Why Did Reddit Trigger a GameStop Stock Surge?

[Astronuc]

GameStop shares soar 30% and take other meme stocks on a ride, after Reddit poster touts shares at a ‘58.2%’ discount​

https://finance.yahoo.com/m/48583f41-b547-3c50-abda-daaa64293325/gamestop-shares-soar-30-and.html

Meanwhile, 55 minutes before markets close -

GME GameStop Corp.

$136.43

-$4.57

-3.24%

 

[bhobba]

Will people never learn? Simply dollar cost average into a good ETF for buy and hold investing. It is very tax-efficient even if you do not do it out of some tax-advantaged vehicle since you never sell. I like NTSX because it let's you get a traditional 60/40 portfolio at 2/3 the cost:


If you get the urge to trade, do it with options. If you want to buy a share, you can do it with LEAPS at half or less than the price of purchasing the shares. You can even sell covered calls over them - your broker recognises LEAPS means you effectively own the shares. Sell short - buy an in the money put instead. Plus many, many other strategies are available. As I said before, once you know about options - forget actual trading shares. Only a very few can make decent money at it anyway. A study of 40,000 day-traders showed only a few made money - and most of the time, it was not much. Only a handful made a good living. Options traders are another matter - there are very low-risk strategies, e.g. covered calls at ten delta that even retirees use. If it is worthwhile is another matter, as has been discussed in previous posts. For the more adventurous, there are strategies like the Rhino:
https://www.smbtraining.com/blog/rhino

I don't trade it. Even though it is reasonably hands off it still needs adjustments. I prefer trades with no, or virtually no, adjustments.

The only explanation I have is hope spings eternal - even amongst professionals who should know better. Full disclosure - I am an Options Tribe member so I am likely biased.

Thanks
Bill

 

[StevieTNZ]

Will people never learn? Simply dollar cost average into a good ETF for buy and hold investing. It is very tax-efficient even if you do not do it out of some tax-advantaged vehicle since you never sell. I like NTSX because it let's you get a traditional 60/40 portfolio at 2/3 the cost:

Have you made some money from what you have currently traded? I guess it is nice to have that extra dosh in retirement.

 

[bhobba]

Have you made some money from what you have currently traded? I guess it is nice to have that extra dosh in retirement.

If you watch the start of the options tribe video, it is emphasized, as is always done in every meeting, you first paper trade any strategy for at least four months, preferably longer. Then you trade in small lots. And slowly increase as you get more experience and it is profitable. As for the ETF Dollar Cost Averaging - yes, I have made money on that - not much, but it is profitable. It is a long-term tax-efficient strategy, so I suggest it as the foundation of your options trading. NTFS is perfect because you get the traditional 60/40 portfolio at 2/3 the price. If purchased in an options trading account, you only lose 1/2 the cost of the shares in reducing your option buying power. Say you have $15,000, you would invest $10,000 in NTFS and effectively have your $15k in a 60/40 portfolio but $10k to use as margin for options trading. You do not have to use it for options trading; you can invest in something like Berkshire Hathaway class B shares which have performed very well as you would expect from Warren Buffett. Dollar-cost average into it, and slowly start trading options in small amounts as you feel more confident. With options slow and steady wins the race.

Under no circumstances trade the Rhino or any other advanced strategy until you have had significant experience. You likely would not be able to do it anyway because you need to know concepts like rolling down and calendar spread.

I only mention this in regard to this thread because professional proprietary trading firms that know what they are doing don't actually short shares (or only rarely do it) and do not run into issues like the short squeeze. It still amazes me it happened. They use options - at least SMB does - even their day traders.

Thanks
Bill

 

[kyphysics]

In all seriousness, what is the future of GameStop's retail business?

