- Christian Armbruester
The Big Short
How Reddit and Robinhood became like a swarm of locusts.
The whole idea of speculating on prices falling seems wrong from the outset. Markets tend to go up and they are what we put our trust in for when we retire and need a nest egg. For most of us, buying equities makes up more than 50% of our asset allocation. We all love the stock market, so why on earth would you ever go the other way?
Far from the image they have in the media, short sellers are not evil, blood sucking creatures from the depth of hell, intent on doing harm to the weak and vulnerable. There are good and bad companies, and both can be trading at the wrong price, so why not play the game from both sides? To be clear, there is nothing wrong with shorting stocks and research strongly suggests that the markets are much more efficient if investors can both buy and sell securities they like or do not like.
Of course, the risk of doing one or the other is very different. When we buy a stock, the most we can lose is the money we put to work. When we short a stock, we can incur unlimited losses, which is an entirely different proposition all together. As such, the concept of shorting stocks has long been the preserve of hedge funds who hold sway over the way things move in the markets and are allegedly “smart” enough not to do anything stupid.
Speaking of which, there is no doubt Gamestop (NYSE: GME) is not worth a lot. Why do we know that? Because it is a retailer, we are in a lockdown and in any event, kids tend to buy their games online nowadays. If it all sounds a bit like Blockbuster, then you have the right idea, this company is going to die, and we all know it. Little wonder then that the blood on the street attracted the interest of speculators expecting the stock to go towards zero, where it belongs. Normally, that would be the end of the story, but we do live in very strange times. I can just imagine what happened when the stock first went up. The short sellers must have been very happy, able to get into the trade at an even better price and naturally sold more. Then, the stock went higher. Inexplicably, utterly nonsensical, but it happened anyway, and the losses piled up.
It is at that precise moment when legends are made, or folly lives in infamy. Clearly, the right thing to do is to close your position, take the loss, and live to fight another day, but of course, the rest is history. To truly appreciate what happened next, I suggest you imagine a swarm of locusts descending on a field of crop and utterly devouring all there is until there is absolutely nothing left. More than $20 billion was lost by some of the most sophisticated and renowned money managers on Wall Street as a bunch of Reddit users trading on Robinhood drove Gamestop up more than 1000% in a matter of days. What goes around comes around, and thankfully for the rest us, there is finally something else to talk about other than Tesla.