Now before anyone wonders if I’ve lost my mind: No. There is no way in hell I’m putting my own money into GameStop, or into any other individual stock.
However, watching the war between Redditors driving up GameStop’s price on one side and Wall Street’s hedge funds on the other is just about the most entertainment I’ve had as a financial adviser since…since ever, really. I never thought being in finance could be this much fun!
I also think this war is the perfect example of what the media gets wrong about Wall Street.
I’m not going to spend a lot of time on the technical details of what’s going on. Others can explain that better than I can anyway. But in brief, this all started because a bunch of Wall Street hedge fund idiots, the sort of folks who think of themselves as the “Masters of the Universe”, pulled just about the dumbest move imaginable. They shorted the stock of a company that had no debt. And they shorted it when the stock price was four dollars a share!
Leaving aside the details, here’s what shorting means. If I short a stock, I am borrowing money to gamble that the stock price will go down. If the stock goes down, I make a profit. If the stock goes up, I lose money. How much do I lose?
Here’s where it gets interesting.
Your potential losses if you short a stock are hypothetically infinite. And up until now, that hypothetical was treated as an impossibility. Well it’s not impossible, as we have witnessed.
Now here’s why the media makes me angry.
They call the Redditors who are driving up GameStop’s price “crazy”, or “insane.” No. They aren’t insane. They might be fanatical. But even if they are, there’s no difference between them spending their own money to drive up a stock’s price and people donating money to hopeless political campaigns. The GameStop craze might be fanaticism but it is absolutely not insanity.
You know what is crazy? Borrowing money to make a gamble where your losses are potentially infinite, and then gambling that a company with NO DEBT, trading at four dollars a share, is going to see its stock price fall even further. That’s crazy.
And then doing it even though the information is public that there was so much shorting of GameStop’s stock that there were more shares shorted than actually existed in the real world?!?
The speculation and gambling of just buying a stock and hoping it goes up is something I don’t encourage. But it’s useful to remember some basic truths about stock trading.
If you go to a casino, your mathematical expected return is negative. The longer you stay in the casino, the more likely you are to lose money. And even if you discover a system to beat the house, they’ll just kick you out of the casino. On the other hand, if you simply buy and sell stocks, your mathematical expected return is positive. As long as you don’t borrow money like the hedge fund idiots, the longer you trade, the more likely you are to make some money at it.
The reason I call it gambling is that, unless you are lucky, you are going to end up taking two, three, four, seven, ten times as much risk on the way to your positive returns as you would with a simpler diversified portfolio.
But what if speculating in the stock market is fun for you? Well, in that case it’s better to gamble in stocks than it is to gamble in a casino. And by the way, as someone who never gambles at all, I want to say thank you to all the speculators. Your speculating is what spreads information and makes long-term investing work.
Of course, part of that information spread is that arrogant “Masters of the Universe” who don’t even understand the most basic elements of running a business need to get wiped out from time to time. Good. If a hedge fund manager is so clueless that he doesn’t realize that businesses without debt don’t go bankrupt, he deserves to get wiped out.
So no, I’m not putting a dime in GameStop. And I’m certainly not encouraging anyone to buy in now unless it’s with money you plan to lose. But I know who I’m rooting for! To the moon, GameStop. To the moon.