Retail is considered the most brutal business on Earth by some:

i.) fixed costs + uncertain revenue & net income (might have to go into debt to survive rough patches)
ii.) low barrier to entry (thus lots of competition)
iii.) Amazon hunting you down
iv.) fluctuating consumer tastes (means your products or services can go out-of-style and you have to constantly keep up with the times)
v.) lots of employee turnover (the second Joe Smith gets a job paying higher than $7.25-min. wage, he's gone)

Yes, GameStop has a niche business with a brand, but it's basic value premise is still lacking as consumers can just download games and never enter a brick and mortar store. Best Buy offers gaming consoles and some games (probably not as much as GameStop), but with a diversified retail business that can draw in customers for other purposes and have them simultaneously "convenience shop" for their gaming needs/wants. Same with other retail stores. ...GameStop is just literally a single concept store with its core product easily downloadable.

Additionally, they're at the mercy of big games makers releasing to them (using them as a middle-man) in a way that may be like Foot Locker being at the mercy of Nike. Foot Locker's stock crashed recently when Nike allegedly broke news it may have its own distribution centers/stores. Foot Locker could always release its own signature brands, but...GOOD LUCK with that. ...GameStop feels like it could also always be at the mercy of big games makers in the same way. It's not like GameStop has a game designing department and can release their own stuff. They have no pricing power either. They are just single-concept niche store middle-men in an increasingly digitally dominant sector within an equally bad and brutal retail space.

RIP
~500,000M debt
negative net income (i.e., they are losing money) last few quarters
market cap of $11B *mmmm hmmm...makes total sense*

 

[Vanadium 50]

It is very tax-efficient

It's probably worth pointing out that you're in Australia and other countries may be more or less so.

If you get the urge to trade, do it with options. If you want to buy a share, you can do it with LEAPS at half or less than the price of purchasing the shares.

What you are saying here is that LEAPS provide a lot of leverage. They do. But leverage works in both directions: gains and losses. Leverage is not for everyone.

One thing that I find scary about this thread is that it's clear many people are investing without goals. As they say, "if you don't know where you are going, any road will take you there."

 

[bhobba]

It's probably worth pointing out that you're in Australia and other countries may be more or less so.

It is worth pointing out. I do not know the details of complex Australian tax law, except in general terms. The US, obviously, even more so. That knowledge is enough for me to leave it to my accountant. Financial advisors are worse than a waste of money IMHO; they hurt your returns. The Royal Commission held into them here in Australia showed what they did was close to criminal. Stay clear is my advice. Accountants are another matter. Tax codes are generally so complex you need professional advice. Having a good relationship with one is very important. I see mine at least once a year. Since starting trading, it will be even more critical. For example, it is generally thought in Australia, unless you are a high wealth individual, you do not set up a Self Managed Super Fund (SMSF). My accountant showed me the very cheap ways to set one up (it costs about $199), and providing your investing is simple; his fees are not much. You calculate the fees you pay for a retail superannuation fund and do it when it is more than the cost of setting an SMSF up. The amount was MUCH smaller than I thought (about $50,000 if I remember correctly - generally, people think you need millions). I am very positive about good accountants' advice.

What you are saying here is that LEAPS provide a lot of leverage. They do. But leverage works in both directions: gains and losses. Leverage is not for everyone.

Yes. For most people, dollar-cost averaging into a low-cost growth ETF (or ETFs) is not only all that needs to be done; it will beat the vast majority of those that actively trade. You must have a reason to actively invest and realize the odds of beating passive long term investing is not good. You do it because you think you know enough to beat the odds. I think I can - but we will see if it is all hubris. Besides, I am only doing it with at most 1/3 of what I invest.

One thing that I find scary about this thread is that it's clear many people are investing without goals. As they say, "if you don't know where you are going, any road will take you there."

Hmmm. Many do not. I know my goal in taking investing/trading up again after a hiatus. I am financially independent, but the recent experience I had with spending $22k on fixing termite damage made me realize you need to be more than economically independent. You need to be able to weather 'storms' that will inevitably occur without it causing friction in your 'family'. I, and my sister, have more than enough money to cope with this, but it was not a harmonious time. I want to be in a position where when similar things happen, money is not an issue that will cause problems. I also want to leave money to secure my niece's future when I die. Without going into details, they are doing it tough because of health issues.

Thanks
Bill

 

[kyphysics]

Is this funny...sad...wise...or what?

