Why Did Reddit Trigger a GameStop Stock Surge?

[BWV]

Decentralized finance is going just swell

https://www.investvoyager.com/blog/voyager-update-july-1-2022/

Voyager Update July 1, 2022​

Today, Voyager made the difficult but necessary decision to temporarily suspend trading, deposits, withdrawals, and loyalty rewards, effective at 2:00 PM Eastern Daylight Time on July 1.
This provides time to continue exploring strategic alternatives and preserve the value of the Voyager platform we have built together. We are in discussions with various parties and will provide additional information at the appropriate time. More information can be found here: Press Release.

 

[kyphysics]

The annualized real return on US stocks 1900-2021 is around 6.7% and gov bonds is around 2% (obviously gov bonds today do not offer 200 basis point yields over expected inflation, but that has been the average result)

Is that a real Wilshire 5000 return?:

S&P 500 or Nasdaq 100 real returns would be interesting.

 

[kyphysics]

Also, I wish Warren Buffett were younger, as I could follow one of two historically back-tested means of either benefitting from or beating his returns:

Method 1: Buy and sell what he does. There is a small delay between Berkshire's actions and when they are disclosed in 13f filings, but studies have shown you'd still have gotten a 17% (nominal) return just following this strategy.
Method 2: Only and always buy Berkshire when it's corrected 10% or more. Doing so would mean you mathematically beat Warren's own returns.

 

[BWV]

Is that a real Wilshire 5000 return?:

S&P 500 or Nasdaq 100 real returns would be interesting.

None of those indexes were around in 1900, but the number is an estimate of the entire, cap-weighted market return, comparable to the Wilshire 5000. Because smal cap stocks are a relatively small percentage of the total market cap, the returns of broad market indexes fall within tens of basis points of large cap index returns

 

[BWV]

Also, the Nasdaq 100 is mostly a subset of the S&P 500 - so not a good chart

 

[kyphysics]

Also, the Nasdaq 100 is mostly a subset of the S&P 500 - so not a good chart

I think the argument is that people say tech/Nasdaq has had better returns in the pastd few decades (vs. total stock market). Not sure about back to 1900, however.

Feel free to correct/fact check if I'm inaccurate. I've mostly heard this and haven't bothered to look (at least not for 50 years or more...).

 

[Vanadium 50]

Feel free to correct/fact check

Here's a nutty idea. Why don't you do your own fact-checking before your post?

NASDAQ opened in 1971. How many seconds do you think it took me to look this up? Four.

 

[BWV]

I think the argument is that people say tech/Nasdaq has had better returns in the pastd few decades (vs. total stock market). Not sure about back to 1900, however.

Feel free to correct/fact check if I'm inaccurate. I've mostly heard this and haven't bothered to look (at least not for 50 years or more...).

The NASDAQ 100 took an 80% drawdown in the early 2000s and did not recover until around 2015

There is always some sector or group of stocks outperforming, it’s been tech over the past decade, but likely it will be something else over the next ten years

Phillip Morris, BTW, has created more wealth than any other American stock

 

[Vanadium 50]

hillip Morris, BTW, has created more wealth than any other American stock

Are you including the boost it gave to health care stocks?

 

[kyphysics]

The NASDAQ 100 took an 80% drawdown in the early 2000s and did not recover until around 2015

There is always some sector or group of stocks outperforming, it’s been tech over the past decade, but likely it will be something else over the next ten years

Phillip Morris, BTW, has created more wealth than any other American stock

Yeah, tech can get very bubbly...but take it back 50 years...does it outperform?

Regarding the 15 year Nasdaq bear market, that applies only if you were dumb enough to have not taken some profits in 1999/2000 and/or put all your money into the market top in 2000 (and subsequently never bought the dip afterwards...), right?

If you're dollar-cost-averaging, what is the returns for S&P 500, Wilshire 5000, and Nasdaq over, say 30-50 years? Any significant diff?

 

[BWV]

Dollar cost averaging is a losing strategy - the avg returns are lower

 

[kyphysics]

Lower than what?

 

[BWV]

Buying all at once and remaining fully invested

 

[Vanadium 50]

It's sad that there are people who don't understand what they are talking about trying to lecture us rather than ask questions. They might think they are looking smart, but they actually end up sounding like some mix of Cliff Clavin and Oswald Bates.

 

[Vanadium 50]

Dollar cost averaging is a losing strategy

Yes, and no.

