Kevin O’Leary, co-founder of O’Shares ETFs, told CNBC on Wednesday that he started trading with users of Reddit’s WallStreetBets forum in hopes of better understanding the online community that played a key role in the recent short fix. GameStop.
In an interview with “Squawk Box”, O’Leary said he put $ 10,000 into an account on the popular brokerage app Robinhood, and said he joined Reddit to “walk the herd”.
“There is a brand new sheriff in town and they are not stupid,” said O’Leary, also an investor in the “Shark Tank”. He added that he is impressed by the sophistication that some Reddit users have demonstrated, saying that they “are not as dumb as everyone thinks”.
“They are looking for over-shorted situations that have thin floats. They are getting organized the night before and are going after the stocks and, in most cases, are taking them up,” he said, adding that he won 5% on Tuesday “at some crazy pharmaceutical company I had never heard of”.
As part of a personal experiment, O’Leary said he is comparing the performance of his day-trading account with the returns he is generating through a robotic consultant who uses computers to manage money. “I am seeing my robot consultant defeat me now. The point is that it is fantastic democratization” and an important lesson about the risks of trading versus investing in a diversified portfolio over the long term, he added.
O’Leary’s comments on Wednesday were made the day before the House’s Financial Services Committee held a hearing focused on the GameStop trading craze that broke out in late January.
The video game retailer’s stock soared as retailers who flocked to sites like Reddit rushed to buy the strong bet against the stocks. Hedge funds, like Melvin Capital, which had sold the shares, sought to minimize their losses by buying shares at higher prices, increasing the momentum of upward movement on GameStop. With those two forces at play, GameStop went from less than $ 20 a share in early January to an intraday high of $ 483 on January 28 – a colossal increase of more than 2,300%. Since then, shares have fallen below $ 50.
At the height of hectic activity, brokers like Robinhood temporarily placed trading restrictions on GameStop and other heavily shorted stocks. Lawmakers will certainly ask CEO Vlad Tenev about this at Thursday’s hearing. Melvin Capital CEO Gabriel Plotkin, Reddit CEO Steve Huffman and Keith Gill – a Reddit and YouTuber user who helped unleash the GameStop madness – are also expected to attend the hearing.
O’Leary said he believes that most people who criticize brokers like Robinhood and Reddit users have no direct experience with either platform. That’s why he decided to start using both platforms.
In doing so, O’Leary hopes to show newcomers to the stock market that it is difficult to make money from day-trading and that the best way to build wealth over time is through long-term investments. “I think education is powerful and important,” he said.
Disclosure: CNBC has the exclusive rights to cables outside the network for ″shark Tank, “of which Kevin O’Leary co-hosts.