Is it time for r/SMBbets?

Why 'GameStop Mania' could change the way we think about investing in small businesses

If your reading habits are anything like ours, your inbox is brimming with commentary on GameStop and r/wallstreetbets. The story is still developing, and has some distance to run, but the analysis has already begun. Should short-selling be banned? Is this an insurrection or just a bit of fun? Where is this all heading?  (We don’t want to repeat what others have already said, so if you’re unfamiliar with ‘GameStop Mania’, this is a good starting point).

It would be easy to dismiss the affair as an escape from intense boredom and isolation after almost a year under Covid restrictions. The impenetrable memes, anarchic jokes and communal ridicule of r/wallstreetbets does make it feel like a bunch of tired, frustrated people just letting off steam. But we can also see this as a symptom of growing scepticism about traditional markets - especially equity markets - and how those markets operate, the purpose they serve, and who has the right to really play.

Let’s imagine that ‘GameStop Mania’ is a significant moment, an indicator of deeper sentiment, and has lasting impact. There could be direct consequences - arguments for increased regulation and taxation on capital gains are already being made (AOC, predictably; Elon Musk, more surprisingly).

But how does this affect SMBs? After all, privately owned businesses seem a world away from the froth and thrust of the equity markets. Well, maybe that’s the point.

Will small public market investors increasingly look to invest in private markets?

One of the most striking features of ‘GameStop Mania’ is that there is almost nothing supporting the leap in the stock price. As Matt Levine has observed, “Being a mall retailer of video games is not obviously a great business to be in”. Yes, there are hopes that the business will be revived and make a successful pivot to e-commerce under new leadership, but there’s no guarantee they will pull it off. GameStop is still the same business, with the same outlook, that it was the day before all of this started.

Through sheer will, audacity and belligerence the huge influx of small-time amateur investors has moved the market. It has always been known that shifts in stock prices are caused as often by emotion as sound analysis but, as Andrew Curry observes, GameStop has harshly exposed the irrationality of the markets and the disconnect between fundamentals and ‘value’. GameStop has also eroded trust in the markets themselves, with some responses to provoking accusations that the system is “rigged” in favour of the most powerful players (the suspension of trading by the Robinhood app, beloved by the regulars on r/wallstreetbets, for example).

If we do see a broad shift in the way the equity markets are perceived, will more risk-averse investors start to look elsewhere for stable returns? Yes, the markets will likely continue to attract large amounts of new money from professional investors, and many will continue to see good returns, but others will look to pastures new. Will investing directly in privately held small businesses with a long-term vision suddenly seem a lot more attractive? This new investment zeitgeist could push more people into considering the micro permanent equity space, for instance. Some of these shifts were happening long before GameStop, but could now see a sharp increase in pace.

And what of those who are comfortable with risk and volatility, but fed up with playing a game that feels stacked against them? Regulation could blunt some of the Hedge Funds’ favourite tools, but is unlikely to diminish their influence. Many investors may conclude that they wish to play an entirely different game. In that scenario, SMB investment, where the owner-operator has far more control over their personal outcomes, may seem increasingly appealing, as well as providing a welcome shelter from overzealous government intervention.

What could r/SMBbets look like?

Of course, it is possible that GameStop will be a blip without any lasting impact on markets, how they work, or how they are perceived. Instead, maybe we should see communities like r/wallstreetbets, along with the rise of crowdfunding, as a symptom of people’s desire to participate in business finance in a way that is accessible and meaningful to them.

The affair has already demonstrated two things: a large number of micro investors moving in concert can create significant impact, and that for these communities the group outcome can be more rewarding than individual gain. In fact, losing money on highly questionable trades seems to be a big part of the fun…

Could SMBs have their GameStop moment? The financial incentive is there, and, as we’ve written before, the pandemic and lockdowns have reminded people how much they value local, independent businesses, and the role they play in shaping our communities. It’s possible to imagine groups of micro-investors congregating online to save a small business with a particularly compelling story or community impact. Especially if the threat comes from a large corporation playing the role of pantomime villain. Maybe the game has just become serious.

We have a deep interest in SMBs, but we are certainly not experts on equity markets. If you are, maybe you have an entirely different perspective. We’d love to hear from you!

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