How /r/WallStreetBets ‘Solved’ Wall Street

There is a book by Wall Street Journal reporter Zuckerman, The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, about James Harris Simons–a former mathematician, physicist, and code breaker–who launched arguably the most successful hedge fund ever, Renaissance Technologies, which for decades has posted annual returns in excess of 40%, making it by far the most successful hedge fund ever. Equally impressive is that in the nearly 40 years of its existence, Renaissance has never had a down year. Unfortunately but understandably, Harris’ methodology of how he ‘solved’ Wall Street remains opaque in spite of intense interest and sleuthing online, but one can infer that it involves various ‘statistical methods,’ which is still hopelessly vague but the best we can infer with the information Zuckerman and others have supplied.

But move over Harris, because there is a cadre of traders who also appear to have ‘solved the market,’ but unlike Harris, they make their trades openly public for ‘bragging rights’ and ‘meme value.’ But Renaissance Technologies is in a league of its own in terms of uninterrupted, smooth returns, but in terms of absolute returns, especially at an endeavor in which so few beat the market, these new traders possibly have him beat.

But let’s go back a bit in history. For years, probably as far back as the late ’90s, message boards and blogs dominated online financial discourse. Then came Twitter, along with YouTube, creating new avenues for traders share wins, losses, and strategies . Sites such as StockTwits, which leveraged the Twitter platform and popularized ‘dollar hashtags’ (such as $AAPL for Apple), grew in popularity. By 2013-2015 or so, at its peak, the ‘finance sphere’ was composed of YouTube channels (such as Tasty Trade, which makes me cringe just typing it out), blogs (such as Seeking Alpha, which aggregates many blogs, and also individually-run blogs), popular message boards (such as Elite Trader and Yahoo Finance message boards), StockTwits (which still exists but is full of ads and is a shadow of its former popularity, having been subsumed by Twitter), trading podcasts, and also Reddit.

Looking back, I only realize now that that all those platforms had one thing in common: no was actually making money . Except for proprietors of newsletters, as well as YouTube channels and blogs that collected ad revenue, the actual traders themselves tended to either lose money or make only table scraps. In spite of this torrent of content, the one thing everyone was ultimately seeking–profits–was out of reach or only a pittance.

Then in 2015, the Reddit sub /r/WallStreetBets changed all of that. Suddenly people were making money for a change, posting verifiable screenshots and video screenshot captures of substantial returns. In any given day, one can easily find many posts of option traders turning thousands or even hundreds of dollars into tens of thousand, hundreds of thousand, or even millions of dollars of profit. Other are making substantial, market-beating returns with ‘buy and hold,’ without options, which tend to be riskier than stocks but produce far greater returns. Of course, given the inherently risky nature of options and leverage, some traders on WallStreetBets also lose substantial sums of money (getting rekt, blowing up, or washed-out, as it’s called), posting screenshots of the losses in all their glory. One ‘degenerate’ [as part of the in-group culture and lingo, traders on WallStreetBets often refer to each other as degenerates or autists, which is not at all that inaccurate of a description], for example, lost $400k on ill-timed Tesla options. In regard to the above links of massive wins, it is not like I am cherry-picking: all of these were selected within a single day, going no deeper than 2 pages within the sub. On any given day, one can easily find at least three or more screenshots and other documented evidence of substantial profits, all within the first page.

Memes and jokes aside, we’re talking big money. Millions of dollars is nothing to scoff at, especially given the statistically improbable and high frequency of such profitable trades, all fully disclosed to the public, and the inherent difficulty of trading and ‘beating the market,’ which is a goal retail speculators and institutional investors alike aspire to but many fall short of, so seeing these ‘autists and degenerates’ post the sort of consistent returns that make Google salaries seem small by comparison, is bound to draw some attention. Consequently, after relative obscurity in 2015, WallStreetBets has exploded in popularity over the past few years as the Trump bull market and the even bigger bull market in tech stocks has enriched speculators greatly, and whipped people up into a get-rich-quick frenzy, and especially since Covid, as young people find themselves with ample free time and money (in spite of joblessness and ‘tough times’, there always seems to be money to trade).