GameStop's meme stock cousin, AMC, is investing in the gold mining space.

 

[InkTide]

i.) fixed costs + uncertain revenue & net income (might have to go into debt to survive rough patches)

This describes all businesses.

ii.) low barrier to entry (thus lots of competition)

This is just untrue, in large part because:

iii.) Amazon hunting you down

You can replace "Amazon" with "large competitor"; anti-monopoly laws are sitting unused and forgotten about. As such, one of the most common avenues of expansion is monopolistic accumulation of anything even suggesting it might become a competitor.

iv.) fluctuating consumer tastes (means your products or services can go out-of-style and you have to constantly keep up with the times)

This applies to all businesses.

v.) lots of employee turnover (the second Joe Smith gets a job paying higher than $7.25-min. wage, he's gone)

This is dependent on internal structure, culture, what the actual wage is, etc. One of the worst examples of high turnover/pathetic retention in the retail space is literally:

Best Buy

... in large part because they have been attempting to turn all their employees into salesmen for Best Buy's garbage "repair subscription service".

GameStop is just literally a single concept store with its core product easily downloadable.

It's clear to me that you don't know what GameStop's business model actually is - GameStop is, in essence, a direct competitor to BestBuy in the consumer electronics space. You seem to be under the impression that it's somehow an exclusively game disk/physical game merchandise vendor, when in reality it's much more like RadioShack or a physical version of Newegg. The death of RadioShack and the continually unraveling reputation of Newegg are direct boons to the core retail business of GameStop.

It's not like GameStop has a game designing department and can release their own stuff.

They are expanding significantly into the digital space, have been for the last year at least.

~500,000M debt

No, GameStop is not $500 billion in debt. I'm going to assume you meant $50 million in long term debt (it's actually $41 million as of their last quarterly report).

This conveniently doesn't mention that they paid off over a billion in long term debt over the last 2 years, and own enough of their existing logistical network to be opening a new hub for it. Part of the benefit of being a chain retailer the size of GameStop is access to a large network of dedicated transportation for stocking each branch of your business - the barrier to entry for a single store is middling (mostly to do with the current real estate market), the barrier to entry for creation of a viable chain of businesses is enormous. Individual retailers are so disadvantaged that they usually aren't even considered business competitors to chain businesses, just local competitors of individual branches.

negative net income (i.e., they are losing money) last few quarters

Paying off debt, expansion of the business, and restructuring internally will do that, yeah. They've been focused on increasing sales and beat expectations last quarter (net sales was $2.2 billion - for context, the net income for the quarter was -$148 million) because they are currently operating in the context of their digital ventures being constructed but not contributing to net income (the effect likely won't be known until the Q3 2022 report, as it's scheduled to launch in Q2 2022). They managed this in spite of the wobbly status of overall economic trends (the real estate market is widely thought to be in a bubble and war in Ukraine is threatening a significant portion of internationally traded food - stuff seems rather precariously trying to avoid a downturn, but nobody really knows if it ultimately will).

GameStop's meme stock cousin, AMC, is investing in the gold mining space.

AMC has completely different market circumstances, significantly more long term debt (to the tune of about $5.4 billion), and a business model that is threatened by both physical retail (DVDs) and digital sales (downloads/streaming). Investing in raw materials mining is actually a pretty good way to hedge operating expenses; the common parlance is "diversification", and mining investment is a bit like agricultural investment - fluctuating supply but reliable demand. In that sense, GameStop's entrance into the digital space with a marketplace for NFTs and cryptocurrencies is quite similar as a diversification strategy - whether either will work remains to be seen, but the post-earnings performance of GameStop's stock is, assuming it actually reflects market sentiment, an endorsement.

If it doesn't reflect market sentiment, then the price manipulation narrative is at least to some extent correct, and the current price action may be approaching a squeeze. The increasing difficulty of borrowing GME shares, high volume currently, and consistently high utilization are suggestive of this.

 

[kyphysics]

Yes and no. It's complicated.

