Table of Contents
3. Never Underestimate the Power of Spite
4. Investing Practice
Happy new year! … Alllll the way at the end of January here. I’ve spent way too many hours in a row researching and writing about the exciting crowdsourced craziness in the market (starting in part 2, below), and my brain is tapping out, so please forgive any errors or confusing bits. I wanted to get it out to you. Who knows what will happen tomorrow?!
This is my first non-guest-written issue in quite a while, so it seems appropriate to start on a personal note. I SO hope you are each doing ok, your loved ones are doing ok, and you’re making it through this pandemic and economic drought as well as possible. It’s a really scary time, still, and probably will continue to be for another six months to a year, as the vaccine rolls out. Regular life is physically draining, mentally draining…it’s all the things. Still, I hold deep hope for the opportunity in this darkness. One of my internal practices through seven weeks in bed, and now slowly recovering with the long version of Covid, has been to shift my mind from being fake-grateful for something I really wish were not happening, to decide that there is opportunity somewhere in it, and I get to look for that opportunity if I so choose.
In a situation in which I have felt entirely powerless, that mindset of opportunity has given me a little bit of control.
There’s opportunity in powerlessness, and to bring this around to investing practice, I’ve found some real joy in powerlessness in my practice. I had always, before being ill, practiced investing with intention. Read the news with the intention of finding an interesting company. Researched a company with the intention of possibly wanting to buy it. For the last few months, though, I knew I was in no mental place to properly evaluate any companies, so my news-reading time was just…blank. It was powerless. It was just for fun. No result was going to come of it, so it didn’t matter what I read or how or how much.
Amusingly, in hindsight, I ended up occasionally on Reddit, and I read WallStreetBets a few times.
Turns out blank space time can be extremely educational – and be informative later, in surprising ways. I suspect I’ve said many times when talking about Wandering Practice, or just my general investing practice, that you never know where or when your research will prove useful. I experienced the result of Wandering Practice not for an investment, but to understand an entire phenomenon. Useless, intention-free investing practice. It’s a joy. Feeling powerless can actually be quite powerful.
Finally, I am deeply grateful for your patience and kindness to wait for me as I slowwwwly recover. Thank goodness, my brain has recovered enough for me to start practicing investing again, and, now, to start writing again.
I hesitate to say even that, because as those of you who’ve had or been around chronic illnesses will understand, there are good days and bad days, and good week and bad weeks, and one of the worst parts is not being able to be reliable to those we care about. I never know when a setback will keep me in bed all day, but I do feel it’s important to share with you all how I’m doing and that I’m trying to come back. This long Covid thing is no joke. Thanks for being here, and I’ll catch up on the back issues throughout this year. You won’t miss anything or receive anything less.
I’d also like to have one of our fun AMA calls coming up. So look out for that in a month or two (I’m not quite strong enough yet).
As I said on my podcast the other day, I’m coming back into my investing practice – lovely investing practice, I missed you so much! – by getting re-obsessed with certain companies and really revising and dialing in my processes via the research. You know how much I earnestly, unabashedly, get joy from working on process. This time is no different. I’m hoping to share some of what I’m learning from you soon. I’m also working on a new text message prompted practice which could be really cool, for those of us (including me) who could use a little nudge in the day.
So, what’s going on in the investing world?
Oh, just a little GIANT EARTHQUAKE DISRUPTION.
Important Note: What follows is entirely my opinion and, as some of my facts may be wrong as new information appears, my opinion is definitely formed with incomplete information. I don’t have linked sources for a lot of my opinions below – they come from background reading over the last week. I’ve linked to sources where I could find a good one. Do your own research and follow your own investing practice, and if you come to a different opinion or conclusion about any of the people or motivations than I have, that is excellent. Thinking for yourself is the entire point of your investing practice.
Over the last few months, as I mentioned, I’ve read a little of this Reddit sub called WallStreetBets, and generally thought it was a bunch of speculative stock traders who make totally short term trades. Completely different than what I do with my investing.
I wasn’t wrong about that. The members of that subreddit are usually all about the day trades and speculative bets. It’s even in the name.
However, in the last few weeks and especially in the last week, the users of that message board have been collectively buying the company GameStop, and they’ve made the stock price rise well beyond any reasonable ceiling. It was floating around $12/share last fall, and it closed Friday afternoon at around $325/share.
