How a massive ‘dumb money’ movement sent GameStop’s stock price soaring and cost Wall Street millions

Jess Carignan is a flight dispatcher from Quebec City. Justin Niklaus runs a family bakery in Owen Sound. David Halpert publishes a cannabis magazine in North Toronto.

This week, they were among the millions of amateur investors who took part in a trading frenzy that sent the stock prices of several unsuspecting companies soaring — at the expense of the Wall Street investors betting against them.

AMC, the movie theatre chain devastated by COVID-19 restrictions, saw its stock surge nearly 840 per cent. GameStop, a bricks-and-mortar gaming retailer most often found in shopping malls (and the parent company of EB Games), saw its market value increase to more than $24-billion from $2-billion in a matter of days. BlackBerry rose to a stock value not seen since 2011, when deciding between the iPhone 4S or the BlackBerry Bold was a difficult choice.

For many of the investors involved, what started as a practical joke paired with get-rich-quick ambitions quickly snowballed into something much bigger.

“We’re at a point where for many people it’s not about the money anymore,” said Carignan, a 25-year-old who started investing with Wealthsimple, a Canadian online investment management service focused on millennials, during the pandemic.

“It’s literally about sending a message to billionaires that retail (investors) are here and we will hold you accountable from now on.”

The chaotic events of the past few days have reflected a resentment among individual investors towards America’s most powerful financial institutions, stemming from the 2008 recession and subprime mortgage crisis. Gathering en masse in online forums including Reddit’s r/wallstreetbets — a community where amateur investors discuss stock and option trading — young, amateur day-traders who watched Wall Street bankers avoid punishment for an economic disaster a decade ago saw an opportunity to strike back.

Wall Street investors first drew the ire of the retail trading crowd when it was discovered that several hedge-funds were shorting GameStop’s shares, a move aimed at profiting from the company’s market decline. The amateur traders — sometimes referred to as “dumb money” on Wall Street — pushed in the opposite direction, buying shares and stock options in GameStop that increased its value exponentially.

The spike in trading forced funds such as Melvin Capital to exit their short positions, with manager Gabe Plotkin telling CNBC that the hedge fund was taking a significant loss. As of Tuesday, Melvin Capital had received a cash infusion of nearly $3-billion from Citadel and Point72.

Niklaus, 36, who bought shares in GameStop from his home in Saugeen Shores, Ont., said he saw it as an opportunity “to make money off Wall Street’s greed.”

“Now the little guy has the power to use the free market to make money off of others’ greed, which is shorting a company like that,” he said. “If you’re allowed to manipulate a company into obliteration, then we’re allowed to respond.”

On the r/wallstreetbets forum, which now has nearly five million users, retail investors congregate in discussion threads to offer informal investing tips to each other.

Many of them started day-trading during the pandemic. Six months ago, Carignan knew nothing about investing, he said. “I had $16,000 as an emergency fund in a no-good TFSA that gave me a whopping 0.25 per cent return.”

Stuck at home while the flights were grounded, the aviation specialist started investing in stocks. He moved to Wealthsimple and started picking his own investments. He discovered r/wallstreetbets, where millions like him were learning on the fly.

“Once you filter out all the noise and memes, there is a tremendous amount of due diligence being there,” he said.

By December he was an active participant in the community.

There’s also r/baystreetbets, a much smaller forum focused on Canadian companies whose users spent the past week championing surges in BlackBerry’s market value and encouraging buyers to hold their positions when its stock plunged on Thursday.

The trading surrounding a company like BlackBerry is in part a joke — what users on the Reddit forum regularly refer to as a “meme stock.” It joins companies such as Nokia and even Blockbuster that have soared inexplicably in recent days. But it’s also based on wild speculation.

On r/wallstreetbets, users made the case for BlackBerry this week, referencing recent partnerships the company has forged with Amazon and Baidu, a Chinese multinational technology company.

“What if I told you there is a company out there that will be the operating system and communication standard for all vehicles out there, whether they are electric vehicles or not, or autonomous or not,” wrote one user. “What would you say that company is worth?” The post received 2,500 ‘upvotes’ from community members. Shares spiked within days.

That’s how the trading frenzies usually start, said Carignan. “You have some guy on r/wallstreetbets coming in and saying, ‘Guys … BlackBerry is pivoting, they’re not into cellphones anymore, they make software for electric vehicles.’ This picks up steam, people invest and the cycle repeats,” he said.

By Thursday afternoon, BlackBerry’s market value had shrunk 40 per cent after online brokerages like including Robinhood and Interactive Brokers limited their trading.

Lisa Kramer, a professor of finance at the University of Toronto, says the behaviour among retail investors is nothing new — it’s just that the forum has changed.

“Back before we had social media, we had chats with our neighbours over the backyard fence. If you hear your neighbour made a bunch of money using Netscape stock, you might also be inclined to jump into the market,” Kramer said.

“Now, there are so many forums online for people to brag about their conquests in markets.”

Experts say investors shouldn’t get swept up by these investment trends. While it’s possible to money pick individual stocks, the approach is more like gambling than a sensible investing strategy, said Dave Hardisty, chair of marketing and behavioural science at the University of British Columbia Sauder School of Business.

“It’s exciting, right? But it’s not smart,” he told The Canadian Press.

Even professional investors struggle to pick individual stocks sometimes, Hardisty said, pointing to a theory Warren Buffett once tested when his index fund won a bet against a hedge-fund manager.

The approach goes against the basic principles of investing, Kramer says.

“Some of these people will make a lot of money, for sure. But many will buy the stock right when it plummets in value. And some will buy the stock using borrowed money, potentially losing more than 100 per cent of what they invested,” she said.

“The consequences can be quite catastrophic.”