The start of the year very much continued in the same vein as 2020: unpredictable and frantic. There was turmoil in Washington which was gobbled up by spectators all over the globe. In the US, there is a new president and the Covid pandemic is still raging while countries are struggling to plan the jabs properly. And then… there was Wallstreebets. An attempt to summarize and reflect on events that shocked everyone who is interested in stock trading, as well as plenty who aren’t.
What is Wallstreebets?
Wallstreetbets, or WSB, is a subreddit which in turn is basically a forum where people can have all kinds of discussions. Those on WSB share their takes on the prospects of certain stocks, and don’t shy away from sharing their losses neither. It is not a new community and has in fact been around for several years. What is new, is their huge spike in numbers of members. At the moment of writing it passed the 8.5 million users. That is a stunning number. What caused this spike?
Heads started turning when the forum zoomed in on the stock of Gamestop, an American retailer of games, which has been struggling in recent years. There was some room for optimism on the community as the company was rumoured to shift some of their business online. That is only a very small part of the story however. The people at WSB also noted the Gamestop stock was significantly shorted…
What is shorting?
This is where it gets a bit technical. Shorting is what happens when investors are assuming that a stock will drop, like hedge funds were doing with the Gamestop share. What short sellers in fact do is borrowing stocks from a broker, and sell them at the market price. At a given moment though, the shares will have to be returned. The shorter in this case is speculating that by then the price of the stock has fallen, hence ensuring a juicy margin. This is however a double-edged sword, because no one can predict the market with certainty. If the price in the meantime goes up contrary to the expectations, it can be dangerous business.
The short squeeze
When the folks at WSB noticed the huge volumes of short positions against the Gamestop stock, they saw the opportunity for a ‘short squeeze’. They started buying the stock, causing an upward pressure on the price. A short squeeze happens subsequently when the shorters have to buy back the shares to prevent even higher losses, which then adds to the upwards pressure to an even greater extent.
In august, the stock of Gamestop (GME) was worth a bit more than 4 dollars. Around the start of the year, the GME stock was balancing around 20$. On the 27th of January, it spiked to more then 340$, dropping to a spectacular 193$ the day after and rising to 325 dollars on the 29th of January. A bit more than a week later, it balances at a bit more than 60$. Quite the rollercoaster. Millions of people have now heard about the stock and have started following it. The high volatility and attention it received made some draw the comparison to the Bitcoin frenzy.
With what some described as a ‘perfect storm’, there are bound to be winners & losers. Some hedge funds were left very bruised in this financial skirmish. The most famous one was Melvin capital, which lost billions of dollars. They were certainly not the only one.
There were also a lot of small, retail investors (sometimes making their first investment) that saw their savings evaporate in rocket speed as the price of the stock came crashing down.
There were, of course, also (big) winners. Some investors, both institutional and retail investors, saw their worth rapidly increase. There are plenty of testimonials to find of people who are now able to pay of their study debt, who can pay off their mortgage and so on.
There is also Robinhood, a very popular investment app, which got publicly torn to shreds after they halted the trade in GME for a time. This caused fury with the users of the app, and it also caused the GME prize to plummet, allegedly because of this decision. Robinhood declared this was because they had to meet legal requirements, but the damage seems done. Its reputation took a big hit from which it will be difficult to recover.
Marathon vs. sprint
Although I was very puzzled by this phenomenon, I would advice everyone to be very careful with these hypes. They can end badly, very very rapidly. Although I was (very) tempted to have a gamble with this stock, I do still firmly believe ETF’s are the way to go. Although some people are now probably able to FIRE in just a day because of this frenzy, keep in mind the reverse also happened. For me, it is a marathon, not a sprint. Never go on the stock market with money you cannot afford to lose.
I hope this high-level summary helped you to make a bit of sense of this crazy turmoil! How do you look back on it? Please let me know!