Kevin O’Leary, co-founder of O’Shares ETFs, told CNBC on Wednesday he’s started to day trade alongside users of Reddit’s WallStreetBets forum in hopes of better understanding the online community that played a key role in the recent GameStop short squeeze.
In an interview on “Squawk Box,” O’Leary said he put $10,000 into an account with the popular brokerage app Robinhood and said he joined Reddit to “ride with the herd.”
“There’s a whole new sheriff in town and they’re not stupid,” said O’Leary, also an investor on “Shark Tank.” O’Leary added he’s been impressed with the sophistication some Reddit users have demonstrated, saying they’re “not as dumb as everybody thinks.”
“They’re searching out situations that are over-shorted that have thin floats. They’re organizing the night before and they’re going after the stocks and in most cases, they’re driving them up,” he said, adding he made 5% on Tuesday “on some crazy pharmaceutical company I’d never heard of.”
As part of a personal experiment, O’Leary said he’s comparing the performance of his day trading account with the returns he’s generating through a robo-advisor, which uses computers to manage money. “I’m watching my robo-advisor beat me right now. The point is, it’s fantastic democratization” and an important lesson about the risks of trading versus longer-term investing in a diversified portfolio, he added.
O’Leary’s comments Wednesday came one day before the House Financial Services Committee holds a hearing focused on the GameStop trading mania that erupted in late January.
The video game retailer’s shares rocketed higher as retail traders who gathered on sites like Reddit rushed to buy the heavily bet against stock. Hedge funds such as Melvin Capital, which had shorted the name, sought to minimize their losses by purchasing shares at higher prices, adding to the upward momentum in GameStop. With both these forces at play, GameStop went from less than $20 per share in early January to an intraday high of $483 on Jan. 28 — a whopping increase of more than 2,300%. The stock has since fallen back below $50.
At the peak of the frenzied activity, brokerages such as Robinhood temporarily placed trading restrictions on GameStop and other heavily shorted stocks. Lawmakers are sure to ask Robinhood CEO Vlad Tenev about that at Thursday’s hearing. Melvin Capital CEO Gabriel Plotkin, Reddit CEO Steve Huffman, and Keith Gill — a Reddit user and YouTuber who helped spark the GameStop craze — are also set to take part in the hearing.
O’Leary said he believes most people who are criticizing brokerages like Robinhood and users on Reddit lack first-hand experience with either platform. That’s why he decided to start using both.
By doing so, O’Leary expects to show newcomers to the equity market that it’s difficult to make money day trading and the better way to build wealth over time is through long-term investing. “I think that education is powerful and important,” he said.
O’Leary made a fortune selling an education software company that he founded in his basement in 1986 to Mattel for $4.2 billion in 1999. He later started O’Shares, an investment firm that provides exchange-traded funds for long-term wealth management.
Disclosure: CNBC owns the exclusive off-network cable rights to ″Shark Tank,” on which Kevin O’Leary is a co-host.