By now you would have probably heard of wallstreetbets (WSB). From the GME saga, its members have grown from 1.5 million at the start of the year to 9.1 million as of Feb 2021.
For those who are still living in a cave, WSB is a subreddit where degenerates (what the community calls themselves) discuss stocks and options trading. It is a community known to YOLO their life savings with the hope of making it big.
Today, we will not be talking about the GameStop phenomenal. Instead, I would like to do an experiment with WSB stock recommendations.
Apart from GameStop (NYSE: GME) one of the most successful WSB trade calls, I would like to determine if investors can actually profit regularly from WSB recommended stocks or if GME was just an exception.
Before you continue reading, I would like to say that this is highly subjective as a slight change in the buy and sell date could change the return drastically.
This is not a recommendation for you to jump into WSB.
How WSB stocks are picked for this exercise?
Here’s how I am going to follow WSB stock recommendations.
With an imaginary sum of $7000, I will allocate $1000 to buy one of the hot stocks recommended by WSB members at the start of every month till I’ve fully invested my $7000. The top stock for the month would be picked based on the top comments from the “Daily Discussion Thread”. This stock would be the one that is being discussed the most on WSB for the month, and would likely be the one majority of retail investors would follow.
In addition, since it is a common practice for WSB members to hold on to the stocks bought, we will be holding these stocks firmly even if the share price plunges. 💎🤲!
At the end of it, we will see if we have profited by buying stocks that WSB has recommended to us.
Building a WSB portfolio
Starting the experiment from Aug 2020, this is how the portfolio looks like:
iShares Silver Trust (NYSEARCA:SLV) – August 2020
- Entered Price: $22.74
- Peaked Price: $26.88
- Current Price (at point of writing): $25.15
- Profit/Loss: $106 (10.6%)
Rocket Companies Inc (NYSE:RKT) – September 2020
- Entered Price: $30.71
- Peaked Price: $31.31
- Current Price (at point of writing): $19.88
- Profit/Loss: -$352.65 (-35.27%)
Nikola Corporation (NASDAQ:NKLA) – October 2020
- Entered Price: $24.11
- Peaked Price: $34.50
- Current Price (at point of writing): $20.74
- Profit/Loss: -$140 (-14%)
Nio Inc – ADR (NYSE:NIO) – November 2020
- Entered Price: $33.32
- Peaked Price: $62.84
- Current Price (at point of writing): $54.76
- Profit/Loss : $643.45 (64.35%)
Palantir Technologies Inc (NYSE:PLTR) – December 2020
- Entered Price: $25.67
- Peaked Price: $38.17
- Current Price (at point of writing): $25.23
- Return: -$17.14 (-1.64%)
GameStop Corp. (NYSE:GME) – January 2021
- Entered Price: $17.25
- Peaked Price: $347.51
- Current Price (at point of writing): $43.72
- Return: 1534 (153.62%)
AMC Entertainment Holdings Inc (NYSE:AMC) – February 2021
- Entered Price: $13.30
- Peaked Price: $19.90
- Current Price (at point of writing): $5.70
- Return: -$571.42 (-57.1%)
Can you make money with WSB trade calls?
With a starting capital of $7000, my net liquidation value now stands at $8202.24 after buying into the 7 stocks WSB suggested. This represents a gain of $1202.24 which is around 17% ROI. Pretty impressive, especially since I had expected the result to be negative before I did this experiment.
Of course, I have to emphasize again, that the returns you may get may vary vastly depending on your entry and exit date.
Though we could not determine the long-term viability of this from just 1 test, what we can take away is the high volatility of WSB recommended stocks. While some stocks were able to obtain spectacular gains like GME and NIO, others like AMC and RKT see their value plunge down.
With these kinds of volatility, ask yourself if you can sleep well knowing the stock could turn sour overnight? Not me.
Too late to the party
Before I end, I would like to show you some infographics I got from SwaggyStocks, a site that tracks all the stocks mentioned in WSB. Some data which you can get include the number of times a stock is mentioned, the current sentiment of the stock, and its correlation to its share price.
The following infographics shows you the correlation (if any) between stock price and comment volume of the stock that is discussed on WSB. The comment volume of these stocks can be used to represent the general interest of a particular stock.
Aphria Inc (TSE:APHA)
Riot Blockchain Inc (NASDAQ: RIOT)
Quantumscape Corp (NYSE:QS)
From these graphs, you can see a general pattern – the share price of a wsb stock tends to peak before its comment volume. Besides, we could see that the share price tends to start dropping days after its comment volume peaks.
If we were to assume* that the peak of the comment volume is where most retail traders enter the stocks, it would mean that they had entered at the peak or near the peak. Days after that, they would see their stock value dropping. What these infographics show us is that for most of us that followed WSB, we would have entered too late.
*This assumption was made base on the belief that members following the WSB treads would most likely buy something that everyone is talking about. This is a phenomenon called herd mentality where you more likely to be influenced by other WSB members especially if everyone is doing it.
My takeaway
There are indeed some who managed to get rich overnight and it is certainly tempting to follow likewise. However, keep in mind that some end up losing their life savings in the hopes of getting rich quickly.
If you are not deterred by the volatility that comes with these stocks, you could consider allocating a small percentage of your portfolio to it as speculation play. However, do differentiate between speculation and investing.
For me, WSB would just be a source of entertainment rather than a source of stock recommendations.
You’re still up despite buying into two recommendations at the very high (and I’ll give you a pass that RKT just popped after your writing). Also, I don’t think WSB recommendations are for long term holds but rather trades and more specifically short squeezes.