Gamestopped

Who knew Reddit could blow up Wall Street? It just did.

Or it tried.

Much has been said, much has been written. I’m shocked at how little people know, even as they posture to provide expert commentary. Ja Rule?

I wanted to recap it all as I did a profile on Robinhood three years ago. Much of what I wrote then is just now coming to light as cause for concern today. Let’s break it down.

Short Selling

First off, I see a lot of people talking about short selling who don’t understand short selling. Let’s help them out.

Say a stock is trading at $10 and I am convinced it’s going to $5. I can borrow a share from my brokerage, sell it for $10, and when it drops to $5 I can buy a share and give it back to my brokerage. Easy right? I pocket $5.

Here’s where short selling is risky. Your upside is capped. The most I can make is $10 if the company busts and no one comes looking for their share. However, if the stock goes up to $20, $50, $300, $1000, my losses are not capped. If my brokerage asks for their share back, I might have to go buy a share for $1,000 to repay them. Ouch. I just lost $990.

Short selling is not an effort to bankrupt a company. It is, however, a way to profit on your prediction thereof. I’ve seen folks who don’t know what they are talking about claiming short selling is purely an effort to drive a company into bankruptcy. Downloading your games on the internet instead of buying them at Gamestop would be more a means to that end.

Robinhood

Like any free product, the users of Robinhood are the product. How does Robinhood offer a free app with free trading? They make money by selling your trades to other entities who then front run them against you to clip a few pennies off every order.

Robinhood’s benefactors pay millions of dollars for their order flow and make money by automatically taking the other side of your trades. They then return to the market to run the trade in reverse. They pocket the difference between the price to buy and the price to sell, known as the bid/ask spread. This is high frequency trading, and there is a fantastic book by Michael Lewis, “Flashboys”, that is more relevant than ever. It covers the story of “HFT” magnificently.

I wrote about all this here in 2017 and it’s hilarious to me that this is just now becoming a concern. Suffice to say, if you are serious about investing you should be using a serious brokerage. I use and recommend Schwab, but there are many out there. Don’t use a free app where you are the product. Be the customer/client instead.

Reddit

If your idea of investment advice is a semi-anonymous Reddit account called Roaring Kitty, you are in for a world of hurting. Oh sure, I know he has made millions and he’s a registered CFA, but if your investing plan is to follow Reddit advice and trending memes just stop reading now.

Dogecoin is a crypto-currency created as a joke. It’s now trading up 800% based on some Reddit memes and anonymous hucksters.

When the Gamestop fun ends that stock is gonna drop like a rock. Bodies will be scattered and blood will be spilled. Steer clear of the carnage. Invest sensibly. There are no get rich quick schemes.

As I write the Reddit Randonneurs (they are in it for the ride) are attempting a silver event. Their efforts pushed silver up 7% Monday before it dropped 8% on Tuesday. Fair play…

FOMO Investing

Wow. I had no idea I know so many investing experts who bought $GME at $3/share in March. All of the sudden folks are appearing everywhere who are “cashing in”, “rolling in dough”, “making bank”. I will let you in on a secret… 99% of them are full of shit.

If you are investing due to the Fear of Missing Out (FOMO) that is a horrible position to be in. You’re probably late to the party, you have limited knowledge, and limited background data. Take a deep breath, review your investing plan, and stay the course.

Then… watch as your expert investing friend gets up to go to his same shitty job in his same shitty car. Unless you see the trades in real time, be suspicious – and don’t be afraid to call bullshit. Sure he probably “doubled his money in Gamestop” but what he isn’t telling you is he owns 1 share…

Evil Forces

The GameStop story is fast becoming a morality tale. It is an extension of an anti-Wall Street animus (Occupy Wall Street?) that began more than a decade ago when the elite players on Wall St. escaped punishment for their hand in the financial crisis and their firms were bailed out by our tax dollars. The tale pits a hodgepodge band of everyman investors in battle against the untouchable financial elite. America is all “us versus them” these days. This a chance to settle some old scores.

The game is rigged when risk is socialized while reward is privatized. How often do we see the big players afforded political cover? Meanwhile the small investors are “non-essential”, forced to close their business, and handed $600 checks in a sympathy card. We will eventually see the “old rules” on Wall St. broken. It’s door kicking time.

I’m possibly being too dramatic. Did we just witness a classic pump and dump?

Never fear, however, our brightest minds are on it. AOC is demanding answers, having narrowly escaped massacre at the hands of Ted Cruz. Now James Brown Maxine Waters is scheduling a hearing – though I’m not sure who will show up.

Conclusion

What we just witnessed is probably somewhere between a David vs. Goliath story and a crowdsourced pump-and-dump.

There is absolutely nothing wrong, however with seeing a mistake (or sn inefficiency) in the market and capitalizing on it. Finding opportunity is what every good investor seeks daily.

This was a feeding frenzy, an aberration, and a short time event. As I write, Gamestop tumbled 34% Monday and another 60% in trading Tuesday. It’s dropped from over $400/sh to $90/sh.

Cut, print, check the gate. FOMO rubes who got in late will get annihilated. The sheep will get sheared. Smarter investors will capitalize on the inevitable drop in price.

This is Wall Street.

As the crowd in the Houston Astrodome chanted at the end of “The Bad News Bears”; “LET THEM PLAY! LET THEM PLAY! LET THEM PLAY!”

Those with some sense will stick to a plan.

Cheers, and thanks for reading!

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