Now another Related to GameStop opinion piece on how retail traders ruined short sellers and cost hedge funds a $23.6 billion report is probably the last thing you want to read. Don’t worry, this op-ed is a little different, because I think the short sellers won and the retail traders lost.
Let me explain why.
Everyone knows the story. GameStop had been in trouble for a long time and was therefore a prime target for hedge funds selling stocks short in hopes of profiting from the company’s demise. Then retail traders on the WallStreetBets subreddit explained how they make money betting on GameStop and a flurry of small transactions followed. On platforms like Robinhood, retail traders pushed the stock ever higher, creating a frenzy that caused both a short squeeze and a gamma compression in the options market. Now, retailers who have entered GameStop are celebrating their victory. The stock is up 1,642% in 2021.
There is only one problem.
A successful trade consists of two actions. First, you need to buy a stock, the price of which then increases. Then you need to sell those shares at a profit and lock in those gains. The beauty of investing is that it is a race with no finish line. There is no time when everyone can assess their profits and losses and compare themselves to others. The markets go on all the time and while you may be ahead one day, you can easily lose it all the next.
This is a particularly important lesson to learn in a bubble. There’s no doubt that GameStop is one right now. But there are so many different ways to define bubbles. Maureen O’Hara, 2020 CFA Institute Research Foundation Fellow Vertin Awardprovided an insightful analysis of the various meanings in a recent Washington Post column.
For me, the most interesting phenomenon of a bubble is that John Kenneth Galbraith called “the bezzle”, or the “period when the hijacker has his gain and the man who has been hijacked, curiously, feels no loss. There is a net increase in psychic wealth. We are now in the GameStop bezzle: short sellers have already won, but retail traders feel no loss.
Without a doubt, hedge funds that had short positions on GameStop lost a lot of money. But there is an interesting observation embedded in the GameStop stock trading volume. Towards the end of last week, it plunged about two-thirds between January 26 and 27. Then, when Robinhood and other platforms briefly blocked merchants from buying GameStop, the stock plummeted over 60% before starting to recover. During this period, the trading volume also dropped significantly.
This is not proof, but it indicates that the short squeeze is over. Right now, GameStop shares are entirely the domain of traders and speculators. No self-respecting short seller or institutional investor is in the stock yet. We have entered the bubble phase where traders can only make money if they find a bigger fool who is willing to buy the stocks they are trying to sell in hopes of finding an even bigger fool. big fool to sell the shares to later.
Pardon the pun, but at some point this GameStop big fool game will come to a halt. Every bubble in history eventually reaches a point where there simply isn’t enough new money to sustain it. And no amount of social media hype can stop that.
I started my career as an investor during the tech bubble of the late 1990s. Back then, Reddit didn’t exist, so people were promoting stocks on Yahoo! Financial advice and other platforms. The mechanism was the same, although fewer people had internet access and so the bubbles were also smaller. We know how this story ended. And we know it’s not the short sellers who lost their money. In the end, the losers were the last fools in line, those who owned bubble stocks with no bigger fool to sell them to.
If you own GameStop stock today, you’ve already lost most of your money, you don’t know it yet. Short sellers left the market. But don’t think for a moment that they are licking their wounds in defeat. They’re hunkering down and probably circling GameStock already, waiting for the right time to short it at a much, much higher price than their original shorts. And when the bubble bursts, they will make billions in profit while retail traders will lose billions.
The irony of all this is that in order to sell GameStop stock short, these traders will have to borrow it from their current owners. And many retail traders are unaware that they have signed terms and conditions with their custodians that allow them to lend securities from their portfolios to other investors for a fee, none of which ends up in traders’ accounts. , Of course. These traders will therefore lend their shares to the very people who will eventually put them out of business.
To learn more about Joachim Klement, CFA, do not miss Geo-economics: the interplay between geopolitics, economics and investments, 7 mistakes every investor makes (and how to avoid them), And Risk profiling and toleranceand sign up for her Klement on investment comment.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.