Key takeaways on stock influencers

• Stock influencers can now make assets shoot up or crash down with a single tweet.
• Social media has changed the way these star investors can communicate their ideas to a following.
• Fundamental and technical analysis of equities is often disregarded.
• Partly as a result, retail investors have flocked to financial markets.
• While it may seem fun in a bull market, the joke might fall flat when things turn bearish.

Are there really people with the power to move markets with a few words?

Yes, and there is little new in this concept. Star investors like Warren Buffett and Peter Lynch have always impressed the rest of us with their track records of consistently beating markets. For decades, their advice has spawned articles and shareholder letters. They’ve given out book recommendations for traders looking to replicate or at least learn from their investing strategies. 

Yet, today, Influencers with much more nebulous credentials have reached new heights of popularity. A simple 11-character tweet from Elon Musk on a January afternoon (“Gamestonks!”) sent GameStop stock soaring 150% overnight. Analysts have long been searching for more rational reasons that explain this jump, but could find nothing other than this tweet as the cause of this surge. A simple “#bitcoin” in his Twitter (now called “X” and owned by Musk) profile bio managed to move the price of the cryptocurrency up, too.

Elon Musk is not the only billionaire influencer moving the markets. Personalities like Cathie Wood and Chamath Palihapitiya collectively have millions of online followers. Many of these are retail investors and spurn most other sources of intelligent financial news and analysis. 

Some influencers who are not even directly in the business and investment world are being closely followed and imitated. When Oprah Winfrey mentioned that she had taken a 10% stake in the company Weight Watchers, she managed to save an enterprise that had been in debt for years. In fact, the charismatic Ms Winfrey’s somewhat off-hand comment generated an extra $700 million in market capitalisation in only two days. That is a massive turnaround for a struggling company, especially given that its fundamentals had not changed in the slightest. 

Social media is a new way to express opinions

What has changed to bring about this brave new world? It seems that a number of factors are in play. While Buffett and Lynch could dispense their advice via books and newspapers, the advent of the internet and social media means that both information and disinformation can be distributed at a much more rapid pace, giving birth to a whole new generation of investing gurus. But this is not the only thing that differentiates the new generation of influencers from financial legends.

Disdain of financial analysis and mistrust of major institutions

One other element that distinguishes today’s financial influencers from their senior counterparts is a kind of contempt for the financial industry’s norms. Analysing a stock? Followers do not see the need. If their icon is buying it, you can be sure that they will follow. 

Examples of this phenomenon abound. David Portnoy, founder of Barstool Sports, livestreamed himself buying stocks based on letters picked at random from a Scrabble set. In another stunt, Chamath Palihapitiya committed to invest a couple of hundred thousand dollars in whatever his Twitter followers could convince him to buy – which resulted in $125,000 worth of call options on GameStop. The advent of celebrity-endorsed cryptocurrencies and “meme stocks” has not improved the situation. To many small-scale investors, the quality of a trade does not matter anymore. It seems that people are excessively eager to follow these social trends, even when it’s their own money at risk. 

These stock influencers also have a disdain for traditional financial institutions such as hedge funds and the SEC. Elon Musk, no stranger to securities law controversy, practically challenged the latter institution to investigate his tweets about the cryptocurrency Dogecoin. Chamath Palihapitiya could not hide his enthusiasm either when Melvin Capital took a beating with the GameStop short squeeze, saying that the WallStreetBets forum has pulled an “insane, crazy baller”. David Portnoy, not wanting to be outdone, also had a dispute with fund manager Steven Cohen when some brokerage firms placed obstacles in the way of buying the GameStop stock, accusing him of trying to save hedge funds to the detriment of retail investors. 

In one sense, this kind of iconoclastic attitude is an understandable reason for stock influencers’ sudden popularity. Many people feel that they do not have any great stake or say in the world of finance, especially when it comes to financial institutions that seem to cater mainly to large corporations and high-net-worth individuals. By framing themselves as outsiders, influencers have succeeded in building a strong and dedicated followership. 

Consequence: stirring up interest in investing

Some individuals are no doubt seduced by frenzied promises of quick profits championed by major business figures. In other cases, the way in which the resulting conversation has made investing mainstream has encouraged people to consider investing more seriously. Either way, stock influencers have fuelled the opening of more trading accounts than ever before. New investors want their piece of the pie, and there are plenty of online investing platforms to facilitate this need. 

Source: JPMorgan Chase & Co

As you can see, independent retail investors are playing an increasing role in the markets, especially since the covid lockdown. The number of online trading accounts has exploded. 

This, of course, also had the effect of pumping up stocks. Arguably, more people making individual investment decisions rather than relying on managed funds also increases the importance of ESG issues and PR-friendly investor relations.

Potential dangers of the influencer trend

There is only one, small, tiny difference between the ordinary man in the street and the most prominent stock influencers: hundreds of millions of dollars. Those who are already wealthy and have developed a taste for publicity can afford to “throw a couple 100k’s” at a stock. Many individual investors are not in a position to blithely lose even a few hundred dollars. Especially if they lack the financial education to understand the risk their actions entail, blindly following unqualified advice is not in their best interst.

During that famous short squeeze, GameStop did go above $345, but it also fell back to $40 only a few weeks later. That is a big swing, and one you probably regret if you invested your stimulus check in the operation. This kind of loss is almost negligible for a billionaire, but it can have serious practical consequences for a retail investor. 

The future and potential of the stock influencer trend

There have always been influential personalities, as mentioned above – after all, we often quote Warren Buffett, Nassim Taleb, and many others (and not, in fact, their tweets). Actionable advice based on data and solid reasoning is not a bad thing. Influencers like Cathie Wood might last as they promise to deliver long-term value – in the end, this is what investors are looking for. Hopefully, snake oil salesmen will eventually be recognised for what they are and lose their followings.

While you can jump on trends like GameStop in the hope of making a quick profit, you should not follow advice blindly and always try to examine the health of a stock or asset before jumping in. If you are willing to take big risks on what seems like a fad, always invest sums that you would not mind losing – if this sum is a few $100k for Palihapitiya, it may be only $100 for you. 

Finally, it’s worth remembering that almost all advice is good while markets are bullish. The fashionable “yolo” strategies some stock influencers champion may work and seem fun as long as the market is going up. Once things turn bad, though, it will be another story.