If you mean "I am going to sit on a big hunk of cash that I want to invest, but won't do it right away", I agree. You're overbalanced in cash, and there is little reason to wait to fix this balance.

But if you mean that dollar cost averaging means investing (I don't think you do, but this thread is filled with people who misinterpret what they read) with every paycheck, I think that's a winning strategy.

There are also strategies that are related - e.g. bond ladders.

 

[kyphysics]

Oh...okay. Yeah, we had this debate before on this forum (was it in this thread?)...altho, that was SPECIFICALLY the lump sum vs. DCA debate.

That assumes you have a huge lump sum of money. I argued the evidence is shaky that the lump sum method is best, since it was valuation-blind from the studies done. If you factor in valuation at the time of your lump sum investment, it's clear that every time you buy into the market with very extreme valuations, you get a very bad return.

That's why Warren Buffett said he'd never lump sum into the market, but rather DCA.

Again, that assumes one does have a huge sum. Most people probably invest a little of their savings from income every month or two and de facto DCA.

 

[kyphysics]

Forgot to add...how does Wilshire 5000 vs. S&P 500 vs. Nasdaq do over say 4-5 decades (which I assume is most people's life-time investing time horizon)?

Again, I've heard people say Nasdaq would have done better, but haven't checked for evidence.

eta: Of course, past performance is no guarantee of future results too.

 

[fluidistic]

Well I must say that this thread made me rethink my near future plan. I have what I consider a medium sized lump sum doing nothing, and I am/was waiting for Tether and Celsius to bite the dust to invest it quickly into cryptos when that happens, like a tiger in the woods waiting for the rat to come close enough. But maybe I will invest it into stocks, an ETF possibly based on the CAC40 or another European market stocks related. Not that I prefer it to the US or international options, it's just that, after 5 years of holding, the tax would be 17.5% instead of 30%. My goal for now is to buy a place to live, but I'm already in the mid 30's.

 

[Vanadium 50]

My goal for now is

Most important words.

You don't say what your timescale is, so let's assume 5 years. It can't eb too much longer, and it can't be too much shorter. I don't have plots for the Euro indices, but here's the US Dow's 5-year returns:

So, it's had one extended negative run (the great depression) and about 4 times when it touched zero, but it looks like the median 8%. I expect the CAC, FTSE, etc. to be roughly similar: you will probably but not certainly do better than a savings account, and the worst performance of the century means you lose (or keep) half of your money.

In contrast, a risk-free (as much as anything can be) investment, a 5-year US treasury, is at 2.8%. That's almost 15% over 5 years.

It's up to you how much risk you are willing to take. My opinion would be that the best case reduces the 5 years to 4 or less, and the worst case increases it to 6 or more. That would be an important factor. Another is that the real estate market is also influenced by the economy - if stocks are going up like crazy, chances are the real estate market is as well. Of course, there is no reason you need to have everything in one basket - if the stock market is riskier than you would like, you can put some money in stocks and some in safe investments. You can dial in the best investment.

Finally, as you mentioned, there are tax implications. If I take on more risk, I want to reap the rewards, not send them off to the government.

As a PS, I have used US examples, but I would think really hard before investing in dollar-denominated, or for that matter, non-Euro denominated assets. That introduces exchange rate risk, since ultimately you will be spending the money in Euros.

 

[fluidistic]

Most important words.

You don't say what your timescale is, so let's assume 5 years. It can't eb too much longer, and it can't be too much shorter. I don't have plots for the Euro indices, but here's the US Dow's 5-year returns:

View attachment 303790

So, it's had one extended negative run (the great depression) and about 4 times when it touched zero, but it looks like the median 8%. I expect the CAC, FTSE, etc. to be roughly similar: you will probably but not certainly do better than a savings account, and the worst performance of the century means you lose (or keep) half of your money.

I appreciate your tips and comments. I don't understand why it shouldn't be a more than 5 years plan, though.

In contrast, a risk-free (as much as anything can be) investment, a 5-year US treasury, is at 2.8%. That's almost 15% over 5 years.

It's up to you how much risk you are willing to take. My opinion would be that the best case reduces the 5 years to 4 or less, and the worst case increases it to 6 or more. That would be an important factor. Another is that the real estate market is also influenced by the economy - if stocks are going up like crazy, chances are the real estate market is as well. Of course, there is no reason you need to have everything in one basket - if the stock market is riskier than you would like, you can put some money in stocks and some in safe investments. You can dial in the best investment.