Here’s a link to GameStop’s investor relations if you’re curious, bemusingly with zero mention of what’s happened to their stock. Nothing has changed much in the company itself during that time.
It’s all these individual, retail investors, mostly using the Robinhood app and some even buying only fractional shares, that has made the price go up. Undoubtedly some additional speculative fund money went in as well, once the push upward started making the news.
It sounds, on first hearing, like a typical “pump and dump” activity of talking up a stock so that ignorant traders start buying it and then taking the profits and leave the ignorant traders holding the bag of low-priced shares. Some people do think it’s nothing more than that.
However. I think this is no pump and dump. I’ve read the posts, and I see smart traders making a smart trade. These guys (it seems to be mostly guys, based on their posts) did fundamental research, and noticed that there were a couple huge hedge funds that shorted GameStop to a massive extent – somewhere around 140%. Yeah. These institutional funds collectively shorted more shares than there are shares of stock.
As many are saying today, how on earth is THAT legal? Isn’t that another Wall Street bailout waiting to happen?
I think it is systemically dangerous. We saw how this week, when certain brokerages halted trading to protect themselves. But first, the important point here, which so many professional investors are missing right now, is that retail investors are not pumping and dumping, they are not stupid, they are not ignorant of the risks – they are consciously exposing the wrong that is institutional investors exploiting the system. They are consciously exposing the fact that institutions are allowed to short more shares than exist. They are consciously exposing the fact that the actions of institutions do threaten the system.
Read with a critical eye, but here’s an explanation from the WallStreetBets folks themselves (be warned, they use strong language – typical for these guys).
In general, I love the idea of what the Redditors are doing. In the law, intent is often a large component of culpability. Here, their intent is to try to use a financial situation that most hedge funds would love to exploit, but maybe just didn’t notice, and do it themselves. However, because they’re retail investors, Wall Street assumes they’re stupid. Cries have gone up of “but what if they lose all their money?” These guys say, so what? We know we might lose all our money. We’re doing it anyway. We’re doing it to take down these predatory short-selling funds. We’re doing it because it’s FUN.
When Wall Street lost all ITS money in 2008, did everyone say “oh no, they were too dumb to be in the market, let’s make sure they can’t buy stock anymore?” Nope. They were bailed out, at the expense of many jobs and homes of people who had done absolutely zero to do with any markets, and they moved on. No one went to jail. (Did one guy go to jail? I can’t remember. Anyway no one of note.) They made more complicated financial instruments and more money and eventually got to today, when they have the gall to complain that a bunch of randos on the internet dared to collectively share information on a risky speculative short and aim to take the other side.
These retail investors are consciously and intentionally willing to lose their money to expose that system is STILL threatened by the financial machinations of some institutions. They post about doing so over and over and over. They write about how it’s personal.
Here’s a strongly worded post about WHY some of them are doing it, and continuing to hold the stock, possibly to their financial detriment, well beyond where they could have taken profits and gotten out.
They’re doing it because of the 2008 crash, of their experience, mostly as kids, of seeing their parents struggle horribly, while Wall Street got bailed out. Now, you can say it’s misguided anger, and these short sellers aren’t necessarily the right target. But going after these funds that shorted GameStop is something they can do. They felt powerless.
This is just something they can do. It may not be the perfect thing, but it’s something. I can’t argue with the deeply felt pain in their posts. It’s real.
Some say the Redditors are too dumb to realize they’re going after the wrong people – that the short sellers involved in the GameStop situation are not the huge banks that were involved in the mortgage debacle. That’s true, they’re not the same, and I bet some of those huge banks are right now profiting massively off GameStop shares and enjoying the ride. It doesn’t look to me, though, like the Redditors are dumb or confused about that. This is something they can do.
Feels similar to the short/long fight of Ackman v. Icahn in Herbalife. Except here, the buyers on the long side don’t even know each other’s real names, and they’re emotionally involved due to the damage of 2007/2008 and want to make the point that no one should be able to get themselves into a situation to threaten the system. They’re not a predictable counterparty.
Professional poker players hate it when a newbie shows up because the newbie doesn’t make predictable moves, and sometimes because of that, wins.
3. Never Underestimate the Power of Spite
So what happened? The system operated to protect the institutional investors, in front of the eyes of the world. Various brokerages – not all – halted purchases of GameStop, but allowed sales. I think they were worried about clearing the trades.
