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How social media influencers are ruling top business investments

Social networks have long been a part of our online lives. Their influence crosses many areas of our society, from arts and culture, religion and politics, ethnic and diversity issues, and of course, money matters.

Our interest in the economy and how it affects our daily round has been demonstrated more than once by the popularity of large discussion forums like SpaceX. Its founder, Elon Musk, whose posts on social networks have the ability to change the stock prices of different companies, is a classic example. This article examines the cases of artificially raising demand by influencers and raises the question of the need to regulate them.

Let's look at one of the most dramatic events in the US stock market, namely, the flurry of investment activity prompted by the hitherto unremarkable American video game company, GameStop Corp. Almost overnight, share prices in the enterprise went through the roof, largely thanks to Reddit users. Virtually in an instant, the value of one share soared from $16 to $248, eventually peaking at $349.

GameStop's boom and nearly bust saga

So how come a rather nondescript video games, consoles and accessories retailer was suddenly one day at the top of its game, if you'll pardon the pun, and the next its declining profits saw it plummeting to the ground over six consecutive years? In its boom and then almost bust lifecycle, GameStop had to close more than 400 of its retail outlets in the US in 2020.

You see, the company had become very popular with Wall Street short-sellers. Investment funds were set too high, too fast, which inevitably caused a weakening in GameStop shares. The trading company FactSet gave the company the ignominious title of 'leader in falling rates in the American stock market.'

Throughout 2020, GameStop lived up to pundit forecasts. Its shares fell 15% in April, 12% in May, then 28% and 27% in June and July, respectively. Then came a sea change on Reddit. The focus of the comments was the WallStreetBets section, where the topic of GameStop stocks was raised. By December of that year, the number of pro-GameStop discussions had skyrocketed.

WallStreetBets is an active community of what's known as hobby traders and has nearly three million subscribers. Its users began to shout 'buy, buy, buy' GameStop shares, which leapt massively. In addition to earning money, the goal was to teach investors a lesson - according to Reddit, the company was deliberately "drowned" for their benefit. The forum perhaps rather smugly commented that hedge funds underestimate the network of stores like GameStop, thus prompting incorrect predictions about its future. So by January this year, the value of one GameStop share was estimated at just $19.

Reddit's bad joke

You see, it all started as a kind of a joke really, but WallStreetBets users started buying GameStop stock like there was no tomorrow. In one day, January 22, when the value of papers rose by 51%, hedge funds' losses amounted to a staggering $1.6bn. At its peak, on January 25, the value of one share already exceeded $144. The trading volume amounted to 175 million shares - almost six times more than the average volume for the month (29.8 million in paper trading). Against this background, investment funds, losing money, began to buy back shares at an excruciatingly inflated price, remaining well in the red - something which also influenced the jump. 

As a result, by January 26, GameStop shares reached the $150 mark. Senvest Management noticed an interest in GameStop, and by the end of October, they owned more than 5% of its shares, and they acquired the bulk of them for just $10 apiece. 

GameStop was a battered survivor of its mixed bag of fortunes brought about by the social media plaudits and downers at Reddit and is today perhaps Senvest's most profitable investment. It saw the firm's portfolio of assets under management grow from $1.6bn at the end of 2020 to around $2.4bn today.

The Musk effect

Elon Musk didn't stand back and let it all happen. Oh no. He joined in the discussions on the website, leaving a link to the community and referring to the popular Stonks meme. A Tweet at Entrepreneur further boosted GameStop's price hike. The company's shares immediately rose another 90% and are now worth $230. Of course, this was neither the first time nor the last that Musk helped provoke additional trading volatility.

Consider an event in early January. WhatsApp announced changes to its privacy policy, which caused massive user discontent. Musk, on his Twitter, urged subscribers to use WA's Signal messenger. Just one post on Twitter sparked the rise in shares of a small company with a similar name - Signal Advance, which sells medical devices. As a result, its shares soared by 1100%! At the same time, the messenger itself is not traded on the stock exchange, having the status of a non-profit organisation.

Musk's dog day with Etsy

The Tesla and SpaceX founder wrote that he liked Etsy, the US e-commerce company which sells handicrafts, antiques and materials, and unique products that come in limited quantities. In a microblog, the entrepreneur said that he bought a wool helmet for his dog on Etsy. After that, the shares of the online store rose by 11% - to almost $232.4 per share. But the jump was short-lived, and the trading ended with a drop in the online platform quotes by 2.11%. So not a great deal to bark about there.

Musk was at it again when, following his Tweet that Cyberpunk 2077 would be available to passengers in the new Tesla Model S, shares in the game's developer, CD Projekt, surged more than 12%.

Regulation to stop these madcap practices

The unpredictable upswings in share prices caused by particular activity on social media are causing concern among professional financiers and analysts. For example, Michael Burry, the prominent American financier who you may recall, blew the whistle on the US real estate bubble in 2008, predicting the global financial crisis which followed, has said: "What is happening now must have legal and regulatory implications. It's unnatural, insane and dangerous." 

Adding to the furore is Dan Lane, an analyst at UK-based trading app Freetrade. "There is a strange irony in Elon Musk's ability to influence market movements and at the same time to criticise the practice of short selling which, in his opinion, is unnatural [for the market]. It may be time to discuss the legality of this practice." 

Mr Lane believes regulators should start to be more proactive. In his opinion, the authorities need to pass new laws and clarify what actions of opinion leaders of the financial market in social networks are acceptable from the point of view of legislation.

The only time the regulator drew attention to the issue was when Musk Tweeted about the increase in the 'volatility' of his Tesla company. In 2018, the US Securities and Exchange Commission filed a lawsuit against Musk for fraud over his Tweet about a possible buyout of his company. The case was subsequently settled, however, Musk and Tesla each having to pay $20m. The founder of the company also humbled himself by agreeing to Tesla's lawyers being able to monitor his statements on social media about it. 

But there was a further sting in the tail for Musk. The SEC said last year that his use of Twitter twice violated a court-ordered policy requiring his Tweets to be pre-approved by the company's lawyers. The problem has still not been resolved, and there are unhappy Tesla investors who continue to closely monitor Musk's illegal actions. 

For example, on March 12 this year, one of Tesla's prime investors, Chase Garrity, filed a lawsuit against Musk and the company's board of directors, claiming that Musk's "promiscuous" Tweets exposed Tesla to billions of dollars in risks.

But today, for better or for worse, the SM influencing goes on unabashed. There's a flow of new non-professional stock market participants who are not interested in a detailed analysis of the company's financial performance and achievements. For a considerable number of newly-arrived bidders, news feeds and the opinions of influencers are of higher priority. 

Investment funders seeking profit growth should be guided by doing their homework first and be wary of what they find before leaping in with their cash. There must be such interest because there are significant institutional investments out there that do support irrational forecasts. So be warned!

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