Whitney Tilson’s email to investors discussing his short squeeze bubble basket fell 18% yesterday; you don’t have to be a hero; Buffett’s advice; his friend’s son lost 50% in an hour; other thoughts on GameStop and the markets.
Short Squeeze Bubble Basket Falls 18%
1) It's too early to know whether I nailed the top of yet another silly, obvious bubble with my big call on Wednesday.
With options expiring today plus Robinhood and other brokers lifting trading restrictions, some of these turds are flying in morning trading – but I think they're going to crash as the day progresses and, collectively, never again see the highs they reached during this crazy week.
In any case, my 25-stock "Short Squeeze Bubble Basket" got off to a good start on its first day, tumbling 18% yesterday while the market was up strongly (even with this morning's bounce, they're still down 13%). Four of the stocks I identified crashed more than 40% and 13 more were down by double digits, as you can see in my spreadsheet:
You Don't Have To Be A Hero, Buffett's Advice
2) I already covered many of the lessons to be learned in my e-mails earlier this week, but here's another: You don't have to be a hero.
Just because everyone is talking about and appears to be making money in a particular sector or stock doesn't mean you need to wade in and make a bet, long or short. In fact, in almost all cases, you're much better off avoiding battlegrounds.
That's why, even though I've identified 25 stocks I think are highly likely, as a group, to underperform, I do not recommend shorting or buying puts on them. It's just not worth the risk and aggravation...
As Berkshire Hathaway (BRK-B) CEO Warren Buffett once said:
Don't get caught up with what other people are doing. Being a contrarian isn't the key but being a crowd follower isn't either. You need to detach yourself emotionally.
Later, he added:
Keep things simple and don't swing for the fences. When promised quick profits, respond with a quick "no."
The Democratization Of Investing
3) Some folks are celebrating what's happening, saying it's the rise of the "little guys" and the "democratization of investing."
I'm not buying it...
And, as for the "little guys" theory, Reuters just reported this morning that YouTube streamer Roaring Kitty and Reddit user DeepF***ingValue – who both played a big role in attracting a flood of retail cash into GameStop – is the same person: "a 34-year-old financial advisor from Massachusetts [who] until recently worked for insurance giant MassMutual." Not a little guy, but a professional – pumping his book (very cleverly)!
Here's what's really happening: countless Americans have been sucked into risking their hard-earned savings – money they can't afford to lose – in an at-home, app-based casino, which is what certain areas of our markets have become.
Worse yet, many are speculating on margin or with options, which will only quicken and magnify their losses. And losses there will be – big ones, just as there were in the Internet and housing bubbles...
Buy Me More AMC On Margin
4) Speaking of which, following up on yesterday's e-mail, I checked in with my friend whose 11-year-old son cried, pleaded, and yelled at him to "BUY ME MORE AMC ON MARGIN!"
Sure enough, he bought his son the stock at $15 – and was "down 50% in an hour!"
I replied: "It's the best thing that could ever happen to him – seriously!"
5) The only good thing that can be said about this bubble is that it's still tiny – the combined market caps of the 25 stocks in my bubble basket is only $165 billion. I know some would argue that the bubble is far larger – for example, Tesla (TSLA) alone has a market cap of roughly $800 billion – but let's leave that debate for another day...
6) So... does this short-squeeze bubble mean that the market is about to crash?
I think not. It reminds me of when theGlobe.com went public on November 13, 1998 and soared 606%, the largest first-day gain of any initial public offering ("IPO") in history up to that date.
There are two important things to note: while the stock of theGlobe.com crashed in 1999 (and the company ceased operations in 2008), tech/Internet stocks melted up for another 16 months!
7) Here's veteran short seller David Rocker's view, courtesy of Doug Kass:
The Gospel According to David Rocker (Part Deux)
* Learn from history
* Monetary and fiscal excesses are the harbingers of dangerous market conditions
* Greed breaks markets – this time is not likely to be different than the past
Two weeks ago I published a guest column by my pal David Rocker.
This morning David is making another contribution to my Diary:
On January 29, 2020, GameStop sold at $4 per share and traded less than 2 million shares a day. As recently as January 4, 2021, the stock was $17 and traded 10 million shares. On January 22, nearly 200 million shares traded and a week later the stock reached nearly $500 per share.
These extraordinary events have been described in the media as the small investor getting even with the big hedge funds on Wall Street. Nothing can be further from the truth.
GameStop hasn't changed. It is still losing money as few people need to buy physical games and can download them online. The bleak prospects for that business model led to a large number of short sales in the company's stock.
Short sales aren't new. Indeed a hedge fund is an entity which is designed to buy companies which it believes are undervalued and HEDGE its positions by selling short companies which it believes are overvalued.
