail investors more common in the market plus their belief that they can be smarter than the market will likely be a boon to Wall Street professionals.

According to Jakab, the democratization of finance and the retail rebellion was an illusion that the financial media bought too easily. If you cater to people’s propensity to gamble when they first have money and tell them they can do 30-50 trades a day without fees, but you’re selling their order flow, you’re creating an indirect way for Wall Street to money. Investor advocates, such as the Consumer Federation of America, are calling for rules to protect investors from these gut bets and are critical of the free trade model.

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Many of the new retail investors will learn their lessons by paying Wall Street tuition in the form of losses. One of the most pernicious effects of young retail investors losing a small sum of money is that they eventually become discouraged from investing. A dollar lost early can be more punishing than one lost in middle age because of compound interest. Stock market wealth is already very unequally distributed by age, race and income.

In short, the author points out that competition and technology have made Wall Street a friendlier and more profitable place for people, as long as they play a not-so-exciting game. If commission-free trading had been around a few decades ago, Jakab estimates that Warren Buffett could have made 150 to 200 times more than the global market. Despite the meme stock revolution, the new boss of finance seems to be the same old boss, and Wall Street is still a place where investors lose too much money when they think they can beat the house.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

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Mark K. Bhasin, CFA

Mark K. Bhasin, CFA, is a senior vice president at Basis Investment Group, LLC, New York, and an adjunct associate professor at New York University’s Stern School of Business.

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