Loved the write up today, Isaac. As a right-leaning individual, I can't believe I'm totally aligned with AOC. She's right and I hope these folks have a reckoning. I bought $500 worth of AMC yesterday and had my two brother-in-laws do that same - we were so excited this morning only to watch Robinhood (of all platforms) prevent the purchase of AMC shares. The hypocrisy of that is sickening. To act like a hedge fund doesn't participate in "low analysis, momentum" investing is laughable on its face. I actually think this is only gonna further ignite the Reddit mob. We will see what happens. Thanks again.
Background: On any stock trade, you can be long or short.
If long, you give money and get stock. Should you not have the money, you must borrow it. Brokers will loan that money to you at their margin interest rate.
If short, you give stock and get money. Should you not have that stock, you must borrow it. Brokers who hold other peoples' stock will loan their shares to you for a fee. (Unless those people specifically tell them not to.)
Hedge funds: Being long is the safest bet. Why? Because, over time, markets always go up. Being short is typically a brief hedge, to protect against interim decline, and hence the name.
The total number of shares available is called the float. The total number that are shorted is the short interest. The collateral (either cash or stocks) that you put up when borrowing from a broker is called margin.
What happened: Sometimes hedge funds will sell shares they do not have without borrowing shares to deliver, even though this is illegal. People noticed, recently, that the short interest in Gamestop exceeded the float. More shares were sold than existed. Someone, likely Melvin among others, was selling shares they did not have without borrowing shares to deliver.
What happened next is classic tipping point. A few canny amateurs bought just enough shares to raise the price a little. It did not take much at $8 a share. The hedge funds got margin calls saying they needed to either put up more collateral or find shares to deliver. Some bought shares, which drove up the price a little more, and then this cycle just kept repeating.
It was not the amateurs who kept bidding shares higher. It was the shorts, closing out their position so they would not have to put up more margin cash. The amateurs just held on for the ride. Thus, there was no true price manipulation. A short squeeze feeds on itself. This happened to VW a decade ago and to TSLA last year.
When the short interest exceeds the float, a squeeze is inevitable because more shares were sold than there are shares to deliver. Unless the company goes broke and the share price falls to zero. Then, the shorts never have to cover. This is why short sellers, typically hedge funds, will try to hammer a company into the ground.
It is stupid to pay $300 for a share of Gamestop. Unless, of course, you are short and have no choice. (Melvin did not buy shares to cover; they put up more cash instead.) I am now speculating: It could be that the amateurs did not even have to buy shares at the start. Perhaps they merely withdrew permission for brokers to loan out shares they already owned. That, alone, could start a self-perpetuating short squeeze. Either way, it was the hedge funds, themselves, that drove up the price as they bid against one another to cover their massive shorts.
My Take: There are a few good places to trade stocks with zero commission. Robinhood is not one of them. Google "front running" to see why. (Vanguard is best, IMO, although their trading platform is flakey.) And never forget that you are not trading against other amateurs, nor even seasoned pros. You are trading against omniscient bots. Yes, it can be fun, just as casinos and lotteries are fun. And someone, somewhere, will even make a profit. But, in the long run, it almost certainly will not be you. Truly, VT is the only thing you need to own.
Incredible job here Isaac. I feel like you not only covered the details thoroughly but got to some of the important underlying societal dynamics. Here's my two or three cents on that part and how it connects to the overall picture of how this may play out, forgive the wall of text:
The thing I think people like Jim Cramer are really missing about this when they say the squeeze is over, you won, walk away (maybe he's missing it, maybe the financial media really is owned by the big boys and is actively spreading disinfo/spinning things) are the psychological/sociological elements you hit on.
Just on the technical merits, this huge short squeeze is an interesting and surprisingly viable play as has already been shown, exponentially multiplied by the hubris of the shorts continuing to double down. The weakness in this strategy at any other time would be that somebody eventually is going to lose big because the stock market is a zero-sum game and the big guys have lots of tools to move the market, mess with people psychologically, and scare retail traders out; and they ALSO have more capital so they can usually hold out longer. So it's about *who gets scared first*, the retail traders and they sell out, abandoning the latecomers who continued to pile in; or the hedge funders whose losses are growing exponentially so they eventually cover.
Now here are a few unique things about this moment though that potentially change the equation:
1) Many of the people who are in on this ACTUALLY are only invested with what they can lose. That's not normal. Part of that is down to the fact that many people have already lost almost everything, then they got some stimulus money. Not really enough to fix anything, but enough to buy a few shares of a stock that has become a lottery ticket in their minds (and in reality arguably depending on how things shakedown). There are surely some who are taking a big risk and may lose, but for many people, their mindset is "I was poor a week ago. If this goes to zero I'll be poor again tomorrow. I can handle that. But can you, Mr. Wall Street?" So a lot of fear is taken away for the retail side.