What is new is the presence of market conditions which have resulted from a Federal Reserve policy of manipulating rates to near zero in traditional savings, pushing people into the stock market as an alternative. This coupled with substantial stimulus money sent to people who have time on their hands and social media at their disposal has created a toxic mix which enables them to form electronic gangs online which act collectively (with a liberal use of options) to create short squeezes in troubled companies like GameStop.
This has nothing to do with investing. It is motivated by greed and these buyers could care less about owning GME as a long term investment. They simply want to force the stock up so they can sell out to a greater fool at a higher price. Thus the explosion in trading volume. Short sellers are forced to cover their positions as prices rise to meet margin requirements thereby creating a self fulfilling cycle. This situation is more akin to a Ponzi scheme where the early buyers make out at the expense of those who follow them and the regulators are asleep.
By the way, the tactic of buying huge amounts of out of the money options is not limited to heavily shorted stocks. The same technique has been used by Tesla buyers and has been responsible for a great part of its price rise. In this context, Elon Musk's support of this attacking heavily shorted stocks is fully understandable.
The Tulip Mania
8) I have mixed feelings about what should be done to protect investors from themselves. Many folks argue that as long as there's no fraud, people should be free to do whatever they want in the markets.
But I think this viewpoint ignores the lessons of history, going back to the Tulip mania of 1637 (and probably long before). Human beings, collectively, are hard-wired to be irrational when it comes to money and investing, with the result that an alarming number of people – especially if it's easy and attractive – will speculate like mad fools and end up penniless. How is this a good outcome for anyone?
The trickier question is: What should be done about it?
Some people have a knee-jerk reaction to government taking a role – but I, for one, am in favor of things like helmet and seatbelt laws, passing a road test before getting a driver's license, and spending extra money to build railings on dangerous curves. Good governments should try to protect their citizens – even if it's just from themselves!
9) But one thing the government (and private businesses) shouldn't do is create an uneven playing field.
I'm not sure Sen. Ted Cruz and Rep. Alexandria Ocasio-Cortez have ever agreed on anything until yesterday, when both (correctly) expressed outrage over trading app Robinhood's decision to block its retail investors from buying GME shares, while professional investors faced no such restrictions. Here's Cruz's tweet:
10) I follow Hedge_FundGirl on Twitter, and she agrees:
The GameStop Short Squeeze Shows an Ugly Side of the Investing World
11) I hope we can all agree that harassing and threatening other investors is totally unacceptable and should be investigated and prosecuted: The GameStop Short Squeeze Shows an Ugly Side of the Investing World. Excerpt:
Andrew Left is no stranger to conflict when it comes to investing. He makes a living betting that companies will stumble, and he calls out executives by name.
Companies and their supporters fight back, but the criticism he normally gets is nothing compared with the venom spewed in recent days by stock traders who have come together online to drive up shares of an unlikely momentum stock, mall retailer GameStop.
"It makes you feel vulnerable," Mr. Left, 50, founder of Citron Research, said in an interview. "We live in a world where we're all exposed and people don't understand boundaries."
Things have gotten so bad that my friend Andrew just announced this morning that "After 20 years of publishing Citron will no longer publish 'short reports.' We will focus on giving long side multibagger opportunities for individual investors." You can watch his 2:40 video here. This is a real loss for the markets, as Left has an incredible track record of exposing frauds and hype.
Will the Real Robin Hood Please Stand Up?
12) Just when I thought things couldn't get any crazier...
Angry Robinhood customers are venting at the Robin Hood charity in New York City, which does wonderful work to help the poor: Will the Real Robin Hood Please Stand Up? Excerpt:
Robinhood's customers were enraged on Thursday when it halted new buy orders on stocks like GameStop, furthering the belief that fat cats were once again rigging the market against the little guy. Ironically, though, a misplaced target of their ire was Robin Hood, a New York charity that most definitely helps the poor. It was forced to respond over and over again to angry traders on Twitter.
Reddit's GameStop Stock Boost & MLB's Hall of Fame Drought
13) The late-night comics are having fun with GameStop. Here's Trevor Noah on The Daily Show: Reddit's GameStop Stock Boost & MLB's Hall of Fame Drought. Best line:
I'm not worried about hedge fund guys. They can cry about this on their helicopter that takes them to their boat that takes them to their yacht.
In fact, if anything, it's actually funny to see how Wall Street doesn't like it when somebody Wall Streets them. Because when they make moves that cost people their homes, people on Wall Street are like, "Hey man, those are the rules."
But when it happens to them, they're like [whiny voice]: "Those aren't the rules. Is someone going to regulate this?"
14) The GameStop short squeeze will go down in financial history for many reasons, but one unusual feature of it is the leading role that teenagers appear to have played in it.
One of my friends is producing a documentary about the teens that made this happen. If you know any teenagers who are interested in the stock market, they can follow the movie on Twitter, Instagram, and TikTok at @gamestopfilm. And if you know a teen that played a part in this history-making event, have him/her send a direct message on Twitter to the producer.