When I started in the industry, retail investors (do it yourself investors without professional experience or knowledge) had a bad reputation. Always investing at the top and selling at the bottom. The news over the last couple of weeks regarding GameStop shows how professional many retail investors are. I’ll also comment on another favourite of retail investors, Bitcoin.
I don’t follow the social media threads that the army of US retail investors used to invest in GameStop so I don’t know the original rationale for their investment. However, I presume it was because they wanted to make money. GameStop was the most shorted US stock (where investors borrow the stock, sell it then when they buy it back they are hoping the share price has fallen) in January and the scale of the short is what I presume the retail investors noticed.
If the retail investors could get the price to start rising, those that have shorted would be forced to buy back the stock before their losses became too high. Which is what they did and the knock on effect (called a short squeeze) of those that shorted it having to buy, made the share price soar. Those original retail investors would’ve made a lot of money if they were able to sell at the right time (if is the key word!). Investors that have bought GameStop later have ended up buying a company that has operational and financial challenges with a very high share price.
The interesting part is the reaction and whether anything can be read more into this. There is a thought provoking opinion by Evgeny Morozov in the Guardian this week talking about ‘platform populism’ and ‘democratising finance’, even comparing it to the riots seen at the US Capitol in early January. I think that the opinion is too strong as I suspect the retail investors were simply trying to make money and with them coming together they could benefit from short squeezes (other stocks such as Blackberry have been targeted too). I don’t think it’s retail investors trying to even the ‘moral compass’ by attacking the ‘evil’ hedge funds (the majority of investors who were shorting GameStop).
The regulators need to be careful in how they deal with this. In my opinion if anyone needs investigating, it is the platforms (such as Robinhood) that restricted trading in names like GameStop, which is clearly unfair and against free market dynamics. It’s good to see this sort of thing in markets to remind investors of John Maynard Keynes’ quote that “markets can stay irrational longer than you can stay solvent”.
Also this week I read an interesting piece on Bitcoin by Chris Clothier of CG Asset Management. If you want a copy of the article, let us know. We don’t invest with CG but I respect their views and opinions. There are some amusing notes in it, such as “On 28 May 2010, Laszlo Hanyecz paid 10,000 Bitcoins for 2 pizzas. Today those 10,000 Bitcoins are worth $355m”. I hope he had lots of toppings! Anyway, there is a more serious side of the article. The management and care for the environment is becoming a huge part of investing and I was shocked to read the impact that Bitcoin is having, “it is estimated to consume as much electricity as Chile and have a carbon footprint to the entire population of New Zealand”. We don’t invest in Bitcoin because frankly, I don’t understand it, however this has given me another reason.
Finally, after writing about pizza, I’m tempted to order one for the Superbowl on Sunday, although I’ll be watching as a neutral due to another disappointing year for the Dallas Cowboys! It’ll be good to see the ‘GOAT’ Brady vs the ‘Baby GOAT’ Mahomes!
Thanks for reading and