As the dust settles on a retail investor gold rush marked with controversy, the wise are pruning the wreckage for insights.
It looks like the jig’s finally up, and the spontaneous bull train that turned the financial industry on its head for a few short (pun intended) weeks has ground to a halt. If you’ve been in and around the markets, you may have known this part of the story was somewhat inevitable, but everything leading up to it was far from ordinary.
If you have no idea what I’m talking about, have never heard of #WallStreetBets, and haven’t tweeted “short squeeze” even once in the past month, welcome to the internet. You picked a great time to switch from AOL dial-up and Internet Explorer. We’ll get you caught up soon enough.
Anyone who is anyone (and anyone who is a nobody with access to Twitter and the ability to type), has been waxing lyrical about Gamestop, AMC and the stock market recently. Myself included. That said, despite actively (and passively) trading and investing for the best part of a decade, I won’t join the long line of people pretending to be expert financiers overnight - but I can definitely signpost you to some insights.
Much ado about Gamestop
Here are the key points.
1.#WallStreetBets rallied the troops (initially based on sound intel)
A Reddit group called #WallStreetBets had been obsessed with Gamestop for several months, feeling the company was unfairly undervalued. There were plenty of good reasons for this sentiment and so the velocity of their trades increased slowly at first, but the hype train started to reach streaking velocity when it was revealed that several hedge funds had taken massive short positions against the stock.
Their plan was simple - if a rally was coordinated, then hedge funds like Melvin Capital would be forced to buy shares at a higher price in order to exit their short positions. And by buying, they’d be further inflating the price for anyone still holding short positions. This cycle is called a short squeeze.
2. Melvin made losses
The rally was successful - Gamestop stock soared 400pc, pushing hedge fund Melvin Capital into losses of over $4.5bn. Total losses are in the region of $20billion.
3. The normies doubled down.
A small tribe of everyday joes became a global movement of over TWO MILLION lay investors.
Yep, that’s me - speaking too soon. It seems the big boys don’t like sharing their toys. It wasn’t long before Robinhood, eToro and a plethora of other platforms froze trading completely on the group of stocks that #WallStreetBets and the Normie Army were rallying around.
4. The giants lowered their boot
I won’t pretend there was no reason whatsoever for trading platforms to pull the plug on certain bets. There are two purported lines of reasoning. One is margin exposure. Robinhood and similar platforms are required to keep a sum of money on hand to cover potential margin losses by customers making leveraged bets. This line of reasoning doesn’t stand up to scrutiny though, as Robinhood could easily have just frozen the leveraged/margin orders but allowed standard buy orders, where traders front the money in full.
The more logical explanation is simply that due to the time gap in settlement — equity trades typically take two days to settle — Robinhood would’ve been on the hook for the full trading volume in the interim, and that volume was rocketing.
At one point, half of ALL Robinhood traders were holding/had buy orders submitted for $GME. It’s an extremely volatile position to be stuck in for two business days, and apparently, Robinhood didn’t have the cash to stomach it. You should also know that stocks in the DEMAT form are basically just IOUs. You never actually own the stock - the exchange does. They just owe you the cash equivalent to the current value. This also means you could technically lose investments if your broker goes bust.
5. ’Unfair’ screamed the crowd
Despite the above, there’s still an overwhelming sense that the wealthy are crushing the little people, changing the rules, and getting away with it. If you weren’t aware, Robinhood is partly owned by Citadel, and essentially feeds their customer deal flow to the bigger fish. That’s why people see them as a pawn in the hand of financial overlords.
Check this article or this thread for more on that:
For most people, the sentiment will essentially be that the financial institutions, market makers, hedge funds et al, changed the rules at halftime. People were justifiably angry. Suddenly Donald Trump Jr and AOC were tweeting from the same side of history. Billionaires like Elon Musk and Chamath were leading the anti-billionaire charge. In perhaps my favorite moment of the saga, Ted Cruz pledged his support to AOC’s scrutiny of Robinhood and the other financial players involved, only to be violently snubbed:
6. The train grinds to a halt.
Gamestop and AMC have dropped by 50% and 60% in successive days, falling back below $100, and leaving a lot of people in the lurch. Everyone who was late to the gravy train and didn’t smell it going off now has mud in their pockets.
