Democratization of Retail Trading: Can Reddit's WallStreetBets Outperform Investment Bank Analysts?

TL;DR

This study empirically compares Reddit's WallStreetBets investment recommendations with those of top banks, finding WSB's advice can outperform banks and detect top stocks, suggesting its potential as a valuable investment resource.

Contribution

It provides the first large-scale empirical analysis of WSB's investment advice compared to professional analysts, demonstrating its competitive performance.

Findings

WSB recommendations achieve competitive average returns.

WSB outperforms most banks in identifying top stocks.

Not all WSB advice is profitable, but some outperform professional analysts.

Abstract

The recent hype around Reddit's WallStreetBets (WSB) community has inspired research on its impact on our economy and society. Still, one important question remains: Can WSB's community of anonymous contributors actually provide valuable investment advice and possibly even outperform top financial institutions? We present a data-driven empirical study of investment recommendations of WSB in comparison to recommendations made by leading investment banks, based on more than 1.6 million WSB posts published since 2018. %enriched with stock market data. To this end, we extract and evaluate investment recommendations from WSB's raw text for all S&P 500 stocks and compare their performance to more than 16,000 analyst recommendations from the largest investment banks. While not all WSB recommendations prove profitable, our results show that they achieve average returns that compete with the best banks and outperform them in certain cases. Furthermore, the WSB community has been better than almost all investment banks at detecting top-performing stocks. We conclude that WSB may indeed constitute a freely accessible, valuable source of investment advice.