Over the past week, the financial media has exhaustively covered GameStop’s wild run from about $ 77 on January 25 to $ 70 – where it is traded as I type – with a move of up to $ 483 per share in the middle . As we all know, a frenzy of trading fueled by social media has caused the stock price to rise in the most extreme tightening I have ever witnessed personally. But all that juice seems to have been squeezed now.
In the past few days, I have been captivated by this violent market whip, with stocks moving from 100% to 200% day after day. Many portrayed this story as a band of cheerful men chasing the big bad hedge funds in the Sherwood forest. It’s a classic David story against Goliath, and everyone loves rooting for the oppressed, especially when it’s against the fat cats on Wall Street.
With more shares sold on GameStop than outstanding, hedge funds simply got too big in the shares and were caught. After all, hedge fund equity traders are conspiring to manipulate stock prices and short companies forever, right? This time, retail investors got together and pushed the stock up, forcing hedge funds to buy back shares and cover their short sales, which further raised the price. It was time for the boys to join in the fun and give Wall Street a taste of its own medicine.
This is a great copy, but as always, the truth is a little more subtle than that.
With over 20,000 comments on Reddit’s WallStreetBets page for GameStop shares, individual day traders have been publicizing the shares for some time, clearly aware that several hedge funds had large equity positions. In fact, many of the comments specifically targeted Melvin Capital by name, which suffered substantial losses in its shorts. And while I suspect regulators will find it difficult to successfully sue any of the individuals posted on the message board for market manipulation, with comments like “PUSH GME TO THE MOON” and “Allll you hedge fund f ** kers, f ** k you too, ”some message board posters are asking for trouble.
One trader in particular – Keith Gill, who goes by the name “DeepF *** ingValue” on Reddit – was a vocal advocate of the action, posting about it as early as June 2019. He was a driving force on the subreddit and posted photos of the your account balances over time. Gill, who recently left his position as a financial advisor for a large company, may find that he faces some regulatory problems due to his behavior in recent weeks, in part because he also holds the CFA charter and may not have notified his previous employer of your personal business activity.
Unlike many of the commentators on Reddit, who were clearly increasing their positions when the GME had already been pushed for hundreds of dollars, it appears that Gill did not complete the trip – he bought the shares for $ 5 – but on Tuesday Gill posted a photo of his account value, showing that he lost $ 13 million that day.
In all, it looks like Gill may have earned up to $ 48 million in paper earnings at the peak and then lost more than half of that, all within the space of a week. Given the stock’s trajectory since then, I hope he has already sold the rest of his position because of you, and because of the hundreds of subreddit followers, who promised: “IF HE IS STILL ENTRY, I AM STILL ENTRY. “
And I bet that by the end of the day, more individual investors will have lost money on this trade – buying on hype on the way up, only to see it fall below its entry point before they can leave – than it will actually, stopped the realized gains. And, in an ironic twist, most of the biggest winners appear to have been the hedge funds themselves that profited from the huge price hike.
The hedged, event-driven hedge fund Mudrick Capital – with about $ 2.7 billion in assets, according to its most recent ADV form – earned $ 200 million in a combination of several Reddit-driven actions, giving 9.8 percent gain in January. And Senvest Management, a deep and opposing hedge fund with about $ 2 billion in AUM, did even better, having recorded $ 700 in profits just at Game Stop.
It is really difficult for investors to time the markets, and even more difficult when you are facing full-time professionals with great resources and resources, with teams of people competing against you. It is part of the reason why active traders do far worse, on average, than simple investors who buy and hold.
A survey by behavioral finance gurus Terrence Odean and Brad Barber analyzed the commercial behavior of 65,000 families on a large brokerage platform and investigated the impact of message boards on returns. What they found was that investors who bought and sold more aggressively the most eye-catching stocks – like Game Stop last week – fared much worse than the heavier types of buy and hold they didn’t negotiated a lot. In fact, the 20% of the most active traders in their research outperformed the fifth least active trader by 5.5% per year – a massive negative behavioral alpha.
Markets are like the ocean. Neither good nor bad, they just are immutably, inexorably. Instead of trying to impose their will on them, investors – like swimmers – are better served by simply trying to learn their cadence. Once you understand what you are – and most importantly not – capable of in the face of such overwhelming force, you can learn to simply surf the waves instead of exhausting yourself trying to fight them, only to find that you have really made no progress.
Which is why I probably won’t even check the value of my equity accounts. I will put the same amount of my next payment in my index fund, as I always do, and I will continue to let the waves carry me forward.