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Would you ignore investing advice from a group of Internet trolls who seem eager to YOLO away their life savings while calling themselves degenerates and idolizing Elon “Daddy Musk”? Probably. But maybe you shouldn’t.
Despite their antics, members of the subreddit r/WallStreetBets may actually have some investing skill — at least when it comes to anticipating short-term stock moves, according to researchers at the University of South Florida and the University of Kentucky.
WallStreetBets' Stock Picks
Researchers looked at over 2,000 posts on the subreddit with a clear buy or sell recommendation from between 2018 and 2020. On average, “buy” recommendations saw 1.1% returns within two days of the Redditor posting. That’s not huge, but it’s not nothing. In fact, it’s substantially larger than the returns seen from the recommendations on the crowdsourced stock market analysis site Seeking Alpha, according to the paper. But, it didn’t stop there: the researchers found that the returns continued upwards by 2% over the next month and nearly 5% over the next quarter.
Daniel Bradley, professor of finance at the University of South Florida and one of the authors of the report, was shocked.
“I was expecting to find that this site attracts uninformed investors,” Bradley says.
He isn’t alone. Earlier this year, an army of everyday traders in the Reddit group made headlines for pumping up GameStop’s stock price, sinking hedge funds that were shorting-selling the stock. They were called unsophisticated, rookie investors who made a game out of Wall Street. Massachusetts Secretary of the Commonwealth William Galvin told CNBC the GameStop mania was “reckless risk” and dangerous for everyday traders.
Taking WallStreetBets Investing Advice
To be clear, we’re not saying to throw your investing knowledge out the window and buy and sell based on a Reddit post. Many of the GameStop traders suffered major losses. Money doesn’t even often recommend picking stocks at all, but to instead keep a globally diversified portfolio of mutual and index funds and regularly make sure it still fits your long-term goals. But the research does indicate that the posters on WallStreetBets may know what they’re doing, even though they give off the air of being risk takers who are essentially gambling.
Despite the memes and constant dumb insults thrown around on the forum, the investors actually acting on the investing recommendations may also have more know-how than you’d think. The researchers, whose report doesn’t include 2021 posts and thus leaves out much of the GameStop frenzy, found that everyday investors are actually trading on these Reddit posts, with retail trading jumping 7% less than three hours after a post was published. The investors appeared to be acting on recommendations that earn them larger returns, suggesting that they may be able to identify high-quality reports.
And some of them are, actually, high-quality. It’s clear some of the Reddit posters do their homework, coming up with well-written recommendations that include a lot of analysis and insights that aren’t completely obvious, Bradley says.
“I was quite impressed with some of them,” he adds. So is at least one hedge fund, apparently. A recent job posting for New York-based quantitative fund Cindicator Capital sought someone who has been an active member of WallStreetBets for at least a year with karma — a reflection of how much a user has contributed to a community — of over 1,000 (as well as“a refined taste for memes and a sense of humour.”)
Will members of WallStreetBets be the next great investors of their generation? Maybe not. But perhaps, they know more than we give them credit for.