The year youth became a market force. Again.
Remember when young investors used the internet to manipulate stock prices, annoyed the establishment and attracted the attention of regulators? No – that time 20 years ago
“The word is about: there’s something evolving. Whatever may come, the world keeps revolving ...” Usually, when we are tempted to use the cliché, here on The Value Perspective, we rein ourselves back to offer the more nuanced line that, rather than repeat itself, history more often echoes or rhymes. Occasionally, though, we have to admit 1990s electro duo Propellerheads – ‘featuring Miss Shirley Bassey’ – may have had a point.
“They say the next big thing is here, that the revolution’s near ...” One of those occasions came the other day after we had read an excellent New York Times piece about young investors using the internet to manipulate stock prices, generally upsetting the market establishment and ultimately attracting the attention of the US financial regulator, the Securities and Exchange Commission (SEC).
No, this is not us coming a few months late to the GameStop saga and the so-called ‘gamification’ of investment through trading apps such as Robinhood – this is us coming really, really late to the Jonathan Lebed saga. Lebed made a fortune at the height of the dotcom boom promoting and trading tech stocks from his bedroom and ended up handing a large amount of that over to the SEC – all before his 16th birthday.
If the story of the first minor ever to be prosecuted for stockmarket fraud is not appealing enough in itself, the New York Times piece from February 2001, Jonathan Lebed’s Extracurricular Activities, is written by Michael Lewis – the best-selling author of such books as Liar’s Poker, The Big Short, Moneyball and, most recently, Premonition – and it is well worth reading in full, even if it does stretch to 9,000 words.
As the article is so long, we will only scratch the surface with a couple of thoughts – the first being an observation on market manipulation the then 14-year-old Lebed made in an initial four-page statement to his lawyer ahead of his first meeting with the SEC. “People who trade stocks, trade based on what they feel will move and they can trade for profit,” he wrote.
“Nobody makes investment decisions based on reading financial filings. Whether a company is making millions or losing millions, it has no impact on the price of the stock. Whether it is analysts, brokers, advisers, internet traders or the companies – everybody is manipulating the market. If it wasn’t for everybody manipulating the market, there wouldn’t be a stockmarket at all ...”
Now, of course not everybody with an interest in investment is going to buy into that analysis, And yet, two decades on, it would not be much of a stretch to imagine some of those Robinhood app users, who earlier this year did their best to make a number of large US hedge funds blink first by pushing up the price of GameStop, nodding their heads in agreement.
Later on, the SEC’s head of enforcement tells Lewis that when Lebed was making multiple posts in multiple names on the prices and prospects of certain companies, he had “no basis for making these predictions” and was “seeking to manipulate the market”. When Lewis asks what that means, he is told: “It’s when you promote a stock for the purpose of artificially raising its price.”
That begs a second question, which is answered: “The price of a stock is artificially raised when subjected to something other than ordinary market forces.” Which prompts a third question from Lewis – what constitutes “ordinary market forces”? “An ordinary market force, it turned out, is one that does not cause the stock to rise artificially,” he writes in his New York Times piece.
“In short, an ordinary market force is whatever the SEC says it is, or what it can persuade the courts it is. And the SEC does not view teenagers’ broadcasting their opinions as ‘an ordinary market force’. It can’t. If it did, it would be compelled to face the deep complexity of the modern market – and all of the strange new creatures who have become, with the help of the internet, ordinary market forces.”
None of which is to make any comment as to what may or may not count as market manipulation or good or bad regulation. Lewis’s extraordinary tale of what one teenager was able to do in the febrile environment of the late-1990s tech bubble and its spooky parallel with today’s market simply reminds us of one of our favourite quotes from economist John Kenneth Galbraith.
“There can be few fields of human endeavour in which history counts for so little as in the world of finance,” he wrote in A Short History of Financial Euphoria in 1990 – a few years before Lebed opened his first online trading account. “Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”
For his part, Lewis observes: “When the internet collided with the stockmarket, Jonathan Lebed became a market force. Adolescence became a market force.” Switch out Jonathan Lebed for the “strange new creatures” using Robinhood and, in 2021, you could say something very similar. Or you could sing it with Dame Shirley: “But to me it seems quite clear – that it’s all just a little bit of history repeating ...”
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
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