Excitement and volatility hit Wall Street last week as at least one hedge fund imploded after its short position was the focus of a viral attempt to manipulate the value of its position.
Someone noticed that a hedge fund had taken a large short position in GameStop.
(A short position is when you borrow a share of an equity from a broker, sell it, and hope it goes down in price because you do have to eventually buy it back and return it to the broker to close your position. If the price falls, you win. If the price increases, you lose. Does this sound like gambling? Well…if you control your position size, you control your loss. If you get greedy, all bets are off.)
Almost immediately, the attempt to manipulate the value and outcome of the short position gained traction and millions of shares of GameStop were purchased. Consequently, the share price of GameStop increased exponentially, while anyone who held a short position saw their loss from their position increase exponentially.
It was as if they could actually see their fund balance evaporate into thin air…in one instance, a hedge fund required an immediate infusion of $3 billion of cash liquidity to avoid insolvency.
This type of thing had never happened before and the hedge funds that were affected are crying foul – and insisting on legal (SEC) remedies.
How interesting – the groups that seem to have accumulated all the advantages over regular investors now have a problem with fallout from something beyond their control.
“Regular stock investors” were thought to account for only 10% of transactions in 2017. Further, at least 50% of the trades on Wall Street are thought to be of high-frequency trading – powerful computers running complex algorithms that might be in and out of trades within milliseconds – hoping to capture as little as a fraction of a cent from as many transactions as possible.
The tired mantra of Wall Street (“buy up, we’re expecting a good year”) and the actual habits of its largest customers couldn’t be more diametrically opposed.
These activities don’t even constitute investing, in my opinion. My previous blog post (here) defines an investment according to Dr. Lee.
Let’s find a better word – speculating?
No, that’s when I buy a piece of raw land that has intrinsic value, when I can afford the purchase and when I plan to either develop or sell the land later, hoping to make a profit.
Manipulate? Better. Exploit, control, influence, steer, maneuver? We’re getting warmer.
Real estate investing allows you to make money in 5 different ways (see previous blog posts). You won’t make money in a millisecond, and sometimes you don’t even make money in several months.
And you won’t succeed in real estate if you organize activities that cause others to fail.
Real estate is a real asset, not a piece of paper that is a derivative (or derivative of a derivative) of a real asset. It has real value, because people and most businesses need a place to live.
And there is a reason that more millionaires have been made through real estate investing than any other way.
That was true 200 years ago, and still is.
As you think about that, always consider how and where you place your hard-earned money and whether you are shouldering more risk than what may be apparent.
Until next time,
Dr. Lee Newton
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References
- https://markets.businessinsider.com/news/stocks/hedge-funds-torched-wall-street-bets-gamestop-short-squeeze-reddit-2021-1-1030016596
- https://www.independent.co.uk/news/business/gamestop-share-price-reddit-hedge-fund-melvin-capital-b1793543.html
- https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html
- https://www.investopedia.com/terms/h/hedgefund.asp
- https://www.cnbc.com/2020/12/21/wall-street-makes-a-big-sp-500-call-for-2021-history-says-ignore-it.html
- https://www.nytimes.com/2020/12/18/business/stock-market-forecasts-wall-street.html
- https://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street/
- https://www.cnbc.com/2017/06/13/death-of-the-human-investor-just-10-percent-of-trading-is-regular-stock-picking-jpmorgan-estimates.html
- https://en.wikipedia.org/wiki/High-frequency_trading
- https://www.wsj.com/articles/ultrafast-trading-costs-stock-investors-nearly-5-billion-a-year-study-says-11580126036
- https://www.investopedia.com/terms/h/high-frequency-trading.asp
- https://markets.businessinsider.com/news/stocks/retail-investors-quarter-of-stock-market-coronavirus-volatility-trading-citadel-2020-7-1029382035
