The subreddit known as r/wallstreetbets has been consistently making headlines this year. Although it has been around for nearly a decade, it gained national prominence during the GameStop short squeeze and has continued to intrigue investors ever since. They employ high-risk strategies that many brokers and investors would never dream of. However, many of its community members have made impressive gains that leave many of us asking ourselves if we should be taking investment advice from WSB.
What is WSB?
For those who are unfamiliar with r/wallstreetbets, it’s a strange place…to say the least. If you scroll through its most popular posts, you will see members sharing their astronomical gains, crushing losses, and investment advice from WSB that goes against conventional wisdom. That’s because this subreddit is not your typical investing forum. It’s a place where amateur and veteran investors alike can discuss ultra high-risk strategies. They ignore the most fundamental rules of investing and make moves that even the most hardened investors cringe at because…YOLO! While some view it as little more than high-stakes gambling, others are taking signals from the community posts and making huge gains from risky investments.
From its inception, WSB has been a place for people to discuss high-risk trades and seemingly crazy investment strategies without judgment or lectures. That is, of course, unless they are referring to themselves. The self-deprecating and sometimes profane tone of the forum has become an important part of the community’s culture. Even though some despise its irreverence and lack of respect for the traditional rules of trading, no one can deny that WSB has played a significant role in recent stock trends.
What Are WSB’s Investment Strategies?
Instead of choosing well-known assets, WSB members throw caution and money to the wind to make risky trades or buy more volatile stocks. If you are new to the forum, don’t even waste your breath discussing the merits of bonds or risk mitigation. Community members know how insane their approach is, and they revel in the madness of it all. And while it may have begun as an obscure trading forum, WSB has grown into a virtual army with its own subculture and jargon. Its numbers swelled after the short squeeze on GameStop stock in January 2021 and made it wildly popular. The entire phenomenon put the subreddit in the national spotlight, and some investors starting taking their investment advice from WSB.
Unfortunately, many members of the subreddit acted on buy and sell signals too late and lost tons of money. I’m not just talking about the money set aside for investing. Some lost their entire life savings and mortgages in a matter of hours. The r/wallstreetbets forum is many things. The one thing all financial advisors can agree on is that the subreddit is not a reliable source for investment advice.
Yet, every day members share their gains and post the impressive returns they have earned from their risky strategies. Countless community members made thousands, even millions, during the GameStop short squeeze. In fact, one subredditor joined the billionaire club when it was all said and done. It’s hard to ignore posts from members barely in the 20s who could retire off their “tendies” while the rest of us slave away at our jobs and stick with tried-and-true investing strategies.
What Do Brokers Think of Taking Investment Advice from WSB?
Any financial advisor worth their salt should tell you not to trust the investment advice you read online. This goes double when it comes from an online forum of novice investors with a penchant for high-risk investments. When I asked my broker his opinion of their investment strategies, he compared it to trusting social media or tabloids for your news sources. And he’s not wrong. Most of the time, advice from WSB involves more gambling than strategy.
But…Here’s Why You Should Take Advice from WSB
Although their strategies are unorthodox and extremely high-risk, there may be a method in the madness. A recent study conducted by two researchers from the Hasso Plattner Institute in Potsdam attempted to unravel the secret behind the success stories. Although some members have had staggering losses, particularly after the GameStop frenzy, the team may have uncovered a way to decipher when you should take investment advice from WSB and when you should ignore it.
In order to determine just how reliable WSB’s advice was, the German researchers created a portfolio based on the community’s most popular stocks and buy/sell advice from its members. And what they found was rather astounding. With the 20 stocks chosen from the subreddit’s posts and discussion boards, the WSB portfolio outperformed the S&P500. In fact, it grew 200% over the last three years and a shocking 480% in the past year alone.
The crux of the matter comes down to an investor’s ability to determine reactive signals from proactive ones. The reactive signals come immediately after a significant price hike or drop. Acting on these signals is how many of the subreddit’s “degenerates” lost so much money. However, the proactive signals turned out to be quite profitable. Therefore, if you know what buy/sell signals to look for, then you could make a killing.
The Fine Print
Although the results were promising, it all remains theoretical since the forum is still in its infancy. The convenience of technology has shown average Joes how easy it is to start investing with individual investing apps meaning more people will likely adopt their strategies. However, you cannot overlook the YOLO approach the WSB community has towards investments. Novice investors often overlook this and only see the community as a way to get-rich-quick. Unfortunately, many do not realize this until it’s too late and they’ve lost everything. If you aren’t prepared to lose it all, then steer clear of investment advice from WSB.
However, if you are looking to make some questionable choices with large sums of money, then you’ve come to the right place. Win, lose, or draw, WSB will always support high-risk moves.
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