Why this game mattered
So why on earth was this movement so significant? Because history. What started as a way to make a fast buck and stick it to the man became a Holy War for the sovereignty of independent traders overnight. Heck, even I, as someone who now rarely makes individual bets, woke up ready to throw a few thousand into the ring. And it wasn’t because I believed in the value of any of these investments. They were a terrible idea. Gamestop and AMC are still on the slow conveyor ride towards the guillotine, and a week-long bull rally isn’t going to change that. But I was happy to contribute to extending the run and prove that ordinary people can beat Wall Street at their own game.
The pretense is over. Bankers and institutional investors have played the game their way for decades, making the market, bartering for information, and scalping companies to line their pockets. It’s the not-so-secret secret racket.
Historically the stock markets have functioned as a transfer of wealth from those without knowledge (and wealth) to those that do. It took a colossal effort to capsize that balance, and even though it only lasted a week or so, it was worth it.
The less rosy picture
The real issue perhaps is that this movement garnered the ears of many new but previously hesitant investors, who saw the little people having their moment in the sun and thought the train would last longer than a few short days. Many of those who bought $GME at c.$400 and $AMC near its own recent peak have been holding on for dear life, hoping that the bandwagon would keep rolling. The problem with moments like this is that if the underlying assets are no good (or at the very least become massively overvalued), someone’s going to be left holding the egg. The rich got squeezed but were bailed out instantly by their friends. The man on the street won’t even be able to get a bank loan after having thrown their savings into a meme stock, hoping to milk the moment.
We saw something similar this week where an apparent group of +200k retail investors tried to stage a similar rally on $XRP, but the rally failed to materialize. The smart money bought in before the scheduled pump and then dumped their stock on the incoming hoard, destabilizing their momentum.
The future of speculative investment
If you take anything away from the Robinhood saga, it’s that decentralized currencies are the future. This might just be my opinion, but it’s a growing one, shared by anyone without ties to the old guard. I’m not going to chew your ear off about the magic of Bitcoin and Ether just yet - we can talk about blockchain currencies another time.
One thing’s for sure. There’s a lot of people out there who would be served extremely well by sticking to the basics and realizing that investment doesn’t have to be sexy. Investment also doesn’t have to be trading. Beating the market is an expensive, time-intensive, knowledge-dependent game that the vast majority of people simply don’t have the resources to entertain. Throwing eggs at rich people’s houses is only fun if you remember to run away before you get caught.
None of these trading platforms will tell you that only about 1% of all-day traders are able to predictably turn a profit net of fees. The average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually. Here’s a great study showing just how bad the majority of individual investors are.
As I like to say - if you don’t have the market knowledge to beat the market, you are the market. And when I say that, I don’t mean you’re tracking the market - you’re the 99/100 below-average investors helping the 1/100 get rich. Stop it.
Investing for Rookies
If you’re completely new to investing, here’s some free game. If you find it useful, share it with a friend, an uncle, a partner, your grandma - anyone. We should all be investing. Just invest smarter.
>> If you want a beefy article, read Investing for Rookies here :) <<
If you want a bite-sized thread with everything you need to know, it’s here:
Books I’ve read/seen/will impulsively buy and add to my “to read” shelf on Goodreads. Recommendations from newsletter readers are always welcome:
- Home Fire by Kamila Shamsie - impulsively bought. A strong, emotive read highlighting faith, love, and perspectives of the Muslim experience in Britain.
- The Psychology of Money by Morgan Housel - recommended. A book investigating our behaviors around money, and some lessons to make better decisions.
- Kill Order by James Dashner - read. I promised I’d finally read the Maze Runner series - perhaps I’ve gone about it backward by reading the fourth book first, but it’s a prequel that doesn’t seem to spoil much.
Things I’m loving
Films and shows:
- Midnight Diner - I was recently introduced to this Japanese anthology series, diving into the stories of regulars at a restaurant that’s only open from midnight to 7 am.
- Nightcrawler- An amazing noir film about a psychopath who decides to make a living filming accident for news stations. Plenty of wow moments. If you’ve watched it, let’s talk on Twitter!
- Nutmeg - In the last 10 years I’ve tried about 8-10 different investment platforms but Nutmeg has the best mix of super-simple plug and plays operations, with great returns (so far). You can use this link to get 6 months without fees :)
- Freetrade - One of the most popular places to easily trade individual shares online. You can get a free share worth up to £200 just by signing up, which is pretty sweet.
- Audible - I’m on course to finish at least 11 books in the first 5 weeks of this year (number 11 will be a sure-fire recommendation next newsletter). Make the most of the daily/weekly deals and start your digital stockpile!