Book Review: The Revolution That Wasn’t

The Revolution That Wasn’t: Gamestop, Reddit, and the Fleecing of Small Investors. 2022. Spencer Jakab. Penguin Random House.

In The Revolution That Wasn’t: GameStop, Reddit, and the Fleecing of Small Investors, Spencer Jakab, current editor for the Wall Street Journal and former stock analyst at Credit Suisse, describes the real winners and losers in the 2021 GameStop short squeeze — who are not the winners and losers we’ve been led to believe they are. He takes us through the fascinating events that led to the short squeeze and explains how financial and technological mechanisms such as Robinhood’s “free” trading app made it possible.

The financial media described it as a watershed moment when power was placed back in the hands of ordinary retail investors. Despite Wall Street advertising the “democratization of finance,” however, Jakab argues that it is still Wall Street, not the everyday retail investor, who is the ultimate winner from the meme stock revolution.

The class of investors that became the primary target of intense scorn on WallStreetBets was the short sellers, who may have taken a permanent hit. Because short squeezes can now be facilitated on social media, for portfolio managers and traders to be short has become much riskier. Short sellers now know they can be “ganged up on” by a motley crew of retail traders. This development will likely reduce short interest in the future. And because short positions play a critical role in maintaining price efficiency, a reduction in short interest will likely lead to more bubbles in the future — bubbles in which the most likely buyers will be everyday retail investors.

A mid-2020 estimate of the average length of time a share is held, according to the author, fell to less than half a year from as much as eight years in the 1950s. Shares now change hands about 17 times as frequently as they did in the 1950s. Although each individual trade is less costly because of the elimination of commissions and a reduced gap between the bid and offer price, the new crop of retail investors, including those who facilitated the GameStop short squeeze, will be leaving significant money on the table as part of their active trading. The combination of more ordinary retail investors in the market plus their belief that they can outsmart the market will likely be a boon for Wall Street practitioners.

According to Jakab, the democratization of finance and retail rebellion was an illusion that the financial media bought into too readily. If you cater to people’s propensity to gamble when they have money for the first time and to tell them they can make 30–50 trades a day commission-free but you are selling their order flow, you are creating an indirect way for Wall Street to make money. Investor advocates, such as the Consumer Federation of America, are pushing for rules to protect investors from such gambling on the basis of their instincts and are critical of the free-trading model.

Many of the new retail investors will learn their lessons by paying Wall Street tuition in the form of losses. One of the most pernicious effects of young retail investors losing a small sum of money is that they eventually become discouraged from investing at all. A dollar lost early can be more punishing than one lost in middle age because of compound interest. Stock market wealth is already very unevenly distributed by age, race, and income.

In summary, the author notes that competition and technology have made Wall Street a friendlier and more profitable place for individuals, provided they play a not-too-exciting game. If commission-free trading had been around decades ago, Jakab estimates that Warren Buffett might have earned 150–200 times as much as the overall market. Despite the meme stock revolution, the new boss in finance appears to be still the same old boss, and Wall Street is still a place where investors lose too much of their money when they think they can beat the house.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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