The Rise of Reddit Traders
The other big topic that everyone’s talking about is the rise of Reddit traders. Through a sequence of collective actions, they forced a number of hedge funds—a large number of them are short sellers—to lose a ton of money, and in many cases receive a bailout from other hedge funds. If you were to think of this purely in financial terms of what’s happening in the financial services industry, you would probably miss some of the deeper implications.
What we’re seeing here is simply the next evolution in democracy. If you go back to the signing of the Magna Carta—which is regarded as the single most important document in advancing democracy in the world—if you go back to the original Magna Carta that was signed by the English lords and kings, it is not a very impressive document. Symbolically, it’s impressive because of what it led to, but at the time it’s not as if every peasant and every farmer in England had the right to vote. The ability for the average person to vote in the UK only came about somewhere in the mid-1800s. Women only got the right to vote in the 1900s.
The principles of democracy start off as a set of principles. Over years, decades and centuries, they start dissipating into society, and those principles become actions. There’s a very big insight here. What we saw happening with the Reddit traders is not an anomaly. It’s the future of finance. We should expect to see more of average people—also known as the voting citizen—having an ability to exercise the right to use their money themselves without relying on a more “educated” professional making financial decisions for them. This isn’t just going to be in the world of finance; it’s also going to happen in the world of democracies.
We think of voting as an exercise in democracy. But is it really, or is it an exercise in voting for someone who will make a decision for you? Is the future for democracy one like the Swiss model, in which they constantly hold a referendum? In the Swiss model, they hold a lot of events where the entire population votes on key decisions. That’s an unusual model of democracy because in most countries, you vote for an elected official once every two or four or whatever that number is years, and that person makes the key decision for you.
Think about each part of the world, in each sector. Think about what would happen if the principles of democracy where the consumer—the person who should have the power—is able to wield that power. Think about what that means as technology makes it more possible. We see this in financial services, and it’s definitely not an anomaly. The average consumer is going to have more tools to move the market. Why is it that generally only someone who went to an Ivy League university and owns/works for a hedge fund can bet and trade? Why is it that generally only they can take a short position? Why is it that generally only they can take a put on a stock? What stops the average person from doing it? The common refrain is that the average person isn’t smart. I have two responses to that. One is that democracy should not be awarded to someone just because they’re smart. Democracy is a right. It’s the ability to make a decision because you exist. Democracy is not about the best answer; it’s about the answer the majority of people want.
Secondly, who says that you’re smart just because you’re educated? We looked at what happened with the Reddit traders and GameStop. It’s easy to say that they caused a huge spike in the stock, so it’s a bad decision. But think of elected, educated people who are put into power and make big bets every day on which sectors to open up to trade, which trade agreements to join, which parts of the economy to grow and which parts of the economy not to subsidize. Those are bets that play out over 4-8 years, but they are bets. We know for a fact that some bets fail, and some bets are successful. Some countries do very well when their elected, usually educated officials make good bets. Many countries do very badly.
If educated leaders in finance and politics can make good bets and bad bets, why do we only notice when the average population makes a bad bet? The deep insight is that the principles of democracy are well known, but the practice of democracy is still being pushed into the world. The principles of democracy are not just about how you vote for an elected official. It’s about how you choose to vote to make every decision in your life, and the most important decision is how you will spend your hard-earned money.
If you’re in a business and you have customers, you have to ask yourself, “How would my customers act if they could make a decision on a daily basis, through a click of a button, either to work with me or work with someone else?” Imagine you live in a country where your power is provided by a monopoly, and you have no chance of changing that. Or your telephone services are provided by a monopoly, or your healthcare is provided by a monopoly. If I was that company, I’d be very scared because as soon as competition comes in, a lot of customers would leave.
As technology evolves, it’s going to be much easier for consumers to vote on a daily basis on how they want to spend their money. The insight here is how is your company leveraging the movement of customers being able to practice the principles of democracy? Think about what technology is going to do in 5-15 years. The massive shift in power towards consumers in finance is only the beginning. Yes, it will be regulated. Yes, there will be rules. But it won’t change this.
Remember that it’s not about education. The mistake is saying that customers are not educated. It’s beside the point. If someone has the ability to make a decision, and someone has the tools to make a decision, they’re going to make the decision. It’s not a question of removing that power because they may make the wrong decision. That’s the opposite of democracy. It’s not about dumb money. Customers make mistakes like anyone else, and they get emotional like anyone else. But they are certainly within their rights to make the decisions they want to make. Of course, you will find that a lot of these people making these decisions don’t have poorly conceived strategies. A lot of them are smart. In fact, some of them are so smart that traditional hedge funds are probably mining their feeds for what the industry calls institutional flow, or strategies to borrow and use.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #14.