Everyone loves a good underdog story when the little guy goes up against the giant and wins. However, in the case of GameStop stock and individual investors vs. short selling hedge fund portfolios, who is David and who is Goliath?
If you haven’t heard the story about GameStop stock this week, this video from C|NET will quickly bring you up to speed. To summarize…
A few institutional investors and hedge fund managers placed bets on GameStop to lose value and began short selling the stock, making smaller GameStop investors angry. These smaller investors went online and started talking about how hedge funds were attempting to devalue the stock.
In what could be considered one of the greatest “Occupy Wall Street” maneuvers of all time, some of these raucous, smaller investors began a coordinated effort to attack institutional investors through online Reddit forums. The conversational dialog spread like wildfire, and GameStop stock began to rise sharply because of a market short squeeze.
As the Chicago Tribune described, beyond the personal attacks on professional investors, the battle has also created big financial losses for Wall Street players who shorted GameStop’s stock. As GameStop’s gains grew and short sellers scrambled to get out of their bets, they had to buy shares to do so. That accelerated the dialog momentum even more by creating an extended online feedback loop.
When the outspoken smaller investors realized that they had helped to ignite the short squeeze, the investing mania chatter peaked online and sent GameStop stock skyrocketing up more than 1,700%.
This distinct action of revenge against Wall Street through online communications is a perfect example of the power that the voice of consumers (VoC) can have on every institution.
In the aftermath, trading platforms like Robinhood restricted GameStop trades. Halting trading does not benefit anyone in this situation because short sellers are locked in, and smaller investors cannot recognize gains.
What is worse is that the Security Exchange Commission and members of Congress will most likely launch investigations to determine if there was any wrongdoing, and if new policies need to be in place to regulate platforms like Reddit and Robinhood.
Whatever becomes of this dilemma, one thing is certain: the power of consumer conversations can move industries at any moment. If such dialog remains unmonitored or undetected, the implications and consequences can be destructive.
Instead of pondering how a group of smaller investors changed the perception landscape towards GameStop, institutional investors need to be asking themselves WHY they did not account for the power of consumer sentiment.
Today, organizations can listen to audiences more effectively than ever. New artificial intelligence (AI) technologies have provided industries with the ability to collect consumer dialog that can be mined for key marketplace sentiment intelligence. These powerful VOC devices are essential for understanding behavioral signals since they are fueled by conversational data collected online across various digital web sources – including Reddit.
Wall Street learned an important lesson this week in that marketplace sentiment is a leading indicator of financial performance.
Conversational analytics and VoC data should be embraced by all investment firms as an alternative data source to help guide investing. Leaving such alternative data out of the decision-making equation diminishes the quality of assessment for any business investment.