If you have followed the tightening of WallStreetBets shares (more information On here, On here, On here), you probably struggled with about 6,000 paragraphs that start with something like “if I gave you a banana …” That’s because you probably learned more about shorts and options and margin calls in a few days than consuming hundreds of movies and TV stock broker content. You can have an intimate knowledge of newly discovered work and disgust of online brokers. Now that you know how stocks go up, it’s time to learn how they go down.
Despite the narrative about a two-part class war between WallStreetBets and hedge funds – which has now become a craze on CNBC, where a parade of venture capitalists is suddenly dying to side with the “boy” – many other people are holding the now expensive shares that WallStreetBets managed to send to Pluto. This includes teachers whose pensions are linked to public funds, wealthy people who have obtained more richand the struggling brick and mortar companies themselves.
Who is most likely to suffer? What will happen to the economy, if anything? What happens at the end of a “short squeeze? ”We ask the local authorities for guidance.
Will GameStop and the 12 or so other stocks inflated by retail investors fall?
Aswath Damodaran
Finance professor at Stern School of Business at New York University
It is not inevitable, but likely. Nothing has fundamentally changed at these companies, and if the only thing that keeps them afloat is trading Redditors, when they move on to other targets, the shares will lose their oxygen.
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Donald Langevoort
Thomas Aquinas Reynolds Professor of Law at Georgetown University Law Center
We are too early to answer. Nothing is inevitable, but if the past is an indication, the relevant stock prices will again mean. What fuels a bubble like this (assuming it is a bubble) is investor overconfidence about past indications that they can move markets indefinitely, which may persist for some time (self-fulfilling prophecy), but it has a natural end point. Obviously, those who came and went at the right point will celebrate their brilliance, but unless they are disciplined enough to stop before the reckoning, there will be losses.
Terrance Odean
Rudd Family Foundation Professor of Finance, Haas School of Business, University of California at Berkeley
I have not analyzed the fundamental value of GameStop. However, from what I have read, I hope that recent prices far exceed fundamentals.
What it probably means is that prices will drop significantly, although not necessarily until prices before January. However, there is no hard and fast rule about the speed of the fall. A stock can go a long time above the price in relation to the fundamentals. This will most likely disappoint homeowners with future earnings, but it may take a while. GameStop is unusual because of the investor’s attention it receives from both sides.
Is there any chance that market makers will ultimately take a large share of the losses?
Terrance Odean
Market makers are at risk when they hold large temporary positions in extremely volatile stocks. So, yes, they can suffer losses. However, the institutional investors with the greatest risk are those who have large short positions without hedge.
What happened when major hedge funds, for example, consciously inflated a bubble?
Sloan Distinguished Professor of Management and an Associate Professor of Economics, Finance and Accounting at MIT Sloan School of Management
We saw this in the late 1990s with the Internet bubble. As we know from transcripts and interviews, several funds recognized that there was a bubble at the time. But what many have realized is that it can be easier to navigate the bubble and profit on its positive side, leaving before the bubble burst, instead of trying to exert corrective influence in the market by pushing prices back to fundamental values.
People who decided to try and chase, and bought at the end of the bubble in the 2000s, ended up losing. Also one of the under-sold groups that lost as a result of the bubble are hedge funds that tried to exert influence in the market by pushing prices back to basics. An example is people like the Jaguar Fund, also known as the Tiger Fund, which tried to exert a kind of corrective force by moving away from the Internet bubble, betting against evaluations. They ended up losing and having to close before the bubble burst.
Other funds, such as George Soros’ Quantum Fund, appeared to maintain a position more in line with the bubble. I must make it clear that I don’t know their intentions, but they survived.
Therefore, there was a small disparity in terms of which funds performed well than those which did not. It seems to align itself with those who knew how to ride the bubble over time versus those who tried to exert influence in the market.
Is there a scenario in which the majority, or even half, of retail investors who bought GameStop or these other stocks end up making a profit?
Aswath Damodaran
Do not.
What are the indirect effects of GameStop’s small squeeze on the general market?
Aswath Damodaran
Hedge funds were already in trouble, entering this crisis, in terms of performance. Money is flowing from active vehicles to liabilities and this will only speed up the process. I think Melvin Capital was already losing money on positions before the race for GME.
Short lengths in a stock can force funds with large short positions in that stock to sell other generally profitable positions in order to raise money to cover margin calls. If many hedge funds have correlated positions and receive simultaneous margin calls, this can lead to a situation where all of these funds sell the same positions to raise money, thereby reducing prices in those positions leading to more margin calls (if the positions are Leveraged). Individual hedge funds with highly leveraged bets can get hurt.
Could this harm retirees, as teachers?
Donald Langevoort
[Pension money] it will be a matter of interest – funds should invest prudently, based on a portfolio, but we know that some public funds feel pressured to place bets inconsistent with this legal mandate. That said, a diverse portfolio is unlikely to suffer much from events like these, and learning from the painful experience can be a useful remedy.
What happens to the companies themselves?
Arun Chopra
“Professor of Twitter” and founder of the financial market research firm Fusion Capital
If you look at AMC, AMC took off, but they are deeply in debt and need money. And then they issued shares the minute the shares were launched, and they fell again [at the time of interview]. And therefore, not all short grips are the same. This will not bankrupt the industry.
At the most basic level, we see small pressures on the markets all the time. We have a strategy that takes all of this into account and there are three to four really good opportunities each year that work. This happened at Tesla all the way. So, this is happening. It is a little exacerbated now because we have never seen so many trading options in all of history.
The real risk is that short squeeze stocks will force these fund managers to start selling their quality stocks. And if that happens, you’ll have Google, Facebook and the ones that are falling, and then everything the Fed is trying to do to keep things afloat will come under pressure. And for me, that question falls on the Fed, because why are they letting this get out of hand? And then you could even extrapolate that further back to why this social situation for the class war is going on.
Final thoughts
Arun Chopra
I think what will happen is that volatility will remain and message boards like WallStreetBets will remain. First of all, they were doing research. GameStop was there for a year, and I’m kicking myself because I considered him a dog.
You can see these fantastic minds on WallStreetBets, especially [the kind of thinking] younger people. When you see things in a certain way and you’re not stuck with dogmas and textbooks – that’s what creates these panels. There is no doubt about the skills of young people.
I think this narrative about the common man comes from everything that is happening. We never dealt with this idea that there was a housing crash in the formative years for most of the generation that now have to pay two hundred thousand to go to college, which doesn’t even guarantee anything. I bet if the system was fairer, half of that group would be busy doing other things.
So, when I read posts on how to live during the housing crisis on WallStreetBets, I immediately think absolutely. And I am shocked watching CNBC, and they are saying, oh, I like David and Goliath too! But I say, no, you don’t. Are you just showing up, are you kidding?
I just think that realism is important and understanding that it will not solve the problem. I’m sure more people lost money at AMC [when it crashed on Thursday] who didn’t even chase GameStop and thought AMC would be next. I think the biggest problem we have is that these real systemic issues – how does Congress do something about student loans – need to be addressed.