Who won the GameStop bet?
An investment is not a bet: the comment on the GameStop case by Giovanni Daprà, co-founder and CEO of Moneyfarm
In recent weeks, the GameStop case has been at the center of the debate among investors and financial professionals, due to the battle between small bettors (retail) and some Hedge Funds, triggered by the initiative of a group of traders who exchange information on Reddit / WallstreetBets .
GameStop was one of the shortest companies on Wall Street and a group of astute WallStreetBetters put together a short squeeze maneuver by advertising it on the forum and thus moving a significant amount of capital to buy the title en masse, launching the valuations to the stars. The growth of the share price, combined with a class struggle rhetoric (X vs Boomers), has triggered an increasing number of followers, heartened by a "value" storytelling based on the possibility of an unlikely digital relaunch of this company that sells video games and other products through a network of physical stores. A real bubble was created that caused the company's value to jump from $ 300M to $ 27 billion, then back to $ 6 billion in a couple of weeks.
Hedge funds and more have lost tens of billions of dollars. The complexity in the management of these volumes has also forced Robinhood, a broker who has popularized trading without commissions, to raise $ 3.2 billion in capital to avoid the risk of "jumping", urgently blocking the trading of the stock with several thousand customers. still engaged in the trade.
Beyond the fact that some hedge funds have actually lost a few billion, it doesn't seem appropriate to me to celebrate the victory of small investors against hedge funds. On the contrary, the story highlights a dangerous attitude and a distorted perception of reality, which puts at risk the savings of many people who have taken up online trading in recent years, as always happens in prolonged periods of bull market. Among the many facets of the story it is worth highlighting three in particular.
INVEST, MIRROR, BET
Investing, speculating and betting are three different things. Except for the funds and some of the professional traders, who were fully aware of what they were doing, the vast majority of people on the forum were involved with the same storytelling manipulation dynamics that we see in other sectors (such as politics ) and have often made absolutely wrong choices, betting a large part of their savings on leverage without understanding the risk. Investing a significant portion of your savings in this type of speculative stock is the proven recipe for getting moneyless for retirement.
A ZERO SUM GAME
The market is a zero-sum game: for every euro earned by someone, one euro comes out of someone else's pockets. For once on the side of the losers there are also funds and not just retail investors, but is it possible to accept such a simplistic narrative? How many Redditors “jumped on the winner's bandwagon” late when the stock was worth $ 350 before falling back to $ 90? Between 350 billion dollars and 90 billion dollars, about 20 billion dollars worth of value have been burned, perhaps some of them were unrealized gains, but also those small investors who are celebrated today as the winners of this each other. There are very few people who have the skills to compete with large investors with far fewer resources at their disposal and even fewer are those who manage to generate profit in a systematic way. This is a lesson that every bear market teaches and it will not be speculation on Tesla's stock that will change the dynamics of a 400 trillion dollar industry: thinking that this time or that in this particular case there is something different is a illusion caused by our cognitive biases. Research shows that only 1% of daily traders are able to generate profit in the medium term. Of all the daily traders, about 40% quit after a month and after three years only 13% continue their business. This data is well known to companies operating in the sector, which build their business model around a few customers who invest regularly and many who are attracted to trading for short periods and then quit once the first significant losses are recorded. . There is sufficient historical data and evidence to draw lessons from the past.
THE ROLE OF SOCIAL MEDIA
The third point concerns the role of social media. The past year has seen an increase in demand for online "financial information" which has been accompanied by a proliferation of alleged social media experts whose best advice is "buy low, sell high". The result has been a popularization of trading as one of the solutions to the problems of the Millennials, unfortunately very badly treated economically.
The fact that intelligent and informed people are wondering if it makes sense to trade crypto to pay the mortgage payments, makes us reflect on the fact that financial education is not enough to help people not make big mistakes, but that empowerment is needed. and a regulation of platforms to reduce their undoubted power of persuasion. Furthermore, financial institutions (and fintech companies) must act more responsibly towards the savings of their users (not customers because, as the case of Robinhood highlights, the business of these platforms is not remunerated by those who invest, creating a potential short circuit of interest).
In essence, speculative investment cannot be the solution to pay the mortgage payments or even to maintain and grow the real value of one's assets over time, but perhaps only a way to have fun when the circumstances are favorable. The advice is certainly to never bet a substantial part of your savings and pay attention to the interests that underlie the information to which you are exposed daily online.
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This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/gamestop-scommessa-vincitori/ on Sun, 14 Feb 2021 07:00:53 +0000.