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According to new data compiled by European trading and investing platform Capital.com, relying on Reddit’s popular online investment forum, WallStreetBets to guide investment decisions was a poor investment strategy for the most part of 2021.

According to Capital.com’s research conducted between 21 January and 17 December 2021, the ten most mentioned stocks on WallStreetBets generated negative monthly returns at least 59% of the time during the year, with an average weekly loss of 1.6% and a monthly loss of 6.7%. The losses increased further to 8.2% on a quarterly basis.

In one out of four times, monthly losses amounted to over 10%. The research reveals that the notable role WallStreetBets played in driving the GameStop and AMC hype in early 2021 was not replicated across other ‘meme’ stocks mentioned on the forum after 21 January 2021.

The findings bring into question the reliability of community forums such as WallStreetBets as a source of investment advice. Commenting on the findings, David Jones, Chief Market Strategist at Capital.com said:

“With the likes of GameStop and AMC making headlines for its outsized returns early last year, meme stock trading has become more than just a passing fad. This is a worrying trend as the risk-reward trade-off for meme stocks is not widely understood. The team at Capital.com analysed the relationship between hype and stock returns to help our clients understand the risk of relying on community forums for investment decisions.”

The data also revealed the highly volatile nature of meme stocks with returns showing extreme swings and significant losses when held over longer periods of time.

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For example, someone who invested in Tilray one day before its hype day and held it for one week would have made a 39.1% gain on their investment, but if that same investor held the stock for three months they would have lost 47.3%. Even if someone had invested just one day after the stock was hyped up on WallStreetBets, they would have made a 76.5% loss on that investment if they continued to hold it for three months.

Other lessor hyped stocks on WallStreetBets such as Plug Power, Riot Blockchain, Brooklyn Immuno Therapeutics and Beach Body all produced significant losses when held for three months.

This illustrates the potential dangers of selecting stocks based on momentum and hype rather than technical or fundamental analysis.

Trading on hype generates high risks for investors

“People who trade on hype or rumors fueled by speculative forums like WSB are exposed to high risk-reward ratios. Investing in stocks based on a company’s fundamental factors such as earnings, revenue or future growth potential could help avoid the wild swings that occur when the hype fades”, added Jones.

Capital.com’s findings are based on the analyses of 4,855 stocks listed on the Nasdaq, New York Stock Exchange and the American Stock Exchange mentioned on WallStreetBets throughout 2021. 176 of these stocks made it into the WSB top ten most mentioned stocks at least once during the year.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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