🎙️ The Trolls of Wall Street

🤔 In a big way, companies like Starbucks, Carnival, Naked Wines, Delta, and Travel + Leisure operate like banks. Yes, banks.

Marc Rubenstein, a former hedge fund manager, pointed out that holding and utilizing customer funds at zero cost provides a major opportunity for these businesses.

Take Starbucks, with its popular gift card programs. It reaps big rewards from interest-free access to capital. The coffee chain (and other firms, like Carnival) benefit from “breakage” — the fact that some customer funds will never be used at all.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• The new generation of young American traders

• Ackman sells stake in Pershing Square pre-IPO

This, and more, in just 5 minutes to read.

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In The News

🦬 The New Generation of Young American Traders

America’s next generation of young American traders are so here, driven by the powerful emotions of rage and boredom and their participation in the online community WallStreetBets (WSB).

Nathaniel Popper’s new Bloomberg feature, an excerpt from his forthcoming book "The Trolls of Wall Street," explores the evolution of this new generation.

The narrative centers on Jaime Rogozinski, whose personal journey from discontentment to the founding of WSB reflects broader societal shifts in attitudes toward finance and investing.

The background: In 2011, Rogozinski, then 29, lived a “monotonous life,” working at the Inter-American Development Bank in Washington, D.C. He spent his days managing economic data and his nights consuming social media, isolated, and battling alcoholism. 

Here comes boredom: Seeking a distraction, Rogozinski opened a brokerage account and began trading options, a complex financial product that satisfied his love for puzzles. 

• His growing interest in the intricacies of trading led him to start WallStreetBets on Reddit in early 2012, when he envisioned it as a forum for discussing high-risk trades, especially options. 

YOLO: WallStreetBets developed into a hub for a unique group of traders characterized by their irreverence, aggressive trading strategies, and disdain for traditional financial advice. The subreddit became famous for its "YOLO" (You Only Live Once) attitude, encouraging members to take financial risks for potentially huge rewards. 

• The culture appealed to many who felt left behind by the conventional financial system, particularly in the aftermath of the 2008 financial crisis, which also came shortly before the introduction of Bitcoin.
  

• WSB’s community’s growth reflected a broader trend: Young Americans were increasingly drawn to speculative trading as a financial opportunity and a form of rebellion against established financial norms.

Mainstream: WallStreetBets gained mainstream attention during the GameStop short squeeze in January 2021, when members of the subreddit collectively drove up the stock price of GameStop by nearly 500% in a matter of days. 

Why it matters:

Meme stock mania highlighted the power of retail investors when united by a common cause and showcased the potential of social media to disrupt financial markets. The frenzy drove massive financial gains and losses, sparking debates about market manipulation and the role of retail investors.

Still hot: By early 2024, retail traders were still pouring big money into the stock market, maintaining levels of engagement similar to the peak of the GameStop episode. Retail investments in stocks surged in 2023: Amateur traders contributed $145 billion to the markets in the first half of 2023 alone.

• Critics liken trading on WallStreetBets to gambling, but Popper argues that it also provides valuable financial education and a deeper understanding of economic mechanisms.
  

• Popper’s forthcoming book underscores the cultural and economic impact of this new generation of traders, who blend financial speculation with social media dynamics to challenge traditional financial paradigms. 

Bottom line: As WallStreetBets' and similar communities' influence continues to grow, they are reshaping the landscape of retail investing and reflecting deeper societal trends of discontent and the search for identity–and empowerment.

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More Headlines

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💳 Bank of America CEO: Consumers have turned cautious on spending

📊 Fed’s preferred inflation metric remains at 2.7% in April

📄 Leaked Google documents reveal details on data the company collects

💸 Bill Ackman Selling 10% Stake in Pershing Square

Bill Ackman is making money moves. 

The billionaire hedge fund manager is planning an initial public offering (IPO) for his firm, Pershing Square Capital Management, as soon as next year. As a precursor, he’s selling a 10% stake in a private funding round that values Pershing Square at $10.5 billion. The private funding round is expected to close in the coming days.

Newfound fame: The funding raised will be used to seed investments in new funds Ackman plans to launch, including half going toward the upcoming Pershing Square USA closed-end fund for retail investors in the U.S. It’s part of Ackman's efforts to capitalize on his newfound fame and soaring social media following, including his 1.2 million followers on X (formerly Twitter).

• His “brand-name profile and broad retail following, along with a substantial media following, will drive substantial investor interest,” one person familiar with the firm told WSJ. Another noted that Ackman “plans to write about new investments on X once the retail fund gets approved.”

Volatility game: An IPO would be an anomaly for a hedge fund. Public markets have soured on the industry since the 2008 financial crisis due to unpredictable fees and volatile returns. As The Wall Street Journal reported Friday, “The management and performance fees that make up hedge funds’ revenues can be unpredictable, assets can shrink if investors yank their money out, and returns can be volatile.”

• But Pershing Square has been repositioning itself as an asset manager with more permanent capital through its closed-end funds, which raise capital for investment through a one-time sale of a limited number of shares, which may then be traded on the markets.

Ackman wants to manage considerably more assets after new fund launches to justify the $10.5 billion valuation based on higher expected fee income. Part of its rich valuation hinges on the expectation that it will manage much more money and pay much more in high fees. 

The IPO would also likely increase Ackman's net worth of $4.3 billion and could aid in succession planning and talent retention at his firm.

Why it matters:

Pershing Square has delivered strong returns recently after a losing streak from 2015-2017. Its 5-year annualized return through 2023 was 31.2%. The firm made over  $5 billion in gains on hedging trades tied to the pandemic alone. 

• Big wins: Ackman founded Pershing Square in 2004 as an activist hedge fund firm and has enjoyed big wins on investments like Wendy’s and mall developer General Growth Properties propelled it forward. One of the fund’s biggest long-term winning investments has been a large stake in Chipotle—Pershing Square currently owns about 3.5% of Chipotle's outstanding shareholdings. (Ackman’s order: chicken bowl.)
  

• Pershing’s concentrated portfolio currently has only nine other holdings.
  

• Ackman and his team have scored high-profile wins on Wendy’s and mall developer General Growth Properties.
  

• After fees, it gained 5.4% this year through April. 

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Quick Poll

On Wednesday, we asked: At what level of income do you believe your happiness peaks or plateaus?

— People love to talk about money, income and happiness. Most respondents said they need $150,000-plus to reach peak happiness, with commentary like: “This is the amount where I started to feel confident in my ability to pay all my bills and also save for retirement, and kids’ college and still have some left over for a nice vacation each year.”

— One reader said, “Freedom to travel, days off, and lack of fear that the bank will take your car or house is I think what the money gets you.”

— Another added, ““I hit $200K in my career, and then was back to about $140… above about $160K we had enough to afford the ‘extras’ without worrying about it. But we were fine lower.”

— Another said that $150,000 hardly feels like enough, writing: “I am 30 at $140K (total comp) and there are still many large purchases in my future (wedding, first house, kids) which make it difficult for me to feel like I am at a point where I can start spending money on things that bring me joy.”

See you next time!

That's it for today on We Study Markets!

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