When I read that brokerages had halted certain kinds of trading, the result of which, whether intentional or not, benefited the short sellers, I personally had a visceral flashback to 2008 when the big firms, who had created the problem, were bailed out, while the rest of us, who had done nothing wrong, got nothing.
I think everyone did. The collective PTSD is strong. All of a sudden, government took notice. Everyone went “hold on, the water tastes a little funny here.”
Must listen/watch, if you can: Chamath Palihapitiya on CNBC (CNBC paywall). Preach! I am OBSESSED. This video keeps getting removed because CNBC paywalled it and is protecting their copyright, as is their right, but somehow it keeps getting reposted on Youtube and Vimeo. I’m not saying you should watch a bootleg video, but if you were to search “Chamath Palihapitiya full interview CNBC” you might turn up one of these nefarious 33 minute recordings before it gets deleted. Who can say?
I watched it before CNBC paywalled it. I must add a big grain of salt – that I know very little about Chamath Palihapitiya and a friend recommended reading a book about Facebook, Facebook: The Inside Story, that apparently isn’t super complimentary towards him, so I’ve bought the book to find out, but haven’t started it yet. He preached for the little guy in this interview and I AM HERE FOR IT.
The disconnect between the interviewer and the interviewee here blew me away. It’s like two different languages.
The professionals really don’t seem to get the problem. They keep saying “the system does that so that it’s protected, so that it doesn’t fail,” and they are correct. That’s right. No one wants the system to fail. No one wanted it to fail in 2008. The reason everyone says the bailouts had to happen in 2008, myself included, was because we needed our system to function so we could recover. That’s true. But that’s not the POINT. The point is that NO investor, big or small, should be able to do the things that threaten our system. You shouldn’t be able to trade terrible mortgages disguised as good mortgages. You shouldn’t be able to short 140% of a stock.
I’m seriously almost on the side of just delete all derivatives. No more fancy stuff, at all.
It would destroy most of the financial industry.
It would give CNBC nothing to talk about all day.
It would make the stock exchange or country that did this far less attractive to speculators and would send them to other stock exchanges that do allow derivatives.
Great. That would definitely happen. Go for it. We don’t want you. We’ll build our long-term-oriented companies over here and let you melt up and melt down over there.
I don’t know, guys. But I know stopping retail investors from buying equity of their own individual free will, regardless of whether I or anyone else thinks the price is ridiculous, isn’t the answer.
If it were, shouldn’t the industry have been lot more upset about Tesla’s price a long time ago?
There is more to get into with all of this. The ownership of Robinhood, and that its customers are its product. That one of the short seller funds, Melvin Capital Management, was started by a guy from a fund busted for insider trading and had an entire book written about it – Black Edge, an excellent read. The Steve Cohen in that book? Same Steve Cohen here, now at Point72, bailing out Melvin (WSJ paywall). Another good article about the whole situation from Institutional Investor. I think a lot more behind-the-scenes information will come out.
4. Investing Practice
In my investing practice, all of this has created such a drive within me to do more. The same way these guys are in it to make a POINT, I more than ever want to be in it to make a point as well. I want my money to be on the side of innovation, growth, and doing something good and useful in the world (to paraphrase Chamath).
Can I do all of that AND, at the same time, be a long-term value investor? Yeah. Absolutely. It’s key to long-term resilience and antifragility of my investments.
What makes you feel like you want to get up and make a POINT with your money?
You don’t have to have the answer. For many of us, it’s more than enough to do a nice little wandering practice every day. That is a lot more than most people do.
But I’m keeping that question in the back of my mind so that when I recognize the opportunity, I feel like getting up and taking it.
I don’t know how any of this Gamestop/Reddit/shorting craziness will shake out, but I do hope it’s in favor of more access and information for retail investors. My pessimism feels that it will be the opposite, but who knows? Maybe the powers that be will surprise me.
As Chamath Palihapitiya said on CNBC: “You can be a kid sitting at home, writing models into Google Cloud that give you the same compute power as the best hedge fund, as the best investment bank. This is what I’m trying to get across to you guys, is we are leveling the playing field. It is happening … I think that’s ok. And I think we have to just embrace the fact that this is where we’re going.”
It’s good to be back, everyone. Turns out there are more of us out there than we ever knew. Happy new year.