i would readily grant your point if these transactions were taking place in a perfectly regulated system. the failures and collusion of auditors and regulators with respect to worldcom and enron as well as the inability of ratings agencies to even approximate reality with respect to mortgage-backed securities implies that the bulk of those salaries are either unearned or being earned for deliberate misfeasance.
i agree that simply being able to take a short position on a security does not grant any kind of superpower but that’s looking at the situation the wrong way around. it is the fact that the short investor has made use of analytical tools at their disposal, which are available to anyone, and have placed their reputation and money under their control at stake on the decision that is important here. also, keep in mind that short positions are not kept hidden, so investors with a long position on these same securities can find out whether anyone is going short on it and by approximately how much. there is more to this than simply profiting from disaster.
The hedge funds involved decided to try a neat trick. They wanted to short the stock, because they thought that would make money. This is old hat, you’re making a bet that the stock would go down, but you make that bet on an actual share of stock. But then they got greedier, and decided to “naked” short the stock, so now they are actually shorting MORE SHARES THAN ACTUALLY EXIST.
That’s it, that’s the story. We have a system that allows the big guys (not the retail investors) to short some imaginary stock. That is what created this situation.
Some retail investors NOTICED. Most of you are just reading about this story this week, but this story has been evolving for months. You will find comprehensive analysis (by the same retail investors that CNBC is trying to claim are too stupid to manage their own money) of the thesis that GameStock was undervalued dating back to the summer and before. A part of that position is that in the hedge funds were shorting most of the stock.
When most of the stock is being shorted it creates a situation where the price rising requires that those shorting the stock actually get their hands on some shares to close their positions. So what happens when people need to buy more of the stock (aka demand has gone up)? The price goes up. Which leads to other shorts falling behind, needing to buy more stock and so on.
The short squeeze (caused by #2) becomes interesting when more than 100% of the shares are shorted, because now as that process starts the supply of shares becomes a major factor. And the folks that already thought the stock was worth something (and it’s not just retail investors, but other big cats too) don’t have an incentive to just fork over their shares do they?
So economics 101 here folks, there’s a limited supply and there’s increasing demand as the price goes up. WSB has a lot of followers, who noticed the situation the shorts were in, and social media has led to more attention being paid to the situation. That, however, very simply isn’t the same as “pumping” a stock, that’s using a loophole that was created to make the funds more money (being able to Naked Short stocks since they’re oh so rich and intelligent) to make money on the other side. That has nothing to do with “pumping” a stock.
This is just a weird, trolling pump-and-dump and it is already illegal.
These redditors haven’t “made any money.” You don’t make money until you sell a stock and if they sell the stock the price falls and it undoes the troll.
Yes, I was rambling a bit, and the point that other people should be responding to the same signs is a separate thing.
But the nub of my point about short selling as a warning device is that, by definition, it warns anyone but those who will end up being harmed. Kind of like a fire alarm that wakes up your neighbors to say “lol that boob next door is about to be crispy”.
I understand your point that staid institutional investors can make use of these signals. But if they didn’t have those signals, would conservative investors be less conservative, or would they accomplish it by moving slower and doing more of their own research in the first place? Or to put that another way: does the market intelligence provided by short selling outweigh the additional wedge that its very existence drives between markets and their underlying reality?
So, here’s what I don’t get. If you’re shorting a $4 stock and it goes up to $8, your decision is to stick with it and not dump it immediately? Not dump it at $6? Hell, I would. They brought this on themselves. Asleep at the wheel. Eat the rich.
It’s not though. With gambling you don’t consider risk. If you did you wouldn’t even play.
Index like S&P500 keep going up, and have done so consistently for decades with only a few “blips”. Because that’s how macroeconomics works.
The skill is how do you evaluate risk. It’s well understood by competent investors. And why most of us would rather have someone manage our money than have to properly dig through the minutia.
Do stocks serve any purpose or are they exploitation? It depends and it’s complicated. I think in our current economic system of capitalism, a private or public stock offering is a practical way to raise capital without ceding too much control to any one investor. It allows someone who is doing the work of creating a business to also be the one making the decisions.
It’s not a perfect system. And corruption and abuse quickly deteriorates its effectiveness, robs the majority of us of retirement assets, and erodes the trust we need to have in the system for it to work. It’s why stock manipulation, fraud, and other activities need to have serious penalties, even for the rich and powerful.
Most likely this Reddit game with $GWE will result in reform. It might be as simple as allowing hedge funds to do naked shorting again (it’s illegal) but perhaps under some tightly controlled circumstances. The Redditors problably can’t win, because they’ve exposed a flaw in the system that can occur repeatedly over a simple network (like a message board). Either change the rules or put the brakes on this activity, probably both. Expect the Redditors to get some roadblocks thrown in their path. And the hedge fund can back out gracefully during the chaos.
I made money - I made like 700 bucks - I bought at 2 and sold at 38. Small potatoes but at 2/share it was stupid undervalued - the stock has never not hit 35 a share when a console launches and they had enough cash on hand to float along for another decade at the sales losses they’ve had.
Dunno who thought they were going under but they were/are at least 10-15 years away from pulling a K-mart.
Except gamblers, well many gamblers, do consider risk. They choose games with the best odds, and unlike “investing” in the stock market, casino games have mathematically calculable odds and there are all sorts of books for gamblers explaining the odds on different plays in different games. The stock market is the genuine gamble, especially if you follow the advice of a broker given that you are literally better off throwing darts at a newspaper to pick stocks than listening to a stock broker or a hedge fund manager.
I understand your point about the long game, the house wins in the long run and the market rises (not as surely as the house wins), but CEOs and investors aren’t playing that game. The market is all about short term gains.
At this point I want to know who’s going to lose money and how much. What does a market cap of $26 billion even mean at this point? How much actual money has been invested for this to happen? And if the WallStreetBets subredditers have gone long, how the heck much are they going to lose when this crashes? How can they be long and think they are in a good position? (My stock market knowledge is not as good as I’d like.)
I’d say a better analogy would be, “when are they going to do a Blockbuster?”. (Or perhaps compare them to a music retailer)
PC gaming has mostly moved over to downloads rather than physical media, and console gaming is doing the same, but with more of a lag, so I don’t see much of a long term future for them. I’d say closer to 5-10 years.
That said, I wouldn’t be surprised if they ended up in a similar position to Blockbuster, ie basically defunct, but with a few shops hanging on, making money from people into retro formats. Plus, I suppose that even if your PS7¾ is completely digital, you might still have a need for a physical shop that can sell you a new controller.
Perhaps that’s the best way to see it, that the Redditors are not investing in something to make a profit, but paying the ticket price for some entertainment. Which, really, is a lot like how I approach gambling: I’m not hoping to win, just buying a moment of thrill, and never hope to see winnings.
And that attitude, of just burning money on entertainment, may be what consternates the professional gamblerstraders. They work so hard to make money, and these doofuses just come in and ruin it for them! It’s Caddyshack all over again!
Which also means short sellers have an incentive not to want shareholders to realise the extent of their peril.
You’d think, but for example, Michael Burry, the subject of the book/movie The Big Short, was pretty public about his theory that mortgage bubble was about to collapse (as it did). It wasn’t that the shareholders affected didn’t know about an impending collapse; they just didn’t believe it.