2) Most of the time in this kind of situation, the investors piling in are just looking for a quick buck. "The stock went from $15 to $60. Great time to sell, you quadrupled your money! It went from $60 to $300. Definitely get out now, that's 5X if you just got in or 20X if you came in early!" That's not what is happening this time. As some Wall Street pro pointed out on Twitter, the WSB people have done an EXCELLENT job of messaging, very clearly, in modern, relateable, meme-laden language, exactly what the play is here. They have explained to everyone in layman's terms that the play here is not to pump and dump (at which point it's a guessing game how high you're taking it together and then a race to get out before the other guy). The play is to hold until the enemy breaks. Not before. Because they've actually explained to laypeople the exponential, infinite loss the "smart money" on the other side is facing. Again, this is more than an investment, it is a lottery ticket. It's all or nothing. So not only is fear taken away from the retail side in point 1, they understand the fear the enemy is facing (apparently maybe before some of the enemy themselves did).
3) This brings us to the final, and possibly the most powerful point - the enemy. As I just said, normally this kind of situation is a classic prisoner's dilemma (google it if you're not familiar). You either work with your partner to benefit together, or you stab them in the back to benefit more by yourself. Lots of psychological research has shown us that people are not always super reliable or predictable and you don't generally want to be in this kind of situation with someone you don't have very good reason to trust. But what if you modified this dilemma to where there was a third party... someone who suffers if you cooperate with your partner and greatly benefits when you betray your partner? And what if that third party was someone who had hurt you deeply? What if they cost your dad his job when you were a kid? What if they cost your family your home? What if they were in the process of trying to destroy a business associated with memories of joy from your childhood like AMC or Gamestop? What if this enemy, in fact, represented everything you hate most? Now maybe the people on the short side of GME aren't actually responsible for those things, but it doesn't really matter, because for the masses on the long side THAT is what they represent. And it doesn't seem to matter where the individual on the long side is coming from, this applies to them. For a long time now we've had issues with polarization. Generally speaking, 'the right' and 'the left' have pointed the finger at each other as the cause of all the world's evils. This is one of the first things I can remember in years to unite people from all across the spectrum. For the right, these are the elites who are pulling the levers behind the scenes, controlling the mainstream media and everything else. For the left, these people are the absolute pinnacle of what they have been saying is wrong with capitalism. When you have AOC and Donald Trump Jr agreeing that you are the bad guy? Wow. You done goofed.
So there you have it. My two cents about what's really going on here. An all or nothing standoff between two armies: one a well-outfitted empire used to crushing all in their path. The other, a rag-tag group with nothing to lose, indignant at years of feeling powerless, fueled by such rage that they don't even care if they are the last one out the door and end up with nothing, as long as the enemy loses it all first. The Braveheart, 300, Endgame memes resonate for a reason.
Who's going to win that battle? I can't say for sure, but I know who I'd put my money on.
**This is not financial advice, this is just my opinion, I'm just a random schmo, never invest anything you're not ready to lose**
I would add that there are sound fundamentals for a pricing of GME well about its value a month ago. Of course the current value is inflated by the gamma squeezes, hype, and looming short squeeze that will multiply it further, but a valuation in the mid 100s is not unreasonable (remember, stock is valued on the underlying’s potential in addition to its current production). Check out GMEDD.com if you haven’t already—you can take a deeper dive into the fundamentals underlying the bull case for the stock irrespective of the mother of all short squeezes.
This is phenomenal reporting Isaac. A nuanced and powerful blend of personal anecdote, straight reporting, and source citing. Turning news into a narrative is an art and you knocked this one out of the park.
The hypocrisy really is sickening. I don't day trade out of principle. Long-term index investor here. But the idea of shutting off markets boiled my blood enough that I jumped in with a couple of shares. Could it go to zero? Very, very likely. But somehow the whole situation made me mad enough to make an irrational "statement." And like you said, it makes for good text convo's with friends.
Wow. I've enjoyed (and profited from Robinhood for almost a year) and I like the ability to take part. It's like being at a ball game watching and cheering instead of being locked out of the stadium hoping and waiting on the news that your team wins. Loved the article. Well stated. I bet it was difficult trying to find a support for the Wall Street side of things (no left vs. Right perspective). I was wondering how 2021 was going to play out and we add another cog into the fracture of our American dream.
