One of my tight-held mantras is that investing on the stock market should be methodical and boring. If excitement is what one craves, they should perhaps go visit a casino. That is why I am ashamed to say I broke my rule book last week gamifying the stock market and watching every tick $GME made.
So what happened?
The reddit group wall street bets and Gamestop. That’s what.
A little background first. A few years ago, before I came to my senses and only started investing in high quality stocks, I bought shares in Gamestop; the American video game, consumer electronics, and gaming merchandise retailer. Buying the shares at $19 was basically a punt hoping the stock was cheap. Little did I know then that what is cheap can always get cheaper. Especially with out of date business models.
Over the years, my Gamestop shares (NYSE: GME) were a constant reminder to never invest in something simply because it is cheap. It haunted me every time I looked at that portfolio and saw the stock in red. But it provided me with a valuable lesson, never invest in anything I did not fully understand. Never invest in hope!
My Gamestop trauma all but changed over the past month when Gamestop became a meme stock on the popular subreddit group /r/wallstreetbets. The same traders that pushed Tesla to record highs were now setting sights on Gamestop.
There were a few reasons these creditors thought Gamestop was the perfect stock to go all in. Firstly, Michael Bury of big short fame and Ryan Cohen, founder of successful online pet food store Chewy took sizeable positions in the firm. Ryan Cohen, being an activist investor, promised to help it rival Amazon beefing up its e-commerce business.
But more importantly, there was a short squeeze thesis at play. Gamestop has 70million+ shares sold short, more than its entire share count!
For those unfamiliar, shorting is basically borrowing shares from a broker, then selling them back into the market with the intention of buying it back at a lower price and profiting the difference.
A short squeeze happens when a rising stock price forces short-sellers out of their position. When panic strikes and those sellers buy back stock, they send shares even higher. Just look at the VW short squeeze a decade ago for an example of this.
The thesis is that if owners in GameStop do not sell there shares, they will be no float available and this will cause the short sellers such as Citron Research and Melvin Capital being forced to buy at higher and higher prices in order to cover their positions.
And so far the redditors of WallStreetBets have been right. Shares in Gamestop have rocketed from under $3 in April last year to $100 today! That’s a 3,400% increase!
Just over the past week it has increased by 100%. On Friday alone it increased 50%+. Today, it opened up another 50%. What is going on is absolutely crazy. And I must admit, I am enjoying the thrill.
The 52 shares I bought for rougly $1,000 a few years ag are worth close to $5,000 now. And the scary part is this value seems to be increasing by the minute!
As a risk adverse investor, and one who is happy to count his blessings, I will sell Gamestop shares worth $1,500 in order to not only recover my initial cost but also book a 50% profit. I will let the other $3,500 ride and see where this short squeeze takes us.
If I were on the side-line, I would not jump in. But since I have a legacy position, I will wait for this to play out. I am up 400% on my position but feel this could go higher.
This is a rather strange episode for me as I always say to stay away from bulletin boards. The investors in GTAT had to learn this the hard way. But I can definitely see the allure of this. Why bother with 12% per annum return when you can get returns of over 100%?
The Yolo Index (which tracks the short term performance of r/wallstreetbets r/investing, r/stocks, r/options, subreddits) is up 916% since January 1st 2020. While this index has historically done poorly, 2020 has been a truly incredible year.
Maybe this is the reason high quality lower growth shares such as Unilever are priced attractively at the moment. No one is looking at these shares as what’s a measly 12% per annum returns as compared to the high growth tech stocks. But that is exactly where I am fishing at the moment. I am willing to bet slow growers such as Unilever will outperforms many of these so called growths stocks over time.
I will leave you with the following snippet from the excellent John Hempton:
“Rampant speculation in growth-oriented and garbage stocks has had many drivers – but the one that matters most to us is the massive increase in the number, value and confidence of retail investors, particularly online retail investors, often young and with no investing experience or historical perspective.
It is not uncommon to have 20-year-old “investors” ask you about call options. The widespread retail interest in short-dated, highly levered positions is reflected in massive call option volume in the most speculative retail stocks. Tesla has literally billions of dollars in one-week call options every week, even in the low-volume Christmas week.
This sort of levered speculation in controversial names sharply contrasts with dull markets in the sort of long-haul, established companies in which we like to invest.”