Wall Street Bets picked more losers than winners
New data has found that in 2021 stocks recommended by Reddit's popular WallStreetBets (WSB) community resulted in more losses than returns.
The data was compiled by European trading platform Capital.com, and suggests relying on advice in the WSB forum was a poor investment strategy for most of 2021.
The research, conducted between January 21 and 17 December 2021, found that the 10 most mentioned stocks on WSB generated negative monthly returns at least 59% of the time during the year, with an average weekly loss of 1.6% and a monthly loss of 6.7%.
The losses increased further to 8.2% on a quarterly basis, and in one out of four times, monthly losses amounted to over 10%.
Early on in 2021, WSB hit headlines for driving the GameStop share price up. However, this data suggests that influence was not replicated across other stocks repeatedly mentioned on the forum after January 21.
"With the likes of GameStop and AMC making headlines for its outsized returns early last year, meme stock trading has become more than just a passing fad. This is a worrying trend as the risk-reward trade-off for meme stocks is not widely understood," says Capital.com chief market strategist David Jones.
Stocks that become memes on WSB were found to be highly volatile, according to the data, with extreme swings and significant losses when held over longer periods.
NASDAQ listed Tilray, a medical cannabis company, was one of the stocks to receive hype from WSB.
The data showed someone who invested in Tilray one day before the day it was hyped on WSB and held it for one week would have made a 39.1% gain on their investment.
But, if that same investor held the stock for three months they would have lost 47.3%. Worse still, if someone had invested just one day after the stock was hyped up on WSB, they would have made a 76.5% loss on that investment if they continued to hold it for three months.
"People who trade on hype or rumours fuelled by speculative forums like WSB are exposed to high risk-reward ratios. Investing in stocks based on a company's fundamental factors such as earnings, revenue or future growth potential could help avoid the wild swings that occur when the hype fades," says Jones.
This article first appeared on Financial Standard
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