- Traders who frequent Reddit’s WallStreetBets forum don’t get the credit they deserve when it comes to making investment decisions, according to a new research study.
- The epic GameStop short-squeeze and subsequent congressional hearings catapulted Reddit’s WallStreetBets into the mainstream earlier this year.
- “In sharp contrast to regulators’ concerns that WSB investment advice is harming retail traders, our findings suggest that both WSB posters and users are skilled,” the study concluded.
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Reddit’s WallStreetBets forum has garnered a reputation for being a meme-fueled casino where members push risky investment ideas and bet their life savings away, but real-world data suggests the users of the forum post serious due diligence reports and are actually quite skilled, according to a new research study.
“Despite the conventional view that the platform primarily attracts uninformed investors, we find no systematic evidence of this,” the research authors wrote.
Place Your Bets? The market consequences of investment advice on Reddit’s Wallstreetbets by researchers Daniel Bradley, Jan Hanousek, Russell Jame, and Zicheng Xiao found that the average buy recommendations posted to the forum delivered two-day returns of 1.1%, with a subsequent 2% return over the next month and 5% return over the next quarter.
Further, the buying activity in the stocks that are the subject of a WallStreetBets due diligence reports is usually driven by retail investors, with volumes increasing sharply in the intraday window following publication, the study found.
“We find that due diligence reports contain investment value,” the study said, adding that retail investors are able to discern the quality of the reports.
“In sharp contrast to regulators’ concerns that WSB investment advice is harming retail traders, our findings suggest that both WSB posters and users are skilled…[and] are likely to benefit from the recommendations on the site,” the paper concluded.
The researchers scraped all posts from WallStreetBets from 2018 to 2020, sorted for due diligence posts with clear buy or sell recommendations, and then manually reviewed the ticker symbols and associated recommendations.
The analysis does not include analysis of the explosion in posts the Reddit forum saw after its membership swelled to nearly 10 million amid the GameStop short-squeeze.
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