Where finance and media intersect with reality


When Betting goes Right, and Investing Doesn’t

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It was during the market closing hours of September 28 that Jake Freeman opened his portfolio and counted his losses; his holdings in the psychedelic biotech company, Mind Medical, had just dropped by 49%.

Just weeks before, his face had been plastered over financial media because of his trade on then-meme stock favourite Bed, Bath, and Beyond, which netted him a total of $110mn from an original investment of $25mn.

Now focusing on a promising biotech rather than a struggling retailer, it seems the young math obsessive’s position could meet its maker.

In our contemporary world, as in meme stonks, conventional logic is suspended. Up is down, and down is up. A bad investment can make you rich, while a good investment keeps you poor.

Could modern economics be missing this gap between theory and reality driven by generational desperation?

Last month, the Blind Spot highlighted our criticism of comments made by Nigel Green, the CEO of DeVere Group,  with respect to meme stocks:

“Back then, as is likely to happen this time around, many individual investors – often young and inexperienced – got badly burned by the experience.

“This kind of investing is extremely speculative and valuations can be expected to be incredibly wild – in both directions. There are genuine risks to people’s wealth here.”

If you do want the thrill or novelty of chasing big gains, you really should ensure that you have a sound, diversified, long-term plan beforehand.

We noted the choice facing predominantly young ‘investors’ in today’s world is not one faced by established advisors such as Green. The latter can afford to give cautious, data-driven, diversified investment advice.

The modern youth cannot.

Most young urbanites’ options are limited to scraping some savings together while praying for a decent salary.

Alternatively, they could ‘yeet’ away money at leveraged positions for some chance of outsized gains – or record yourself crying when it (likely) goes wrong for Reddit karma.

The choice for any rational youth seems almost obvious. Take the shot. YOLO.

Rational irrationality is the new norm evinced by Wall Street Bets and meme stocks.

Jake Freeman, the 20-year-old student who gained $ 110mn from his Bed, Bath, and Beyond play after obtaining a ‘small loan of $ 25mn dollars’, is a far cry from the average WSB retail investor.

While he can’t typify generational desperation in this trade, he made a fortune from it. Fortune appears absent from his Mind Medical investment, however.

It shouldn’t be this way.

Bed, Bath, and Beyond is a struggling retailer with plunging valuations; an overstaffed company inefficiently selling boring products, consistently closing stores, and laying off employees.

It was the retailer’s poor performance that attracted the attention of activist investor and Chewy co-Founder, Ryan Cohen in March 2022. WSB, smelling another highly shorted and underperforming company, piled in for a shot at winning the lottery.

Alternatively, it appears self-evident that Mind Medical attracted more traditionally ‘smart’ investors, such as Kevin O’Leary. While risky, such groundbreaking companies can make their investors rich. The use of psychedelic substances to aid mental health issues has never appeared so promising. Canada’s Alberta just announced its support for such treatments.

Jake Freeman, furthermore, has family-level access to Mind Medical’s former co-founder and CMO.

But it’s no walk in the park. In what Freeman presents as a hostile response to his proposals, the Board opted to dilute existing shareholders’ shares – causing the noted share price drop of 49 per cent on the day and eliciting tears from retail investors. Mind Medical’s leadership argues this secondary offering will raise $30mn, boosting its cash stockpile to help fund clinical developments.

The Canadian biotech now finds itself in the middle of a lawsuit filed by Freeman’s uncle, Dr. Scott Freeman, against another set of co-founders. Freeman senior alleges then-CEO Stephen Hurst failed to protect their IP in favour of a competing biotech, Ceruvia. Freeman senior claims Hurst has close ties to Ceruvia’s founder, Carey Turnbull, and skirted corporate agreements to maintain control of Mind Medical’s stock. Reached out to for comment, Stephen Hurst replied “there is no factual basis for (Dr. Scott Freeman’s) claims”. Mind Medical has opted not to comment on the lawsuit, of which it is not a part.

These setbacks make Freeman’s insane profits from his Bed, Bath, & Beyond trade seem ironic.

Freeman states his ignorance of the stock’s meme status at the time of his buy-in under $5.50, before July 21, after which he proposed a drastic turnaround plan for Bed Bath & Beyond.

On August 18, the subreddit found Cohen had started selling near the stock’s peak, on August 16 – the day Freeman cleared his position, at over $27 a share. Community sentiment collapsed and the stock nosedived.

In the trade’s success, the part of WSB’s groupthink overshadowed Freeman’s play. Later, the 20-year-old said there were “too many cooks”. Need this matter? One YOLO maketh another.

Even if he bought low and sold high in contravention of WSB principles.

The efficient markets hypothesis allows for some variations on its assumption that prices are fairly priced based on available information; some ‘froth’ can contend; hype or FUD, estimating these price influencing mechanisms to only ever be temporary.

In the acclaimed Phishing for Phools book by Nobel laureates George A. Akerlof and Robert J. Schiller, the authors challenge the conventional understanding of the market’s fair pricing mechanisms.

They posit the ‘phishing equilibrium’ – that markets spawn deception and trickery alongside constructive competition, incentivising turning consumers into ‘phools’.

One aspect of this ‘phishing equilibrium’ was suggested behind one GME rally on October 2020. A mysterious user named /u/namsilat urged WSB users to purchase stock in the gaming retailer. He claimed to hold solid ‘pump-and-dump’ credentials. GME announced a partnership with Microsoft later that day, sending shares soaring. The post was later deleted by the user.

Going further than Akerlof and Schiller, we question whether meme stocks mean our understanding of markets has failed to price in desperation alongside deception.

Until we price in the cost of a desperate and technologically empowered generation, intelligent well-wishers such as Green may continue to underestimate the rationality of our newly irrational world.

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