Not all businesses have high fixed costs, nor high variable income - at least, not in the same way as simple concept retail. Key word: high

Subscription/membership businesses like Costco (general/wholesale store) and Planet Fitness (gym) or long-term contract businesses, such as property managers and utility-like service providers (Verizon residential phone/internet, for example) have very stable income. Yes, one can argue they might lose a giant portion of that over time, but it's not a month-to-month sort of thing or even a three or four month type of thing.

Likewise, not every business has equally high fixed costs. When I worked at AMC Theaters in high school, my supervisor said there were lots of dumb aspects of the business. Whether a movie showing had literally just 1 customer or a fully packed 280 person seated theater, they still had to pay a licensing fee to the studio to show the film, turn on the projector, turn on the lights, and warm/cool the theater room. It's a huge space to have to "pay for" during slow periods or even zero person showings. On a super slow day, you might have lots of 0-person, 1-person, or 2-person audiences for showings. There is still the same fixed cost to run that movie. You can't tell Disney you're sorry that no one showed up and that you don't want to pay them a licensing fee or tell the lone customer to leave and come back for a more packed showing so you can shut the theater room down.

Some online math tutor, on the other hand, probably has much lower overhead and can even just Zoom chat with you. No major monthly recurring big fixed costs. I guess it's all relative. Yes, everyone has SOME fixed costs.

 

[kyphysics]

So...

I popped into my local GameStop. There were two customers. Both were grown ups in their 30's...40's. Men.

One was asking for some item for his kid...the other was a grown adult gaming fan.

Gamestop has LOTS of toys/collectibles. That part is probably unique.

Otherwise the games, consoles, and accessories can probably be bought elsewhere (brick/mortar - like Best Buy) or online. Nothing special about them that I could see.

I reiterate. They are like Foot Locker in that sense.

 

[kyphysics]

This describes all businesses.

This is just untrue, in large part because:

You can replace "Amazon" with "large competitor"; anti-monopoly laws are sitting unused and forgotten about. As such, one of the most common avenues of expansion is monopolistic accumulation of anything even suggesting it might become a competitor.

This applies to all businesses.

It's late and I'm bored/procrastinating...so I'll entertain these thoughts more.

I don't think retail has a very high barrier to entry. Mostly, you're just selling stuff you buy from wholesale as a localized convenience to people. I'd say a high barrier to entry business is something like becoming a medical doctor. On top of needing to have many years of advanced education and training, the AMA strategically limits the amount of people who are admitted to medical school every year to protect the medical market. They DON'T want an oversupply of doctors, as that would endanger the livelihood of current doctors. Of course, it's partially to uphold academic/professional standards as well. This contrasts with the ABA, which has let way more people become lawyers than are needed and with pretty crappy credentials/pedigrees. Some law schools let you in with C-average undergrad grades and/or a crappy LSAT. For a long time, many low-tier law schools have been degree mills for profit. Law, then, is sort of a relatively law barrier to entry field. I think retail is mostly the same on a relative basis.

As for Amazon and monopolies in retail, I don't know. . .Brick and mortar stores not named Walmart (or a hugely successful big box store) don't seem to have that much monopolistic power. They can achieve economies of scale that lower their costs of operation and thwart competition, but this is not at all guaranteed, as you also have diseconomies of scale and "Cournot's dilemma."

Overall, I think selling a products in a brick and mortar retail environment is just much more unstable than, say, being an accountant, teacher, medical doctor, funeral home operator, etc. GameStop is possibly in one of the worst retail niches for reasons mentioned in earlier posts.

Feel free to disagree.

 

[Astronuc]

Five Imploding $40 Billion Companies Are Shadows Of What They Were​

https://www.investors.com/etfs-and-...lion-companies-implode-to-a-fraction-of-that/

The largest loss in market value from the all-time high is Amazon (AMZN). Shares of the online retailer shed a remarkable $766 billion in market value from its all-time high on July 13, 2021. That's a 43% drop in market value.

A colleague invested in AMZN recently, right before it dropped again.

