Tweets, LinkedIn, YouTube, Reddit and the fast moving rumor

Can your company survive and thrive? Part I of a two-part series.

PART I: I HEARD A RUMOR

I work with companies and Boards of various sizes, and one of the challenges they all face is the impact on their company value of “spreading like wildfire” rumors and unintended opinions in the marketplace.

This will be a bit of an experiment this week, as I intend to cover this topic in two parts, with this being aptly named “Part I.”

The world is different than it was in 2013 when the Securities and Exchange Commission (SEC) first announced that companies could share key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.

Or when the SEC started to raise alarm bells about stock rumors, including pump and dump scams, being shared on social media in 2015. Oh how far we’ve fallen.

How social media impacts investment decisions

In my business law class, we talk a lot about the need to question information, especially legal information, and approach “recommendations” with skepticism and a critical eye for the surrounding context. But what happens in a world where even knowledgeable, institutional investors trust in platforms and digital sources as much or more than some mainstream media outlets? 

How big is the impact of fast moving information via social media on investments? Consider the following statistics:

• “[A]lmost 80% of institutional investors use social media as part of their regular work flow 

• Approximately 30% of institutional investors say information obtained through social media has “directly influenced an investment recommendation or decision.” 

• “34% of retail investors have made at least one change to their investments as a result of announcements seen on social media” and

• “58% of institutional investors — the professionals who trade on behalf of banks and pension funds, the so-called "smart money" — admit to having made an investment decision based on information from Reddit.” 

Also, once information is out there, what can business leaders do to minimize the impact? Especially when this “critical thought-driven skepticism” is not a skill that everyone has. Said another way, given the constant need for judgment in a world filled with accelerating information, how do we, as business leaders, identify, gather, and assess information both for our own companies as well as in our own lives?

How does social media impact the financial markets? 

Let’s start with a few recent examples.

Of course, there is Silicon Valley Bank (SVB), which regulators “blame social media for SVB’s rapid collapse.” It is certainly a different world where depositors can “one click” their money to another institution based on rumors they see on Twitter as opposed to going down to the bank to meet with neighbors and friends like George Bailey did in “It’s a Wonderful Life.”

Remember when Christiano Renaldo pushed the Coca-Cola bottles out of the way at a press conference and held up water instead? Coca-Cola lost $4 billion in market value almost immediately.  

And who can forget the 808s & Heartbreak that Adidas witnessed from Kanye West’s antisemitic social media rants? Adidas has lost ⅔ of their market cap, could lose another $1.3 billion in revenue if it cannot sell the inventory that it has, and has issued its fourth “profit warning” to the markets in less than six months. Even more shocking, this will likely mark Adidas’ first annual profit loss in 31 years!

And it works the other way too….

After short sellers took positions in GameStop, retail investors weaponized a coordinated group of Redditers (and other social media tools) to drive the stock price back up in a bizarre digital tug-o-war with the hedge funds that were shorting the stock in the first place.

Speaking of short sellers¹

One of the most fascinating areas of investment, in my opinion, is the influence of short sellers. In a recent article in The Atlantic, these “market movers” are profiled.

In the article, Carson Block, a sort of Henry Rollinsish² looking chap and founder of Muddy Waters Capital (a name I suspect The Set List crowd will appreciate), outlines how he takes a short position in a stock, releases an “investigative” research report (and social media campaign to its approximately 234,000 Twitter followers) that is highly inflammatory and often contains allegations of fraud and deception, then profits as the share price plunges (often in minutes).  

But mind you, Mr. Rollins, I mean Block, also received a SEC whistleblower award in the amount of $14 million, though now he is allegedly being investigated by the same SEC. Which is where the controversy sets in. Haters of short sellers like Elon Musk (who has called the SEC the “Short Seller Enrichment Commission”) think that short sellers are simply manipulating the markets for their own gain. However, supporters counter that short sellers, by uncovering fraud, do more good than harm. They argue that [short sellers provide] a vital service in policing the markets.” But where is the line between “citizen journalist” and market manipulator?

If this isn’t enough, there is Hindenburg Research (Hindenburg), whose Twitter byline reads “Popping bubbles as we see them. We express strong opinions. Not investment advice.” Hindenburg (which “isn’t a hedge fund, and prefers to be known as a forensic research outfit that operates with its own capital”) has been behind several recent “PR” nightmares accelerated by their vast reach, including 566,000 followers on Twitter. 

