Stocks have long been the investment vehicle of choice for people with small amounts of excess cash.  Bonds are confusing, bank interest doesn’t pay much, and property requires high amounts of cash that most people don’t have.  But stocks are easy to understand, potentially give jackpots, and require such a small amount of upfront investment that almost anyone can afford them.  In ages past stocks were still usually bought through a specialized broker, and while the shoe shine boys in New York giving out stock tips may have been seen as a signal of a price crash, most people not living in major cities didn’t have access to a broker who could help them buy.  The brokers were therefore a barrier to entry that prohibited a lot of people from owning stocks who otherwise might have.  These days buying a stock can be as easy as installing the app, so quite literally anyone can own one at the push of a button.  This has democratized the market, but may have led to some unexpected consequences.

It seems that these days, stocks have become more than an investment opportunity.  Some stocks can be a badge of honor, a feeling of belonging, or a source of self-actualization.  You may invest in nuclear power because you want to help fight climate change, you may invest in Manchester United because you love the club, you may invest in GameStop because you believe you’re destroying the short sellers and want to be part of something greater.  None of these feelings have anything to do with the stock’s financial value.  They aren’t a dividend, they aren’t growth, they are a feeling you have when you own the stock and those feelings are often irrational.  In some ways these feelings call into question our understanding of stocks and investors generally.  

Now let’s be clear, there has always been emotions in the stock market.  Some people have always bought a company simply because they “liked” it with no better reason why, and “panics” can be just that: mindless rushes to cash out based on fear without thought.  But when a stock’s price is almost entirely based on feeling rather than actual value, to some extend it forces us to re-evaluate the market as a whole.  Last year, GameStop’s stock rose exponentially for no good reason whatsoever, and while some have considered it nothing more than a bubble, the price remains irrationally elevated even today.  There is no way a stock with no growth, no earnings, and no path to profit should be trading so high, and yet it is. If you took a company that was identical to GameStop in every way, but called it something different, it would  have but a small fraction of GameStop’s market cap.  That’s because GameStop isn’t just a company, GameStop truly is a meme. It seems insane, but there truly is a group of people for whom ownership of GME stock is bringing them no financial value whatsoever, but who continue to hold it out of emotional value.  You wouldn’t think such a group would be big enough to move the market, but last year showed them to be plenty large, and I believe there are still enough of them hanging around, holding the stock, and even buying more to ensure continued upward pressure on the stock’s price. 

If a market is anything, it is a mechanism of price discovery. The stock market should be a mechanism to discover the correct price of companies, and our research assumes that this in turn allows profitable and growing companies to prosper while unprofitable and shrinking companies fail. We know market actors can be irrational, but the average of all market actors, the “wisdom of the crowds” so to speak should have some logical underpinning if the market is to find the correct price of these companies. Stocks becoming a form of self-expression more than an investment vehicle could introduce inefficiencies to this market, and I’ll still trying to come to grips with what the consequences could be. We might imagine a future in which board members will seek out a CEO based not on the value they can add to the company but by whether or not they, like Ryan Cohen, have a ready-made base of support among the memesters. But I don’t have the economic or statistical background to understand how much this would change things, maybe CEO’s have always been picked for dumb reasons. What do you think?