Been a little (some might say irrationally) agitated about people and the market recently. There's GME, and then there's the whole thing with Elon and dogecoin and bitcoin.
The biggest gripe I have with it all is the mania and the number of people who are going to get burnt. And it's a little extra upsetting because there isn't really any one thing to blame really so I'm not sure what fix there is.
Alright, GME. Here's what went down. Basically, some traders saw a position that was potentially great for them, so they jumped in, making a bet that they will make some money. They weren't expecting it to blow up the way it did, they weren't trying to be political about anything, they weren't pretending to want to be doing anything but making money.
Somehow it got traction, perhaps because there was some actual movement in the price and more and more people started paying attention. These wouldn't just be retail investors mind you, I'm sure many of the people paying attention were the institutional investors too, who were there for the same reason, there is potential for money to be made.
Anyway we know what happened next. The story blew up, retail investors started flocking in. It became a mob. The original subreddit had many traders who studied stocks and made bets, but it was no longer about that. It became all about apes and bananas and diamond hands and rockets to the moon. Reddit is a scary place because of it's potential to drown out voices and become and echo chamber. You were supposed to upvote anything that merits discussion, but in practice people always upvote what they wanted to see and downvoted opinions they didn't like to see. So the subreddit became a massive hive mind, a giant mob screaming at each other to HODL.
It didn't matter if people believed what was being said in the subreddit, everyone wanted everyone else to hold or buy because from a self-interest perspective, it was always good to make the price go higher. So misinformation was actively being upvoted to the top. Many likely genuinely believed it, not realising that the person who wrote it had zero financial background and was reading too much into some numbers. Others probably didn't care whether the post was accurate or not as long as it made everyone else want to hold or buy. Dissenting opinions were not seen as they were all downvoted, because these people were all apparently either bots or shills for hedge funds trying to spread misinformation to drive the price down. It was like watching a conspiracy group gathering live.
The entire narrative about the short squeeze went from the original 'hey we can take advantage of the hedge funds who have to cover their shorts to make some money', to giving the hedge funds the middle finger and making them bankrupt. HODL they say, till the hedgies go bust, which for some reason the mob thought was a good idea (I mean we do realise that bankruptcy means the organisation is not able to pay back it's obligations and all that money has to be written off right... that's literally what bankruptcy is about).
The goal posts kept shifting. It was hold till Friday, then it was hold till Monday, and then till Wednesday. The original traders were happy when the stock price was 20 but the mob said hold till 100, then till 300, then till 1000.
The story continues to spread, onto other social media platforms, covered by the news, people talking to each other. Everyone knew about GME at this point. Not everyone followed the subreddit, some just saw the thing going up and up and experienced FOMO. People got greedy, they jumped in not knowing what they were getting into, people who have never bought a stock in their lives opened brokerage accounts to buy GME. There was serious hype.
Any long time investor or trader knows however, that there is a cardinal rule in the stock market. If everyone knows about it, it's too late. A story goes that JFK's father Joe Kennedy was getting his shoes shined, when the shoe shine boy told him to buy a stock. He went home and sold it all. Shortly after that, the stock market plunged and the Great Depression began. So goes the famous quote:
"You know it's time to sell when shoeshine boys give you stock tips"
People saw large green percentage numbers on their apps. They say 'look, I've made so much money overnight'. What these people don't realise is that you've earned nothing until you cash out. That, or they all thought they would be able to catch the peak. They would be the ones to time it at the best price and get out then. But it's a demand and supply game and it's impossible for everyone catch the peak.
At the peak, each and every person who sold there got out of their position by selling to someone else who bought it at that price thinking it would only go higher.
These are the people who will eat the dust.
It dipped. People were selling. For awhile many still believed. Many bought on the dip. It went up again. There was a short period of renewed hope that the dip was just temporary and a scare moment. But that illusion was soon burst as it all came crashing down.
Honestly, all of this was completely predictable. Look at this graph.
There is absolutely nothing new about what happened. It just happened faster and on a larger scale than we've ever seen before.
As an aside, I think it's interesting how even the denial to bull trap to return to "normal" situation was captured in the study as a pattern that happens to speculative bubbles. The fact that there would consistently be such period across bubbles show that no one can ever predict where the peak is. Think about it - this happened because it is likely that there were more people who thought it was still a good time to buy more, than people who thought it was time to sell.
GME crashed to around 60 plus and has been slowly trending downwards since. Still much higher than the original valuation, but the people still holding now are likely those who bought at much higher and just don't see the point in selling at loss now. They hang on to the hope that with the positive direction that the company is going (which is indeed true and a key impetus for the initial increase in price), one day the stock price may eventually rise again. Unfortunately, even with future expectations of the company built in, the current price is still likely significantly overvalued, much less whatever price these people bought it at. But hey, who knows, they might somehow go the way of Netflix. Unlikely though, when you consider their possible potential business models moving forward and their competitors they would face. Going digital is not a magic bullet, not this late in the game, not when your competition would be Steam, Epic, Microsoft and Google. Netflix pivoted to streaming in 2007 when YouTube was only 2 years old.