First off, CEO Jack Dorsey (remember him, he is the one that sold Twitter to Elon Musk) has publicly touted that CashApp is mentioned in hundreds of hip hop songs as evidence of its mainstream appeal. 

Just last week, according to Hindenburg, “a review of those songs show that the artists are not generally rapping about Cash App’s smooth user interface—many describe using it to scam, traffic drugs or even pay for murder.” The story is getting wings through traditional media outlets, fueling the spread of a belief that Cash App (Block Inc.: SQ) allows crime and fraud to run rampant. Will an implosion at the third most popular peer-to-peer app follow, or will the stock continue an unexpected surge in price?

Then there was Adani Group. A two year “investigation” by Hindenburg led to a report titled “Adani Group: How the Worlds 3rd Richest Man Is Pulling the Largest Con in Corporate History.” The report and its aftermath forced Adani Enterprises to abandon a $2.5 billion stock offering and led to an $110 billion erosion of market capitalization. Adani has since retained Wachtell Lipton to fight this battle, so pop some popcorn, queue up some jazz music, and await the findings as the story spreads, including through other platforms like Instagram, where @thetatvaindia shared the information with its 1.1 million followers.

…and so on, and so on, and so on.

Regardless of which side you are on, these professional short sellers are evidence that social media’s impact on financial value is swift and significant.

Ask yourself: whose interests does this information benefit?

Let’s return to the concept of skepticism, which I believe is a course that should be taught at every school in the country. 

A true skeptic is "critical" in both senses of that word—willing to challenge what is widely believed rather than taking it on faith, but also committed to relying on careful analysis. Skepticism and criticism come from Greek words meaning, respectively, to examine or investigate, and to judge or discern. (Psychology Today: What Makes A True Skeptic, 2021)

Consider the “self interests” at play because, as we know from history and economics class, “self interest drives capitalism.” Adam Smith’s sentiments seemed to be echoed in a boss I worked for once that used to tell me, “the only interest you can be sure of is self interest.”³

Some easy ways to embed skepticism into your view of the world, and teach your kids to do the same:

• Start with the simple concept, “I’m not sure whether to believe this.” Then set out to verify the information with other, reputable sources. Of course you can’t do this every time, but when it makes sense, go for it.

• Also consider, “What if I’m wrong?” Use this as an opportunity to “play devil’s advocate.”

• Actively seek contradictory viewpoints and continue to test your beliefs and opinions as new information becomes available.

For example, if venture capitalists are driving the run on a bank like SVB, consider how they might benefit, or what result they might be interested in creating for themselves. What might they expect in exchange for loaning out emergency operational capital? A board seat? A favor? Part ownership? 

And what about the banks that are “allegedly” saving the day? How did their actions ultimately pan out for their own coffers?

Or, consider how murky the waters are around Jack Dorsey. As we saw above, his latest company, CashApp, is in hot water for some misleading information he might be spreading and other potentially deeper acts of fraud, which is exactly like the accusations that Elon Musk made when he initially attempted to buy Twitter. And in a weird twist, even with all the animosity between them, Dorsey remained voluntarily invested in the now private Twitter to the tune of $1 billion.

As you ponder these scenarios and wait for next week’s Part II post (creative name, right?), which will cover the way forward for directors and leaders, consider this from David Mikkelson, co-founder of Snopes.com (a fact checking website):

“Twenty years ago, if you found something in a food product, what could you do about it? You complain to the neighbors or write a letter to the company, or maybe you get on the local news show. Now you post something on social media, and half an hour later it’s a headline." 

It certainly isn’t George Bailey’s Wonderful Life. We don’t have the option to have a hushed conversation in the lobby of our own company, and no one is getting any wings any time soon.

1. Short sellers are people who “open a short position by borrowing shares, usually from a broker-dealer, hoping to buy them back for a profit if the price declines. Investopedia

2. And looking like Henry Rollins is DEFINITELY a compliment. Here I am with Henry “pre-pandemic.” Yes, I was speechless. Yes, I acted like a complete fan girl dork. Yes, I might still be giggling from meeting him. Yes, I am wearing a Go-Gos t-shirt in homage to Belinda’s brief stint as the drummer for The Germs, one of Henry’s favorite punk bands (and mine, but who cares about my opinion when you can have his).

3. He also regularly called me “both decorative AND functional,” which is certainly a topic for another day.