The subreddit known as r / wallstreetbets has hit the headlines regularly this year. Though it's been around for nearly a decade, it gained national notoriety during the GameStop short squeeze and has fascinated investors ever since. They employ risky strategies that many brokers and investors would never dream of. However, many of its community members have made impressive profits that have left many of us wondering if we should seek investment advice from WSB.
What is WSB?
For those unfamiliar with r / wallstreetbets, it's a strange place … to say the least. As you scroll through the most popular posts, you'll see members share their astronomical gains, devastating losses, and investment recommendations from WSB that go against conventional wisdom. That's because this subreddit isn't your typical investment forum. It's a place where both amateur and veteran investors can discuss extremely high risk strategies. They ignore the most basic rules of investing and make moves that make even the most die-hard investor cringe because … YOLO! While some consider it little more than high stakes gambling, others take signals from the community posts and make huge profits from risky investments.
From the very beginning, WSB has been a place for people to discuss high-risk trades and seemingly insane investment strategies without judgments or lectures. That means, of course, unless they relate to themselves. The forum's self-deprecating and sometimes mundane tone has become an important part of the community's culture. While some may despise his disrespect and disrespect for traditional trading rules, no one can deny that WSB has played a significant role in recent stock trends.
What are WSB's investment strategies?
Rather than picking well-known assets, WSB members tossed caution and money to the wind to make risky trades or buy more volatile stocks. If you're new to the forum, don't even waste your breath discussing the merits of borrowing or reducing risk. Community members know how crazy their approach is, and they indulge in the madness of it all. And although it started as an obscure trading forum, WSB has grown into a virtual army with its own subculture and jargon. The numbers soared after the short squeeze on GameStop stock in January 2021, making it very popular. The whole phenomenon has brought the subreddit into the national spotlight, and some investors are starting to get their investment advice from WSB.
Unfortunately, many members of the subreddit responded too late to buy and sell signals and lost a lot of money. I'm not just talking about the money that is made available for investment. Some lost all of their savings and mortgages in a matter of hours. The r / wallstreetbets forum is a lot. All financial advisors agree that the subreddit is not a reliable source for investment advice.
Still, members share their winnings every day and post the impressive returns they have made using their risky strategies. Countless community members made thousands, even millions, during the GameStop short squeeze. In fact, a subredditor joined the Billionaires Club when all was said and done. It's hard to ignore posts from members in our twenties who might pull away from their "tendencies" while the rest of us work on our jobs and stick to proven investment strategies.
What do brokers think of taking investment advice from WSB?
Any worthwhile financial advisor should advise you not to trust any investment advice you read online. This is doubly true if it comes from an online forum for inexperienced investors with a penchant for high risk investments. When I asked my broker for their opinion on their investment strategies, they 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 … you should seek advice from WSB here
Although their strategies are unorthodox and extremely risky, madness can have method. A recent study by two researchers from the Hasso Plattner Institute in Potsdam attempted to uncover the secret behind the success stories. While some members have suffered incredible losses, especially after the GameStop frenzy, the team may have found a way to decipher when to take investment advice from WSB and when to ignore it.
To find out how reliable the advice from WSB was, the German researchers created a portfolio based on the community's most popular stocks and the buy / sell advice provided by their members. And what they found was pretty amazing. With the 20 stocks selected from the subreddit's posts and discussion forums, the WSB portfolio outperformed the S&P500. In fact, it grew 200% in the last three years and a shocking 480% in the last year alone.
The crux of the matter lies in an investor's ability to distinguish reactive signals from proactive ones. The reactive signals come immediately after a significant price increase or decrease. Responding to these signals is how many of the "degenerate" of the subreddit have lost so much money. However, the proactive signals turned out to be quite profitable. So, if you know what buy / sell signals to look for, you can achieve murder.
The fine print
Although the results have been promising, everything remains theoretical as the forum is still in its infancy. The convenience of technology has shown average Joe how easy it is to invest with custom investment apps, which means more people are likely to adopt their strategies. However, you can't overlook the WSB community's YOLO approach to investing. Beginners often overlook this and see the community only as a way to get rich quick. Unfortunately, many only notice this when it is too late and they have lost everything. If you're not ready to lose it all, avoid WSB's investment advice.
However, if you want to make questionable decisions with large sums of money, you've come to the right place. Win, lose or tie, WSB will always support high-risk moves.