Professor’s research: Don’t bet on Wall Street success via Reddit

Recent scholarship co-authored by Assistant Professor Thibaut G. Morillon found no evidence that Reddit's WallStreetBets forum, famous for promoting GameStop and AMC Theatres shares, leads to a winning investment strategy.

Sure, you can sometimes make money if you follow investment advice posted on the internet.

Thibaut Morillon
Assistant Professor of Finance Thibaut Morillon

That much was obvious in 2021 when many retail investors – those who buy and sell stocks without going through a broker – followed tips left on the social media platform Reddit in which they encouraged others to short sell shares in GameStop and AMC Theatres. Demand for both soon pushed up their prices, leading to handsome returns for savvy day traders.

But is it to your long-term benefit to follow the investment advice shared on Reddit’s WallStreetBets forum? No.

Recent scholarship co-authored by Elon University Assistant Professor Thibaut G. Morillon determined that “meme stocks” promoted on WallStreetBets see a higher volume of trading in the days and weeks following their Reddit appearance. But stocks themselves don’t over-perform the market, despite wishful thinking on the part of those who contribute to the conversation with either “long buy recommendations” or advice to sell short.

“Will the Reddit rebellion take you to the moon? Evidence from WallStreetBets,” which Morillon co-authored with Ryan Chacon of the University of Colorado and Ruixiang Wang of Clark University, appeared in Financial Markets and Portfolio Management, the official publication of the Swiss Financial Analysts Association.

The trio scraped data from the WallStreetBets subreddit to analyze 221,255 buy or sell recommendations made from 2012 through early 2021. They formed portfolios “following a trading strategy that most retail traders on Reddit would be able to implement” and then evaluated profitability.

“Overall, we interpret these findings as evidence that a trading strategy following WSB recommendations does not (outperform the market),” they write. “In no cases were the buy recommendations as a group fruitful and in very few cases were the sell recommendations useful.”

The new research gives attention to three trends that have led to steady growth in stock and option trading among retail investors: apps like Robinhood allow easy access to buying and sell shares without paying a commission, COVID prompted non-essential workers to stay at home and reduce consumer spending, and stimulus packages provided retail investors with lump sums of cash.

“Our findings contribute to a timely discussion on retail investors in financial markets that are more available than ever,” the authors conclude. “Additionally, the results serve as useful information to the droves of retail investors searching the internet for trading advice.

“Productive future work will disaggregate the WSB subreddit data and identify pockets of successes and failures as we learn more about fruitful sources of information.”

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Since joining the Department of Finance faculty in 2019, Morillon has been prolific in both his scholarship and service to the school, with recent recognition as the recipient of a 2022 Love School of Business Dean’s Award for Excellence in Scholarship.

Morillon is a former financial advisor at LCL Bank. His scholarly interests include mergers and acquisitions, blockchain/cryptocurrencies, international finance, corporate governance, and real estate. He today serves as advisor and mentor to the Elon Blockchain Club and as an Honors Thesis Committee Member, among other service roles at the university.