Since the beginning of COVID we have seen excessive daily trading volume in a number of worthless or near-worthless securities. This phenomenon has come to be known as the “Reddit Phenomenon”. Reddit, in case you don’t already know, is a social media platform on which millions of people (roughly 60 million each day) sign on to the many “communities” (special interest or topic groups) to share information and experiences. The user demographic of the platform is made up of mostly men aged 18 to 29. A great description of the Reddit Phenomenon as it relates to stock trading goes like this: “it is the power of collective wisdom facilitated by the digital revolution, supported by “boredom” and enabled by new technology platforms (and the concurrent impulsivity that these platforms help facilitate).
This phenomenon is not entirely unique to todays’ world. Most people I have talked to have never heard of the “Tulip Craze” which occurred in the 1600’s in Holland. It is generally considered to be the first recorded speculative bubble in history. At the peak of the Tulip Craze, in February 1637, a single tulip bulb sold for more than ten times the annual income of a skilled artisan or craftsman. In today’s dollars that would put that one, single tulip bulb value at about $800,000.
Today's professional, as well as casual stock market traders, must be aware of this market behavior. While directly trading in individual named speculative securities will certainly provide excitement (either good or bad), it can also indirectly have an effect on many other securities, mainly those in the same industry group.
This brings me to a very surprising and recent example of this irrational trading game, the stock of Bed, Bath & Beyond (BBBYQ). Bed Bath and Beyond became one of the darlings of the Reddit phenomenon prior to its formal demise on April 23rd, 2023 when it filed for Chapter 11 bankruptcy. Prior to filing Chapter 11, the stock price had run up to many multiples of its (negative) book value solely in speculation that some retail savior would swoop in and save the company. While the company (and its stock) have technically become worthless and delisted from all major stock exchanges, its bankruptcy shares “BBBYQ” are still tradable on the “pink sheets” or “over-the-counter” (OTC) market.
The remarkable thing about this is that, due to the Reddit phenomenon, these intrinsically, worthless pieces of paper have traded hands in the past month and a half to the tune of $200 million dollars. Roughly 90 million shares are traded each day. When people ask me, “how is this possible?”. I tell them, “it’s the greater fool theory”. That is, one can sometimes make money through the purchase of overvalued assets (items with a purchase price drastically exceeding the intrinsic value) if those assets can later be resold at an even higher price, much like the Tulip Craze of the 1600s.
Clearly, we have entered into a new paradigm of speculative behavior in trading, of certain formerly household named stocks, as well as new-age technology and financial (i.e. crypto) stocks, thanks to the influence of social media and platforms such as Reddit.