Financial markets are efficient, or so the theory goes. Unless you’re insider trading or some sort of genius, it’s likely whatever you think or heard about a stock is already priced in. Through this lens most financial trading is just sophisticated gambling. The prevailing advice is to just put your money in an index fund, and observe the magic of compound interest. Ignoring that sage advice, a Reddit user with the handle u/DeepFuckingValue placed a huge bet on Game Stop (GME) in September of 2019. He had noticed the short trades against GME added up to 140% of existing shares. If the stock price went up for long enough, anyone with a short position would be forced to buy the stock at any price. He liked the stock. He thought it was undervalued. He was right. The retailer wasn’t dead yet. GME’s cash position exceeded its debt. Ryan Cohen (former founder of Chewy) bought 13% of the company and took a board seat. Dr. Michael Burry of ‘The Big Short’ fame took an interest in the company.
That trade ended up making u/DeepFuckingValue over $46 million, but more than that, it sparked somewhat of a revolution. He hadn’t kept this opportunity to himself. He had posted the trade in Reddit’s r/WallStreetBets forum, where the stock turned into a meme. Redditors piled in, and pushed the price up by 30x to $500 a share. By January 2021 this band of unlikely heroes were bleeding a billion dollars a day from several elite hedge funds that had shorted GME. The “little guys” had learned how to actually #OccupyWallSt, and hit them were it hurts. The stock no longer represented the underlying value of a video game retailer, it represented a way to “stick it to the man”. Just like buying Union bonds in the Civil War let sympathizers of the cause express their support, democratized trading apps like Robinhood were enabling small size investors be part of something bigger than themselves. What War Bond buyers knew, and most of us forget, is that investing isn’t always about picking winners, sometimes it’s about making them.
Of course as is true of all gambling, the house always wins. Financial institutions lent on Robinhood to shut down trades in GME, allowing hedge funds to exit their positions just in time to avoid being crushed. What traditional financial institutions understood, that Robinhood day traders did not, is that finance is all about trust. The hedge funds for all of their shortcomings, are trusted entities. They’re trusted for the same reason mob bosses trust each other: if anyone takes one of you out, it’s only a matter of time before they come for the rest of you too. That’s not good for business. When there’s chaos in the system, regulators are going to come down on the side of existing institutions. You can make money in the short term betting against them, but if they’re too big to fail, you’re guaranteed to get steam roller-ed in the long term.
Anybody who declares that they think markets are efficient will be fired on the spot.
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