The subreddit is now slightly schizophrenic. Many have left, and there are two groups remaining. There are the original ones whose voices are finally heard and are now saying 'I told you so but you all kept downvoting me'. Then there are the ones still in denial, trying to convince everyone that the short squeeze is still coming (because see these numbers wow), that the tonal shift is caused by institutional investors who have invaded the subreddit and led to bots and shills spamming it while banning them for posting the truth. Sounds almost like a certain ex-president claiming his lies being flagged and blocked were proof of censorship.
So who won? Well we don't know for sure yet, but if I had to make a bet (ha ha), I would think institutional investors net won. High frequency traders would have made bank on this. While some hedge funds would have lost big, surely many others would have been on the opposite side rolling it in. Yea the whole sticking it to wall street narrative never made sense because you would at most be sticking it to a few funds while other funds were massively profiting of this.
Institutional investors have huge advantages. Technology, experience, time, and many more. Some say the system is rigged... I'm inclined to agree, but it may not be rigged in the sense that there's a conspiracy ongoing that looks to intentionally transfer wealth from the retail investors to the institutions. It's just the simple fact that institutional investors just have too many accumulated advantages on their side by virtue of them being institutions that exist precisely to win in the market.
When Robinhood restricted trading, it was bad. It's good that questions will be raised about this. But let's face it, even if those actions were unfair and problematic, it doesn't change the fact that GME would always have reverted to the mean. Maybe GME could have hit a thousand if not for the trading restrictions, and all that means to me is that some retail investor would have bought it at a thousand and truly be eating dust now.
The biggest losers are likely the ones who don't know what they were getting into. And that makes me sad. Yes an argument could be made that some of these people deserved it, that perhaps they were greedy and decided to throw their money into something they didn't understand because they thought they could make bank. There is no free lunch in this world after all and just as you shouldn't believe scams you shouldn't believe 'investment advice'. But it does still feel bad because there really was a lot of misinformation floating around, and it's easy for people to get caught up in their emotions and do stupid things. There will also always be a small group of people who would have made the stupidest decisions of their lives - staking their life savings for example. There will be some lives that would have gotten completely ruined.
(Makes me wonder - actually what happens to the elderly who get their life savings scammed uh.)
I hope at least GME was a very public lesson for people. With the huge publicity it got, whether you were in it or not, you know what happened at least at a basic level.
Personally I'm glad I didn't get involved. I'll admit it's not that I totally didn't feel the FOMO, but I chose to ignore it and stick to what I know is right. I understand the temptation though. That said, honestly if I got in and made money off this, I'm not sure how comfortable I would be with it. This sense of the money I'm making coming from the losses someone else is making, it's like blood diamond.
I suppose I never was a fan of trading. There is some inherent value in trading, but personally I'm a little skeptical. Although I do see traders having some value in regulating prices, I find that the profit incentive they have is not neatly aligned with the positive value they may create. It leads to things such as traders participating in the gamble of riding trends to make money at the expense of others, instead of doing the job of normalising the prices.
Too many uninformed people throwing away their money, giving it to people who are already richer and don't need that money. It just feels a little predatory to me. Sure you can argue that those who earn from trading can do so precisely because they took the time to learn the skills and are being rewarded for that. To me though it's still a zero sum game where no real value is being created. I don't think I would be proud of having a skill that allows me to profit myself at the expense of others. It's a skill that has no benefit to the the wider society.
Perhaps there is some merit to think about the GME narrative against the institutional investor. I do believe there was some genuine outrage. If we don't like what they do because they transfer wealth to themselves, isn't it the same for skillful retail investors who also participate?
It just doesn't sit well with me.
Anyway. Markets are crazy these days. Increasingly prices are getting divorced from fundamentals and based more on social media generated hype. Elon tweets something and prices go vroom vroom. I suspect it's in part because the market as a whole have been having a really impressive performance. With many people earning going around, people start thinking that riding hot stocks actually work.
Same principle applies though, you don't earn anything until you actually cash out. Riding these trends are dangerous because at some point in time people need to start cashing out and that's when the fundamentals matter because it will affect the mean that it is being reverted to.
Perhaps the market as a whole is in a bubble right now. Markets were supposed to crash with COVID but with so much government support and lots of cash sitting around in this low interest rate environment, it seems that people are instead putting more money into the market. Ironically, perhaps we might see a valuation crash when the economy recovers. But man, no one knows. I'm not going to bet on what happens next. You shouldn't too.
Alright, it's a long rant, honestly there's still plenty more to say but... we'll see. I'll be keeping an eye on the longer term impact of GME, whether it will lead to changes to the rules of the game. With all these other things happening as well, perhaps the rules of the market need to change quite fundamentally. Though that's never going to happen unless we have a Great Depression type scenario. For my other thoughts, I've been slowly building notes for my little deck on investing and I'll get round to it. It's going to be a really long deck I think.
I'll just end off with this quote from Buffett:
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
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