'This is real' — Mark Cuban says Reddit traders won't go away just because they lost money

Key Points
  • Investors who are active on Reddit have recognized their potential influence in the stock market during the GameStop frenzy, Mark Cuban told CNBC on Tuesday.
  • "It's not going to be a set of circumstances where all these people lost money, they're going to go home with their tail between their legs and they're never going to do this again," Cuban said.
  • He also contended younger investors take a different approach to traditional valuation metrics for stocks.
Mark Cuban discusses state of investing amid Reddit-fueled frenzy around GameStop
Mark Cuban discusses state of investing amid Reddit-fueled frenzy around GameStop

Billionaire entrepreneur Mark Cuban told CNBC on Tuesday that he believes the Reddit traders who helped spark the GameStop short squeeze and subsequent stock surge will remain a force in the market.

"I always was taught, 'You get long and you get loud,'" Cuban said on "Squawk Alley." "You get out there and create more buyers for your stock and the stock price goes up and that's exactly what's happening here, except it's just WallStreetBets that's doing the 'getting loud.'"

Cuban's comments came as GameStop shares were plunging about 50% on Tuesday to around $111 each, one day after losing nearly a third of their value.

The video game retailer's stock — which rallied 400% last week, reaching an all-time high of $483 per share at one stage — started soaring in response to a short squeeze that happened when online traders on sites like Reddit's WallStreetBets forum poured into the heavily bet-against name.

Cuban, who made billions of dollars during the dot-com boom, said he believes those online investors have gained valuable knowledge from the short squeeze, as well as from the volatile cryptocurrency market. "I think this is real," said the "Shark Tank" investor and owner of the NBA's Dallas Mavericks.

"I think now that they've recognized their power and now that they've learned some lessons, we're going to get more of it, not less of it," he added. "It's not going to be a set of circumstances where all these people lost money, they're going to go home with their tail between their legs and they're never going to do this again."

Short selling is a strategy in which an investor borrows shares of a company and then promptly sells them, expecting that the price will decline in the future. The short seller buys back the stock at its lower price and gives back the borrowed shares, profiting off the difference.

When the opposite happens, like when online traders rushed into GameStop, hedge funds and other investors who had shorted the stock may try minimizing their losses by buying shares at the current higher price. Both groups of investors purchasing the stock adds to the upward momentum.

Cuban sees young investors throwing out old Wall Street metrics

Mark Cuban: I wasn't telling anyone to buy more
Mark Cuban: I wasn't telling anyone to buy more

Cuban said he believes a larger shift is afoot among younger investors. Not only do they obtain their information through different channels online, Cuban said he thinks they may also approach valuations with an alternative mindset after growing up "with an iPhone their entire lives."

"They put a premium on items that are digital," he said. "The idea that a digital trading card or digital artwork could have more value than something tangible in our minds, or physical, would be inconceivable to many people yet to Gen Z, that's what makes perfect sense."

"When it comes to stocks it's the same thing," Cuban said, suggesting there may be less of an emphasis on traditional valuation metrics such as a price-earnings ratio. He said his perspective has been altered by the crypto market, where some investors have adopted the buy-and-hold mantra known as "HODL."

That strategy has "worked for a period," he said. "Maybe bitcoin, ethereum, etc. will go down again but at the same time, we're starting to see the evolution of applications on blockchain that are really starting to build marketplaces. I think younger kids, Gen Z in particular, maybe younger millennials have a different approach to how they look at stores of value, how they look at how assets are priced than we looked at traditionally."

From his own experience, Cuban said he believes that approach can carry over into publicly traded stocks. "I've never looked at owning a share of stock that doesn't pay a dividend as the current discounted value of future cash flows," he said. "To me, that was always a narrative that brokers used to sell stocks. To me, a share of stock without a dividend is just like a baseball card. It's what someone will pay for it."

Cuban says Robinhood, SEC should have warned about trading limits

Cuban took Robinhood and the Securities and Exchange Commission to task for failing to proactively warn investors last week that the popular brokerage app may need to put trading limits on GameStop and other heavily shorted stocks.

GameStop shares dropped 44% on Thursday as Robinhood and Interactive Brokers implemented trading limits on a few stocks seeing major demand and volatility. Robinhood CEO Vlad Tenev later told CNBC's Andrew Ross Sorkin the restrictions were put in place to "protect the firm and protect our customers," noting there are capital requirements it had to comply with.

"What Robinhood could've, should've done is say to them, 'Look guys. We have capital constraints and oh, my God, we are getting blown away by all of this. We are going to have to restrict,'" Cuban said. "The SEC should've been out there saying the exact same thing." 

At one point Thursday, Robinhood users could only sell shares of GameStop, not buy any additional ones. The brokerage has continued to ease restrictions in the following days. As of Tuesday, clients are able to buy up to 100 shares of the video game retailer.

Robinhood has tapped credit lines and raised fresh capital from existing investors in recent days. Nonetheless, Cuban suggested retail investors may be served by a larger brokerage firm that has a "multitrillion-dollar balance sheet."

Cuban contended the trading restrictions on GameStop have contributed to the declining stock price. "When you shut them down ... you took out a lot of natural buyers. When sellers come in, if there aren't buyers, sellers keep on lowering their price until they find buyers and the stock goes down," Cuban said.

The SEC did not immediately respond to CNBC's request for comment. A spokesperson for Robinhood directed CNBC to an explanatory blog post the company published Friday that detailed its need to comply with capital requirements.

"Our goal is to enable purchasing for all securities on our platform," Robinhood wrote. "This is a dynamic, volatile market, and we have and may continue to take action to make sure we meet our requirements as a broker so we can continue to serve our customers for the long term."

Disclosure: CNBC owns the exclusive off-network cable rights to "Shark Tank," on which Mark Cuban is a co-host.