I'm willing to take serious risks, after all I'm already partly involved into several cryptocurrencies.
Not sure what "safe investments" you have in mind. I do have a bank account with around 2% yearly interest, even though it's limited and I cannot fill it above a low threshold. Then it's other accounts with lower yearly interest, but higher threshold. I don't have anything else in mind when it comes to a safe investment.

Finally, as you mentioned, there are tax implications. If I take on more risk, I want to reap the rewards, not send them off to the government.

As a PS, I have used US examples, but I would think really hard before investing in dollar-denominated, or for that matter, non-Euro denominated assets. That introduces exchange rate risk, since ultimately you will be spending the money in Euros.

If I open a PEA (it's a sort of plan for savings in stocks), I have to wait 5 years without any selling for the tax to pass from 30% to 17.5%. I could open the PEA today, even though I do not buy a single stock right now, I think, and the time would tick. That would be the beginning of my plan for now. Then I would have to decide whether to invest the lump sum all at once, or DCA. The thing is, since it's not that much either, and since they charge, I think around 6 euros per transactions, a DCA might not be the best option, even if I'm not that lucky with the timing of the lump sum investment.

Regarding EUR/USD, even though the EUR is very low, I would bet it still has room to go below the USD in the near future.

 

[russ_watters]

Back to Gamestop:

GameStop has fired its Chief Financial Officer, Mike Recupero, and is making staff cuts across departments as part of an effort to turn around the videogame retailer, the company announced Thursday.

Recupero, who joined the company about a year ago...

https://www.cnbc.com/2022/07/07/gamestop-cfo-is-leaving-the-company-retailer-announces-layoffs.html
Developing story.

 

[Astronuc]

I don't know how Reddit was involved in Tuesday's runup of BBBY, but someone made a killing. Timing is everything

• A college student made a $110 million profit on Bed Bath & Beyond stock this week.
• Jake Freeman's fund revealed a 6.2% stake in the retailer in late July, then sold it on Tuesday.
• Bed Bath & Beyond, the latest meme stock to skyrocket, has more than tripled in value this month.

https://www.msn.com/en-us/money/oth...ng-25-million-into-the-meme-stock/ar-AA10NZoZ

Bed Bath & Beyond stock more than tripled in price from under $6 to over $20 during that period, as retail traders piled in hoping it would skyrocket in value like GameStop, AMC, and other meme stocks. Freeman spent about $25 million on his stake, or less than $5.50 a share, and sold it for north of $130 million on Tuesday, the Financial Times reported.

"I certainly did not expect such a vicious rally upwards," Freeman told the newspaper. "I thought this was going to be a six-months-plus play," he continued, adding that he was "really shocked that it went up so fast."

Similar story on Yahoo
https://finance.yahoo.com/news/20-old-usc-student-netted-122608953.html

 

[Office_Shredder]

Timing and having friends and family willing to give you 27 million dollars to buy a meme stock.

 

[Astronuc]

(Bloomberg) -- The other guy - billionaire Ryan Cohen - pocketed a $68.1 million profit from the sale of his stake in Bed Bath & Beyond Inc., scoring a 56% gain on an investment he held for roughly seven months.

https://finance.yahoo.com/news/bed-bath-beyond-stake-sale-213259911.html

The worst part for the Reddit crowd: It was Cohen’s very involvement in the stock that fueled their enthusiasm. The price at one point this week more than quadrupled from a recent low in July, with at least some pointing to a disclosure that showed the GameStop Corp. chairman still was holding onto his stake, which at that point exceeded 10% of the firm. It included call options that would only be in-the-money if the stock continued to soar.

Meanwhile -

the Union, New Jersey-based company hired law firm Kirkland & Ellis to help it address an unmanageable debt load, according to a person with knowledge of the decision. The firm, known for restructuring and bankruptcy, will advise the retailer on options for raising new money, refinancing existing debt, or both.