Loved the write up today, Isaac. As a right-leaning individual, I can't believe I'm totally aligned with AOC. She's right and I hope these folks have a reckoning. I bought $500 worth of AMC yesterday and had my two brother-in-laws do that same - we were so excited this morning only to watch Robinhood (of all platforms) prevent the purchase of AMC shares. The hypocrisy of that is sickening. To act like a hedge fund doesn't participate in "low analysis, momentum" investing is laughable on its face. I actually think this is only gonna further ignite the Reddit mob. We will see what happens. Thanks again.
Background: On any stock trade, you can be long or short.
If long, you give money and get stock. Should you not have the money, you must borrow it. Brokers will loan that money to you at their margin interest rate.
If short, you give stock and get money. Should you not have that stock, you must borrow it. Brokers who hold other peoples' stock will loan their shares to you for a fee. (Unless those people specifically tell them not to.)
Hedge funds: Being long is the safest bet. Why? Because, over time, markets always go up. Being short is typically a brief hedge, to protect against interim decline, and hence the name.
The total number of shares available is called the float. The total number that are shorted is the short interest. The collateral (either cash or stocks) that you put up when borrowing from a broker is called margin.
What happened: Sometimes hedge funds will sell shares they do not have without borrowing shares to deliver, even though this is illegal. People noticed, recently, that the short interest in Gamestop exceeded the float. More shares were sold than existed. Someone, likely Melvin among others, was selling shares they did not have without borrowing shares to deliver.
What happened next is classic tipping point. A few canny amateurs bought just enough shares to raise the price a little. It did not take much at $8 a share. The hedge funds got margin calls saying they needed to either put up more collateral or find shares to deliver. Some bought shares, which drove up the price a little more, and then this cycle just kept repeating.
It was not the amateurs who kept bidding shares higher. It was the shorts, closing out their position so they would not have to put up more margin cash. The amateurs just held on for the ride. Thus, there was no true price manipulation. A short squeeze feeds on itself. This happened to VW a decade ago and to TSLA last year.
When the short interest exceeds the float, a squeeze is inevitable because more shares were sold than there are shares to deliver. Unless the company goes broke and the share price falls to zero. Then, the shorts never have to cover. This is why short sellers, typically hedge funds, will try to hammer a company into the ground.
It is stupid to pay $300 for a share of Gamestop. Unless, of course, you are short and have no choice. (Melvin did not buy shares to cover; they put up more cash instead.) I am now speculating: It could be that the amateurs did not even have to buy shares at the start. Perhaps they merely withdrew permission for brokers to loan out shares they already owned. That, alone, could start a self-perpetuating short squeeze. Either way, it was the hedge funds, themselves, that drove up the price as they bid against one another to cover their massive shorts.
My Take: There are a few good places to trade stocks with zero commission. Robinhood is not one of them. Google "front running" to see why. (Vanguard is best, IMO, although their trading platform is flakey.) And never forget that you are not trading against other amateurs, nor even seasoned pros. You are trading against omniscient bots. Yes, it can be fun, just as casinos and lotteries are fun. And someone, somewhere, will even make a profit. But, in the long run, it almost certainly will not be you. Truly, VT is the only thing you need to own.
Incredible job here Isaac. I feel like you not only covered the details thoroughly but got to some of the important underlying societal dynamics. Here's my two or three cents on that part and how it connects to the overall picture of how this may play out, forgive the wall of text:
The thing I think people like Jim Cramer are really missing about this when they say the squeeze is over, you won, walk away (maybe he's missing it, maybe the financial media really is owned by the big boys and is actively spreading disinfo/spinning things) are the psychological/sociological elements you hit on.
Just on the technical merits, this huge short squeeze is an interesting and surprisingly viable play as has already been shown, exponentially multiplied by the hubris of the shorts continuing to double down. The weakness in this strategy at any other time would be that somebody eventually is going to lose big because the stock market is a zero-sum game and the big guys have lots of tools to move the market, mess with people psychologically, and scare retail traders out; and they ALSO have more capital so they can usually hold out longer. So it's about *who gets scared first*, the retail traders and they sell out, abandoning the latecomers who continued to pile in; or the hedge funders whose losses are growing exponentially so they eventually cover.
Now here are a few unique things about this moment though that potentially change the equation:
1) Many of the people who are in on this ACTUALLY are only invested with what they can lose. That's not normal. Part of that is down to the fact that many people have already lost almost everything, then they got some stimulus money. Not really enough to fix anything, but enough to buy a few shares of a stock that has become a lottery ticket in their minds (and in reality arguably depending on how things shakedown). There are surely some who are taking a big risk and may lose, but for many people, their mindset is "I was poor a week ago. If this goes to zero I'll be poor again tomorrow. I can handle that. But can you, Mr. Wall Street?" So a lot of fear is taken away for the retail side.
