Why Reddit loves Elon Musk, Cathie Wood and Chamath Palihapitiya
Tesla Inc boss Elon Musk, serial SPAC promotor Chamath Palihapitiya and fund manager Cathie Wood of Ark Investment Management have all succeeded in coopting the retail investing public, rather than be run over by it.
The GameStop Corp. saga that has gripped the investing world this week was fueled in part by anti-establishment rage, as my colleague John Authers has written. On one side were retail investors who see themselves as crusaders for a democratized stock market, where even the shares of an ailing brick-and-mortar retailer must only go up. On the other were wealthy hedge fund managers who wagered that the price of equities should have something to do with financial fundamentals. The latter was crushed.
Most of the financial elite is either running for cover or baffled as to why amateur day traders might exhort each other on the r/wallstreetbets forum to sink their college savings or pandemic stimulus checks into such a company. A year ago GameStop's market value was about $250 million, now it's $13.5 billion.
Three people from the world of business and finance might be able to offer some insight. Tesla Inc. boss Elon Musk, serial SPAC promotor Chamath Palihapitiya and fund manager Cathie Wood of Ark Investment Management have all succeeded in coopting the retail investing public, rather than be run over by it. This may become a less happy position when the stock market bubble eventually bursts.
For now the trio are adored by Reddit, Stocktwits and other online investing communities — there's even a line of Cathie Wood merchandise — and they're proof that it's possible to be both part of the establishment and against it, something we've seen a lot of recently with populist politicians. Palihapitiya is angling to become California governor.
Though Wood hasn't commented, Musk and Palihapitiya were quick to associate themselves with the Redditors. Palihapitiya told his 1 million Twitter followers that he'd purchased GameStop derivatives (he's since closed out the position and donated the profits). Defending himself against accusations of being an irresponsible Pied Piper leading neophytes toward inevitable ruin, Palihapitiya insisted “this retail phenomenon is here to stay. There are 2.7 million(1) people inside of Wallstreet bets, I think they're as important as any hedge fund or collection of hedge funds.”
All three are evangelists for innovation, and they're idolized by people betting on tech stocks. None is overly concerned by old-fashioned business priorities like profitability and cash flows. It helps too that Palihapitiya and Wood are Bitcoin believers. Musk has been more circumspect but on Friday he jumped fully on board the bandwagon by adding #bitcoin to his Twitter bio page.
The trio in turn have retail investors to thank for their enormous success, which has developed a reflexive quality: The more popular they become, the more money flows they attract, which in turn fuels their businesses.
Seeing this success, and the pitfalls of getting on the wrong side of retail investors, I'm sure others will try to copy. Charming young Redditors in an authentic way isn't an easy act to pull off, however, and it might not be sustainable. Will Musk, Wood and Palihapitiya be as adored when the tech mania subsides?
Unlike the publicity-shy Wall Street barons they're displacing, the new establishment is more transparent. “I care about two constituents: One is myself and then two is retail,” Palihapitiya said during a recent interview with the cofounder of Stocktwits.
I'm skeptical about the inflated values of companies such as Opendoor Technologies Inc. and Virgin Galactic Holdings Inc. that the former Facebook Inc. executive has taken public. Palihapitiya has, though, made launching SPACs an artform. He already has six, and aims to add at least another 20. Each time there's even a hint of a Palihapitiya deal, the shares have rocketed.
Palihapitiya pens a simplified one-page summary of each investment case so they can be read hundreds of thousands of times on social media. He also gives a four-minute deal pitch live on CNBC, creating yet more shareable content. “I think it really tweaks the [financial] establishment when I do those things,” he said in the StockTwits interview, and it appears he's not done shaking things up. “The real escape velocity for me would be to figure out a way to be more part of a Stocktwits community, or wallstreetbets, or whatever it is … being more connected to retail.”
Cathie Wood also relies on unorthodox ways to attract retail investors to Ark's actively managed ETFs, which focus on hot sectors such as robotics, fintech and genomics. Her firm received massive inflows last year and the flagship Ark Innovation ETF returned about 150%.
Making Ark's research available for free and publishing information about its trades daily, so retail investors can follow along, has played a big part. So too has social media, which has helped her firm punch “far above our weight,” she told Bloomberg's Erik Schatzker. “It has given us a competitive advantage because the compliance departments in other organizations won't let their portfolio managers or analysts talk about their research.”
Wood's team of young researchers builds links with people in industries they cover online. “I don't think any one of [my researchers] dreamed they would enter the financial services industry, in fact some of them thought that was the dark side of the world,” she told a Goldman Sachs Group Inc. interviewer. “Our analysts are out there on Twitter, Linkedin, Medium, Telegram, any social network that will help them engage with and become a part of the communities they're researching.”
As for Musk, he wrote the book on how to charm retail investors, who he says often have more intelligent insights than Wall Street. His attacks on Tesla short sellers helped neutralize them and were doubtless an inspiration for this week's action. If you're surprised by the intensity of GameStop's retail boosters you haven't been paying attention: Tesla fandom — like that of Bitcoin — long ago became cultlike. The strategy worked: Tesla's market value is almost $800 billion, letting it raise heaps of cheap capital.
With power comes responsibility. Each of these three has, in their own way, encouraged young investors to plow money into extravagantly valued tech stocks. So what happens if things go belly up? Wood, Musk and Palihapitiya are the new captains of the democratized stock market. Leadership can easily become a burden.