Shares of Peloton topped out with a massive $45.4 billion market valuation on Nov. 18, 2021. The stock hit 176.65 on that day as it looked like people would ditch their gyms and workout at home. But now it's the Peloton investors who are sweating and perhaps hoping for a buyout. The company's market value shriveled nearly 90% from the highs to be worth just $4.6 billion now, or 13.83 a share.

GME closed on Friday at $98.39, which is up from previous close of $89.57. Earnings per share is -$5.25
AMC closed on Friday at $11.81, up from its previous close $11.20. On June 2, 2021, it hit a high of $62.55. The one year range is $9.70 - $72.62.

BitCoin was down from its high.

BTC-USD

$29,406.35

-$641.23

-$2.13%

But it's above its low of $26,284 on May 12. It's high on Nov 8, 2021 was $67,582.80.

 

[Vanadium 50]

But...but...stonks only go up!

 

[Astronuc]

Coinbase founder Brian Armstrong had a personal fortune of $13.7 billion as recently as November. That’s now just $2.2 billion.

Ouch!

 

[Vanadium 50]

You know, my lifestyle would be identical if I had a net worth of $2.2B or $13.7B.

 

[Office_Shredder]

You know, my lifestyle would be identical if I had a net worth of $2.2B or $13.7B.

It's easy to say that until you actually have that much money. Only one of them let's you drop a billion dollars on five giant mansions across the country without worrying about the cost.

 

[artis]

It's easy to say that until you actually have that much money. Only one of them let's you drop a billion dollars on five giant mansions across the country without worrying about the cost.

I'd argue that both of them should be used to drop a billion on 5 mansions if not for anything else then for the simple fact that it is wise to invest in stuff that doesn't swing back and forth in value like a leaf in the wind.

 

[Office_Shredder]

I'd argue that both of them should be used to drop a billion on 5 mansions if not for anything else then for the simple fact that it is wise to invest in stuff that doesn't swing back and forth in value like a leaf in the wind.

The market for 200 million dollar homes is not large, it seems pretty easy to lose half your investment if demand drops a bit.

 

[phinds]

The market for 200 million dollar homes is not large, it seems pretty easy to lose half your investment if demand drops a bit.

I recall reading a story fairly recently about a super mansion that was sold originally for $250+ million and put on the market for $250 million and ended up selling for "only" $150 million, so yeah.

 

[artis]

true, well then simply invest in something that doesn't drop in value or isn't volatile if one wishes to safe guard their assets without further risking with them

 

[Stephen Tashi]

it is wise to invest in stuff that doesn't swing back and forth in value like a leaf in the wind.

Have you seen the online game "Crack shack or Mansion" ?

 

[Vanadium 50]

Only one of them let's you drop a billion dollars on five giant mansions across the country without worrying about the cost.

I get your point, but doubt either can do that in practice. Most bezillionaires have tehir wealth in the stock of a company - where it is illiquid (but can serve as collateral for a loan). With the average dividend yield of 3.1% and the rule of thumb that your mortgage can be 2.5x your income, you get $78M in house per billion in assets.

There are people who can do that - about 15 of them.

And there are some very, very nice houses available for a mere $10-20M.

 

[Office_Shredder]

I get your point, but doubt either can do that in practice. Most bezillionaires have tehir wealth in the stock of a company - where it is illiquid (but can serve as collateral for a loan). With the average dividend yield of 3.1% and the rule of thumb that your mortgage can be 2.5x your income, you get $78M in house per billion in assets.

There are people who can do that - about 15 of them.

Billionaires borrow money against their stock to fund whatever they want. If you have 15 billion in assets, you can borrow a billion dollars, pay 30 million a year in interest, and buy everything you want right now.

You only need a divided friend of 0.2% on your assets to support the interest.

This is pretty standard stuff - wealthy people don't sell stock when they need money, they borrow money to avoid paying capital gains tax.

You can also get a pretty good interest rate - borrowing a billion dollars secured by 15 billion dollars of assets is a pretty safe bet. I don't know the specific details of how these loans work but I would guess for people who own growth assets, they let the loan grow in lieu of interest for the first couple years.

