As retail investors stormed the hedge fund castle and forced likely the most ridiculous run-up in a stock ever, my Dad asked, “What’s a GameStop?” I told him to think RadioShack or Blockbuster – i.e. dinosaur retail stores that quickly lost relevance and went bankrupt – but GameStop is for buying physical video games and accessories. “How does that have any value?” he asked. It doesn’t. Which is why “normal” retail investors who have gamified the stock (pun intended) will inevitably lose their shirts (and have since the drafting of this post – see the below chart).
At a high level, Wall Street heavily shorted the stock which reached upwards of 150% of its outstanding shares at one point. This means that hedge funds and other players borrowed shares, sold them immediately collecting cash, and were obligated to replace those shares before their contract expired (days, weeks, or months in the future depending on the contract). They were betting that Gamestop (ticker: GME) shares would drop in value so they could buy GME shares at a lower price to replace the shares they borrowed, keeping the difference between this price and the price at which they originally sold their borrowed shares. Reddit blog warriors and other Main Street individuals continually bought the stock, pushing GME higher, causing Wall Street to close their short positions at massive losses.
As a prelude to what will likely be a popular topic for me on this forum, I’m all in for every platform that democratizes investing and building wealth. There’s so much talk about only the rich being able to invest and only the rich get richer. Yes, the rich will continue to get richer. Yes, money creates more money. Yes, we don’t all start from the same place. Yes, finance, just as life, is not always fair. HOWEVER, there is a narrative where we are all able to play the game and it is playing out in front of our eyes. We can all shoot our shot, and we all can build wealth for ourselves. It doesn’t matter if you make $40k or $400k. Smart game play unlocks financial security for everyone (more on the most underserved educational topic in future post).
This is why I love everything Robinhood, Webull, Fundrise, Groundfloor, etc. Platforms that allow Main Street to more easily get into the game of investing. I understand that finance can be scary. But it doesn’t have to be. I understand that investing isn’t always intuitive. But it can be. I love these platforms because 1) it gets people IN THE GAME to start their investing journey, 2) they are generally less “intimidating” than logging into your Vanguard or TD Ameritrade account, 3) they are more easily accessible and functional than traditional brokerages, and 4) in the case of Fundrise and Groundfloor, allow you to invest in assets that you can see and touch – real estate.
As much as I love these apps because it gets people thinking, reading, talking, and actively building wealth we can’t overlook the risks. I love these trading platforms because they make the markets and trading more accessible to the average person, but I’m also concerned about these platforms because they make the markets and trading more easily accessible to the average person. Robinhood is like twitter for trading. You can scroll through and see what your friends are trading, like the posts, readily see enticing news articles about stocks to buy, etc. If you are new and/or do not fully appreciate the market and inherent risk in trading securities (especially in the short term) the likelihood of loss can be high. Robinhood makes money through what is called ‘payment for order flow’ which means they connect your trades to market makers who actually execute your trades on the exchange. Said simply, the more trading volume on their app, the more they make. So, they are directly incentivized to get you to trade more frequently. Look, I don’t hate this, and I don’t think it’s a crooked/scheming business model and this is typical of brokerages. But just like any product, consumers need to understand what they are holding and buying and make their own decisions according to the risk. It’s crazy that mining company GME Resources in Australia was up 50% because of traders mistaking it for Gamestop. If you are trying to buy into a gaming retailer and you end up buying into cobalt mining, you shouldn’t be buying into anything. Hopefully we can all agree on that.
Circling all the way back to GME, the stock has been pushed astronomically high by retail traders (like you and I, but no I did not buy it) on their Robinhood apps or other brokerages. It’s all fun and games and until the stock comes back to what it is – worthless – and the $3k spent for 10 wildly overpriced shares disappears overnight. If you want to spend $3k to fight the establishment and push up the stock to force short sellers to take huge losses, that’s fine. But do realize that pushing the stock to the moon will likely give some of these same established hedge fund players a HUGE payday when they short the stock at the right time and the gas finally runs out on GME.
There are lots of angles we can take this discussion and I’m all in for it. But for now – I love anything that democratizes trading/wealth building, but if you’re just in it because everyone else is doing it, tread lightly.
Below are links to a couple articles people may find useful for more background. And if you do not already have a WSJ subscription, this is my plug for Apple News+. For $9.99/month you will receive a WSJ subscription along with more news and magazine subscriptions that I can name. It’s really great.
I think it’s important to point out alternatives to the Robinhood trend or not investing at all: index funds and robo advisors. I personally use Fidelity as my broker of choice and spread 80% of my investments across index funds (like FXAIX or FSKAX), another 15% or so across actively traded funds (I like FCNTX and FOCPX) and leave a small % to use as play money to invest in single stocks or sector ETFs. I recognize my own track record investing in single stocks has never been great so I put most of my reliance on a buy and hold index fund plan. If I wanted to use a piece of that small % of play money to buy GME it wouldn’t materially impact my overall worth if I lost all of it.
As for Robo Advisors, I have done light research on some and have used Betterment in the past as an experiment. I thought Betterment spread my investments nicely across vanguard index funds and charged a minimal fee to create and maintain that allocation. This is a good option for someone who has no business or investing background. Last i checked, you can start an account with $0.
You’re right. We definitely skipped over a huge step in the investing decision tree which is setting up an initial foundation of index or mutual funds to buy and hold the market for the long term. Whether that’s in your 401k, IRA, or taxable account you need that broad diversified base before graduating into individual stocks or sector ETFs with a smaller subset of your portfolio. I like the sector ETF point as a good way to bridge between broader funds and individual stocks. They’re still diversified (albeit across a certain industry) and hold a variety of stocks, but they are riskier based on their concentration (I got caught buying into some oil and gas ETFs back in 2014 before oil prices tumbled). ETFs at least get people taking a closer look at what they’re buying. I haven’t used Robo Advisors but they sound like a good option for those with a more limited investing background that want to be more involved in their investing rather than sticking their funds into the standard ‘target date’ fund.
I’m hopeful that with the development of more trading apps, we’ll have more people asking questions and wanting to understand investing. You need to be in the game to shoot your shot, but let’s all be educated players.