Meanwhile, one other GameStop-related Opinion piece on how retail traders ruined short sellers and value hedge funds 23.6 billion US dollars might be the very last thing you would really like to read. Don’t worry, this comment is slightly different because I feel the short sellers won and the retail traders lost.
Let me explain why.
Everyone knows the story. GameStop had been in trouble for a very long time, and was subsequently a first-rate goal for hedge funds that were shorting shares within the hope of cashing in on the corporate’s decline. Then retail investors on the WallStreetBets subreddit began talking about how they were making a living betting on GameStop, and an avalanche of small trades got here pouring in. On platforms like Robinhood, retail investors drove the stock higher and better, sparking a frenzy that caused each a brief squeeze and a Gamma squeezing in the choices market. Now retail traders who got into GameStop are celebrating their victory. The stock is up 1,642% in 2021.
There’s just one problem.
A successful trade consists of two actions. First, you should buy a stock, which then rises in price. Then, you should sell that stock at a profit and lock in those gains. The fantastic thing about investing is that it’s a race and not using a finish line. There isn’t any point at which everyone can assess their gains and losses and compare themselves to others. The markets are continuously changing and while chances are you’ll be within the black sooner or later, you may easily lose every little thing the following.
The most interesting phenomenon of a bubble, to me, is what John Kenneth Galbraith called the “bezzle,” that’s, “the period when the embezzler has his gain and the embezzled, strangely enough, feels no loss. There is a net increase in psychic wealth.” We are actually within the GameStop bezzle: the short sellers have already won, however the retail traders feel no loss.
There is little doubt that the hedge funds that held short positions in GameStop lost a variety of money. But there’s an interesting remark within the trading volume of GameStop shares. Towards the top of last week, it plunged by about two-thirds between January 26 and 27. When Robinhood and other platforms briefly banned traders from buying GameStop, the stock fell by greater than 60% before beginning to get well. During this era, trading volume also dropped significantly.
This is just not proof, however it does suggest that the short squeeze is over. Now, GameStop shares are solely the domain of traders and speculators. No self-respecting short seller or institutional investor is within the stock anymore. We have entered the phase of the bubble where traders can only generate income in the event that they can find an excellent larger idiot willing to purchase the shares they try to sell, within the hopes of finding an excellent larger idiot to sell the shares to later.
Pardon the pun, but eventually this game with the good idiot GameStop will end. Every bubble in history eventually comes to a degree where there just is not enough fresh money flowing into it to sustain it. And no amount of social media hype can stop that.
I began my investing profession through the tech bubble within the late Nineteen Nineties. Reddit didn’t exist back then, so people hyped stocks on Yahoo! Finance forums and other platforms. The mechanism was the identical, although fewer people had access to the Internet and the bubbles were smaller. We understand how that story ended. And we all know that it wasn’t the short sellers who lost their money. In the top, the losers were the last fools in line, those that owned bubble stocks and did not have a much bigger idiot to sell them to.
If you own GameStop stock today, you have already lost most of your money, you simply don’t comprehend it yet. The short sellers have exited the market. But don’t think for a second that they are licking their wounds. They’re regrouping and are probably already circling GameStock again, waiting for the suitable time to sell the stock at a much, much higher price than their original short sale. And when the bubble bursts, they’ll make billions in profits while retail investors will lose billions.
The irony of the entire thing is that with the intention to short GameStop shares, these traders should borrow them from their current owners. And many retail investors do not know that they’ve signed terms with their custodian banks that allow them to loan the securities of their portfolios to other investors for a fee, none of which, in fact, leads to the traders’ accounts. So these traders can be lending their shares to the very individuals who will ultimately bankrupt them.
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Photo credit: Cropped image courtesy of Keith C. License.