2) Most of the time in this kind of situation, the investors piling in are just looking for a quick buck. "The stock went from $15 to $60. Great time to sell, you quadrupled your money! It went from $60 to $300. Definitely get out now, that's 5X if you just got in or 20X if you came in early!" That's not what is happening this time. As some Wall Street pro pointed out on Twitter, the WSB people have done an EXCELLENT job of messaging, very clearly, in modern, relateable, meme-laden language, exactly what the play is here. They have explained to everyone in layman's terms that the play here is not to pump and dump (at which point it's a guessing game how high you're taking it together and then a race to get out before the other guy). The play is to hold until the enemy breaks. Not before. Because they've actually explained to laypeople the exponential, infinite loss the "smart money" on the other side is facing. Again, this is more than an investment, it is a lottery ticket. It's all or nothing. So not only is fear taken away from the retail side in point 1, they understand the fear the enemy is facing (apparently maybe before some of the enemy themselves did).
3) This brings us to the final, and possibly the most powerful point - the enemy. As I just said, normally this kind of situation is a classic prisoner's dilemma (google it if you're not familiar). You either work with your partner to benefit together, or you stab them in the back to benefit more by yourself. Lots of psychological research has shown us that people are not always super reliable or predictable and you don't generally want to be in this kind of situation with someone you don't have very good reason to trust. But what if you modified this dilemma to where there was a third party... someone who suffers if you cooperate with your partner and greatly benefits when you betray your partner? And what if that third party was someone who had hurt you deeply? What if they cost your dad his job when you were a kid? What if they cost your family your home? What if they were in the process of trying to destroy a business associated with memories of joy from your childhood like AMC or Gamestop? What if this enemy, in fact, represented everything you hate most? Now maybe the people on the short side of GME aren't actually responsible for those things, but it doesn't really matter, because for the masses on the long side THAT is what they represent. And it doesn't seem to matter where the individual on the long side is coming from, this applies to them. For a long time now we've had issues with polarization. Generally speaking, 'the right' and 'the left' have pointed the finger at each other as the cause of all the world's evils. This is one of the first things I can remember in years to unite people from all across the spectrum. For the right, these are the elites who are pulling the levers behind the scenes, controlling the mainstream media and everything else. For the left, these people are the absolute pinnacle of what they have been saying is wrong with capitalism. When you have AOC and Donald Trump Jr agreeing that you are the bad guy? Wow. You done goofed.
So there you have it. My two cents about what's really going on here. An all or nothing standoff between two armies: one a well-outfitted empire used to crushing all in their path. The other, a rag-tag group with nothing to lose, indignant at years of feeling powerless, fueled by such rage that they don't even care if they are the last one out the door and end up with nothing, as long as the enemy loses it all first. The Braveheart, 300, Endgame memes resonate for a reason.
Who's going to win that battle? I can't say for sure, but I know who I'd put my money on.
**This is not financial advice, this is just my opinion, I'm just a random schmo, never invest anything you're not ready to lose**
(That said, 💎✋🤚🚀🌕)
I didn’t know I could love you more. But ultimate frisbee? Your spirit of the game comes through in your writing.
I would add that there are sound fundamentals for a pricing of GME well about its value a month ago. Of course the current value is inflated by the gamma squeezes, hype, and looming short squeeze that will multiply it further, but a valuation in the mid 100s is not unreasonable (remember, stock is valued on the underlying’s potential in addition to its current production). Check out GMEDD.com if you haven’t already—you can take a deeper dive into the fundamentals underlying the bull case for the stock irrespective of the mother of all short squeezes.
This is phenomenal reporting Isaac. A nuanced and powerful blend of personal anecdote, straight reporting, and source citing. Turning news into a narrative is an art and you knocked this one out of the park.
The hypocrisy really is sickening. I don't day trade out of principle. Long-term index investor here. But the idea of shutting off markets boiled my blood enough that I jumped in with a couple of shares. Could it go to zero? Very, very likely. But somehow the whole situation made me mad enough to make an irrational "statement." And like you said, it makes for good text convo's with friends.
Possibly my favorite Tangle yet. What a story!
Wow. I've enjoyed (and profited from Robinhood for almost a year) and I like the ability to take part. It's like being at a ball game watching and cheering instead of being locked out of the stadium hoping and waiting on the news that your team wins. Loved the article. Well stated. I bet it was difficult trying to find a support for the Wall Street side of things (no left vs. Right perspective). I was wondering how 2021 was going to play out and we add another cog into the fracture of our American dream.