Over the last two decades, the use of social media has grown exponentially, impacting our lives dramatically and the effect on financial markets is no exception.  As with any tool put to a new application, sometimes we discover unintended outcomes.  The challenge is learning to manage the good and the bad.

The good

Social media has become a key source of information used by institutional investors in their research processes.  As far back as 2015, a study from Greenwich Associates found that 80% of investors use social media at work, a third of whom confirm that information consumed through social media has impacted investment decision making.  Five years on, those figures are certainly much higher in both cases.

Social media adds value to an investor toolkit by leveraging some of the best-known platforms.  Twitter has become a source of breaking news and industry developments that informs how stories are perceived.  LinkedIn is used to conduct due diligence and research investments by leveraging connections and identifying valuable resources to gather relevant information.  Despite its challenges elsewhere, Facebook serves as a barometer of sentiment that can reveal brand perception.  None of these examples exist in isolation to support investment decisions but are becoming part of the resource matrix investors utilize to hunt for information.

The bad

Exhibit one is the example of videogame retailer GameStop that broke into public view last week, exposing the general public to new terms like short-squeeze and meme investing.  GameStop supporters on a Reddit forum found themselves in a battle against hedge funds betting on GameStop shares declining in value.  Only through social media platforms could millions of individual investors come together to pursue a similarly-minded objective, yet do so independently.

The gains in GameStop shares and the reported losses for the short-sellers were eye-popping, prompting complaints that the feverish activity is manipulative.  It may be, but how to prove and prosecute a crowdsourced pump-and-dump scheme remains unanswered.  The curiosity here is that the most aggressive individuals on social media care little about company fundamentals.  There is no spreadsheet analysis or consideration of competitive advantages.  As a retail seller of video games with hardly any digital presence in a world where online channels are all that matter, GameStop has lost its way and offers little chance for future success.  For the social media crowd, it is all about sentiment, how they feel about the company.

What does it all mean?

For long-term investors trained to focus on company fundamentals, competitiveness, and earnings potential, or investors who work with an advisor to craft a long-term plan, the market behavior surrounding GameStop and possibly other distressed companies can all be a bit unsettling.  Even so, there are three things to keep in mind.

One, social media is here to stay and will play a growing part in distributing investment information. Two, companies can be mispriced in both directions, even wildly so.  These mispricings present opportunities for diligent investors willing to do the hard work of securities analysis.  Three, a company’s share price is eventually driven by earnings, no matter how you might feel.  Anything else is sheer speculation.

*The reader should not assume that an investment in the security identified or described was or will be profitable.  Any reference to a specific company does not constitute a recommendation to buy or sell that company.

Disclosure: https://mitchcap.com/disclosure/