So back to James Simmons, I believe, contrary to EMH purists, that actual trading ‘skill’ exists, and that returns comparable Renaissance Technologies, or even greater, are possible, and that there are traders on /r/WallStreetBets who are doing that now (sure, they do not have billions of dollars, but you have to start somewhere, and small, successful strategies can be scaled up). The common retort is that if losses and wins follow a normal distribution, then we would expect given a large enough pool of traders that some traders on the tail-end of the distribution will appear very successful and have a long string of big wins, by pure chance. Yet empirical observation seems to suggest otherwise. Despite the large losses, it is evident some traders have a knack for making consistent, large profits, and that some strategies are superior to others, with far greater frequency that can be attributed by chance alone. Even if unsuccessful traders are disinclined to post their results on /r/WallStreetBets, there are enough large winning trades and successful traders, that we can infer such a strategy. Even hedge funds are taking notice , trying to elicit such tradable and replicable strategies and gems from the pile of memes and ‘shitposts’.

So why is WallStreetBets, large losses not withstanding, so successful , when all prior communities failed to deliver on actual profits? My belief, again deferring to HBD, is that the addition of 20 or more extra IQ points from the generally high-IQ Reddit community created superior strategies. The blogs and communities that predated WallStreetBets focused mostly on technical analysis (annotating stock charts with lines and diagrams to predict price direction) and small cap stocks (penny stocks are often very popular on stock massage boards and blogs, yet few people make money trading them), but those strategies are inferior to the strategies the successful traders on WallStreetBets employ. Eschewing technical analysis or small cap stocks, traders on WallStreetBets focus instead on dominant, big tech companies and employ a more holistic, fundamental approach and ignore chart patterns. Traders on WallStreetBets correctly deduced that the ‘easy money’ is made with $50-500+ billion companies such AMZN and TSLA, not small or medium-sized stocks, which tend to be more volatile and give up their gains too easily, whereas mega-cap tech stocks such as Tesla and Amazon hold their gains, have less volatility, and have superior absolute returns compared to smaller stocks despite being orders of magnitude bigger (Tesla stock, for example, despite being worth $600 billion , was up 700% for 2020).

A possible objection is that, sure, we can go back in time and find successes such as Tesla and Amazon, but how do we know this is not just luck, versus skill? Maybe they just got lucky in choosing those stocks and that the luck will run out. But consider the recent success of Palantir (PLTR). As soon as Palantir went public on September 30th, WallStreetBets traders immediately honed in on it and began buying. For example, one trader bought shares as soon as it began trading, on the IPO, at what was then $9/share. Palantir, just 2 months later, trades at $27/share–a gain of 200%, far surpassing the S&P 500, which was only up 15% year-to-date. Scanning the archives of WallStreetBets, one finds dozens of instances of traders speculating, correctly, that Palantir would go higher and profiting greatly by buying call options on Palantir or buying shares outright, typically on Robinhood. Many traders have made six figures in profit doing so. So out of a pool of thousands of companies to choose from, WallStreetBets correctly singled out Palantir, one of the strongest-performing stocks of the past 2 months even before it it gained 200%. This is demonstrative of actual skill and not just guessing.

Hedge funds spend inordinate amounts of money hiring some of the smartest PHDs and other credentialed experts to find strategies that may give their funds even just a small edge over the S&P 500 or some other benchmark, yet the retail traders on WallStreetBets appear to leave these experts in the dust. Sure, in fairness, hedge funds seek to minimize volatility whereas WallStreetBets traders appear inured by the volatility that comes with trading highly speculative call options, yet it would at the same time seem as if they have found a strategy that otherwise was overlooked by the experts. The experts have been trying to time the bottom on value stocks and commodity stocks, for years, to no avail, but WallStreetBets traders chose growth, market dominance, and size over cheapness. By possessing above-average IQs and a strong and reliable intuition about how the market works, WallStreetBets traders were able to ferret-out–much like how James Harris, who is a genius, was able to find winning strategies–that buying call options and or ‘buying and holding’ these handful of large, dominant tech stocks is the winning (or alluding to Zuckerman’s book, ‘solving Wall Street’) strategy out of a multitude of inferior strategies.