On a number of occasions over the past week, I’ve alluded to the distinct possibility that while furious rallies in stocks touted on Reddit and social media may well have created small fortunes for a relative handful of market participants, it was a virtual guarantee that there would be more losers than winners in the rapidly expanding universe of retail investors.
While nothing is certain in life besides truisms and tautologies, one could be almost sure about the following: Shares of GameStop, AMC, and others caught up in the frenzy were destined to collapse.
As I put it last Thursday (here),
The farce seen in shares of names targeted by the Reddit crowd isn’t sustainable. The bottom will likely fall out for some (if not all) of those names eventually. I haven’t been more sure of anything (or anything related to markets, anyway) in quite some time.
Fast forward to Tuesday and the bottom had indeed fallen out.
Short interest in GameStop collapsed. The stock, meanwhile, gave up some 75% of recent gains.
This was a good idea that morphed into a classic pump-and-dump, amplified by both the traditional media and, especially, social media.
While the Reddit crowd can boast about inflicting big losses on a few hedge funds, the harsh reality is this: The people running those funds and their employees are still rich. Can the same be said for the unfortunate souls who were sucked (suckered?) into this absurdity in its latter stages? I doubt it.
If you ask Mark Cuban (who’s rich), that won’t deter the collective. “I think now that they’ve recognized their power and now that they’ve learned some lessons, we’re going to get more of it, not less of it,” he told CNBC. “It’s not going to be a set of circumstances where all these people lost money… go home with their tail between their legs and they’re never going to do this again.”
But maybe they should (go home) and shouldn’t (do it again). Or maybe Mark is creating a straw man. Maybe these investors should treat investing like investing and not like gambling. While it sounds good to say things like “Hedge funds have been treating our system like a casino for decades, so why not retail investors?”, the simple retort goes something like this. If it’s bad for hedge funds to treat America’s capital markets like a casino, then why is it good for retail investors to do it? Because “rage”? Because “anger”? Because “vengeance”?
Those aren’t good reasons.
Nobody should treat it like a casino. Stocks aren’t poker chips. They represent an ownership stake — a partnership, as it were — in a company. Treating it like gambling perverts the process no matter who’s doing it. If you want to gamble, go gamble. There’s a game somewhere near you, I personally guarantee it.
By definition, retail investors have less margin for error. Someone who’s worth $2 billion can lose $250 million and the worst thing that’s going to happen is he/she gets some redemptions and maybe has to close a fund. But the fine art collection is… well, it’s fine. So is the Bentayga in the driveway.
Is that “fair”? No. But it’s reality. And there were some folks out there on Tuesday experiencing that reality first-hand. If they’d bought an S&P 500 index fund last week (when the broad market was down the most since October), they’d be up right now in their portfolio. And they wouldn’t be up at night worrying about whether the five shares of GameStop they bought are going to open another 40% lower in the morning.
Make no mistake, folks: It’s not “the hedge funds” or “the man” who will end up losing in this debacle.
“In our opinion, the main market implication from [last] week’s events is not arising from the short covering on certain small stocks or potential losses inflicted on certain hedge funds, but more from a potential slowing of the overall retail flow that had been an important driver of the risk market rally since November,” JPMorgan’s Nikolaos Panigirtzoglou said. The figures (below) are proxies for increased retail investor participation.
“The sharp rise in volatility and margin requirements for stocks popular with retail investors could inflict losses on the same retail investors that have been profiting from the positive momentum of the previous weeks,” Panigirtzoglou went on to remark, in what came across, to me anyway, as a kind of pseudo-lament. “These losses could in turn result in a slowing in the overall retail flow going forward, weakening one important support for the equity market.”
You’re drunk, Reddit. Go home.