 

[Vanadium 50]

That is my point exactly - being a billionaire does not mean you can write a check for a billion dollars. It's not like Scrooge McDuck, who has a basement full of gold.

 

[russ_watters]

But...but...stonks only go up!

I pointed this out on Reddit a couple of days ago and was told it's really just code (they don't necessarily really believe it). Code for what, wasn't explained. In two separate threads people implied they recognized a bubble/game of musical chairs...though they implied they though all stocks were like that.

 

[BWV]

Billionaires borrow money against their stock to fund whatever they want. If you have 15 billion in assets, you can borrow a billion dollars, pay 30 million a year in interest, and buy everything you want right now.

You only need a divided friend of 0.2% on your assets to support the interest.

This is pretty standard stuff - wealthy people don't sell stock when they need money, they borrow money to avoid paying capital gains tax.

You can also get a pretty good interest rate - borrowing a billion dollars secured by 15 billion dollars of assets is a pretty safe bet. I don't know the specific details of how these loans work but I would guess for people who own growth assets, they let the loan grow in lieu of interest for the first couple years.

but at 3% interest vs a 23.8% max LTCG tax, its cheaper to realize gains rather than let the interest compound. At a zero cost basis the 3% interest becomes more expensive after 8 years.

 

[artis]

Have you seen the online game "Crack shack or Mansion" ?

No I have not, should I ?

That is my point exactly - being a billionaire does not mean you can write a check for a billion dollars. It's not like Scrooge McDuck, who has a basement full of gold.

Exactly. I actually think the Cali cartel and other top 5 drug empires or other criminal enterprises might have at some point had more realistic assets than many of today's billionaires because unlike them the drug lords had all their money pretty much either cash or in other real valued items like diamonds, gold, property etc.

Pretty much how business was done in the old days I think, you produce something of real value and you get your money's worth.

 

[bhobba]

Billionaires borrow money against their stock to fund whatever they want.

Many of the well off (not necessarily Billionaires - just wealthy) do the wheel or modified wheel. The wheel is you select, using fundamentals detailed in classics like the Intelligent Investor (i.e. basically what Warren Buffet uses) strong stocks. You buy them at discounts using puts. That means you get paid while waiting for the share to reach your price. Once it reaches your price, it is assigned, and you sell calls at ten delta, meaning 90% of the time, you collect the premium. In the rare case that the stock reaches your strike price, you have collected the premium and hopefully a nice profit in the share rising. If you don't make a profit, you sell your call, keep the stock, and continue selling calls. If it is sold, you buy another using a put and keep repeating. The modified version used by Warren Buffett is to sell puts on shares he wants. Or you could trust Warren and buy Berkshire Class B shares. But instead of then selling calls, he keeps the stock. If he doesn't have the cash to buy the share if assigned, you can easily borrow the money against your other shares (most option accounts give you a 50% margin these days), but it is also easy to sell the put and take a bit of a loss. The details of the strategy can vary a bit but let us say you have a million-dollar stock portfolio but little or no cash. Of course, you can borrow against it, but you can also sell puts using the stock as 'collateral' or 'margin'. Nothing is sold. It is kept aside should the trade not work out. Here are the details on one way of doing it (forget the sales pitch):


If your goal is to collect premium and it looks like you may be assigned, you close the put at a loss and move on to the next trade.

Thanks
Bill

 

[Office_Shredder]

but at 3% interest vs a 23.8% max LTCG tax, its cheaper to realize gains rather than let the interest compound. At a zero cost basis the 3% interest becomes more expensive after 8 years.

You're ignoring the potential for future growth on the assets that you would have owned if you didn't sell them to buy your stuff. If you have a billion dollars of stuff earning 30 million a year, selling it to buy stuff vs borrowing a billion dollars and using your 30 a year to pay the interest is economically equivalent. (Where here 30 million a year might be mostly contained in the growth of the asset, since we're assuming they're cash poor to begin with)

Bhobba , I'm not talking about an investment strategy, I'm talking about a tax hack to buy actual stuff (cars, houses, yatchs) without paying capital gains tax.