Cohen co-founded Chewy about a decade ago and then sold it for $3.35 billion to rival PetSmart and a British private equity firm in 2017.

https://finance.yahoo.com/news/exclusive-meme-stock-hero-ryan-185217269.html

https://finance.yahoo.com/news/ryan-cohens-60-million-bed-090518332.html

Losses mount this morning about 10:10 am

Symbol	Last Price	Change	% Change
BBBY Bed Bath & Beyond Inc.	11.09	-7.46	-40.22%
GME GameStop Corp.	35.47	-2.46	-6.49%

 

[bhobba]

Interestingly now I am trading options with real money and refining my strategy; professional traders often gravitate to what is known as delta-neutral strategies that make money regardless of market direction. That is possible from something known as theta decay. My strategy has a trade of that type as part of it without going into details (it's called the ten delta iron condor by its originator).

Thanks
Bill

 

[BWV]

Interestingly now I am trading options with real money and refining my strategy; professional traders often gravitate to what is known as delta-neutral strategies that make money regardless of market direction. That is possible from something known as theta decay. My strategy has a trade of that type as part of it without going into details (it's called the ten delta iron condor by its originator).

Thanks
Bill

To make money on a delta neutral position you have to be short gamma (vol), which is what an iron condor does. Thr proverbial picking up dimes in front of a steam roller.

 

[BWV]

One small correction - there is one(trivial) delta and gamma neutral position and one gamma neutral position with positive expected values:
If you look at two basic relationships from put/call parity
Stock = cash - put +call
Cash = stock + put - call
but these positions just replicate long stock or long cash, so you don’t need options to get this exposure

 

[Vanadium 50]

Hmmmm...

There are three ways to make money in the market:

1. Profit from the underlying asset, often in the form of dividends
2. Out-trading your counterparty
3. Commissions from brokering transactions.

That's it.

Unfortunately, "I got to system" works only slightly better in the stock market than the casino.

I'm not an expert in iron condors or triple dipsy doodles, but if one is going to try and make money through #2, one needs to understand what side of the bet you're betting on. In this case, it sounds like you are betting that volatility - more correctly, price variations, will go down with time.

This is usually a good guess, but it is not always true. So that's what you are betting.

In line with "picking up dimes in front of a steamroller", you might well be in a situation where 90% of the time you get a dime, and 10% of the time you lose a dollar. But your expected gain is zero (slightly negative if there are commissions) or you won't find a counterparty. (In reality, supply and demand will adjust the options prices accordingly).

 

[BWV]

Hmmmm...

There are three ways to make money in the market:

1. Profit from the underlying asset, often in the form of dividends
2. Out-trading your counterparty
3. Commissions from brokering transactions.

4. selling insurance (which is what short option positions do)

The bulk of the finance lit indicates there is a modest risk premium (meaning a return above the discounted expectation)
https://www.aqr.com/Insights/Research/White-Papers/Understanding-the-Volatility-Risk-Premium

 

[bhobba]

4. selling insurance (which is what short option positions do)

Exactly. It's not 'triple dipsy doodles' it's based on an observed fact. 83% of the time, the premiums paid for options are more than they are worth. This gives a statistical edge in selling options. It's exactly why Warren Buffett uses them all the time to get shares at the price he wants. He knows the insurance business well and understands its benefits. There are very profitable systems (not 'picking up dimes in front of a steam roller.') that make use of this and are neutral eg the Rhino system (based on $25k capital):
https://www.smbtraining.com/blog/wp-content/uploads/2018/07/SMB-Rhino-Backtest.pdf

When looking at returns like this, one can be inclined to go WOW and think it is a way to make a fortune from the market. It is good all right - but must be compared to simply buy and hold. The issue has to do with TAX, which of course, depends on one's individual situation. Even as a retiree here in Aus I have to pay taxes. Not only that, but any income I get affects the small amount of money I get from the government because I am a self-funded retiree. It is often not worth it without going into the details, but that is another story. Using buying, and holding it never is a problem - it just sits there growing. After that is taken into account, the returns are not as spectacular as they may seem. Such option strategies are really for those that would like to do it for a living instead of the 9 to 5 grind. Its big advantage is managing options trades only takes a couple of minutes daily. With some strategies, just a couple of minutes a month eg the Super Bull. Note - it is not market neutral. Secondly, you MUST not use more than 1/10 of your capital as it is VERY volatile, and you can lose all your money.


The returns of the above strategy are not steller using the correct account size - but if you want income, it is an easy way to go. Plus, you only use a small amount of your capital - the rest can be put into long-term and medium-term investments.

Even professional options traders that rely on it for their income do not trade with all their capital. They use something like $100k-$200k. They invest the vast bulk in long-term investments, and any money left over goes straight into those investments. The only exception would be those trading for a prop trading firm or something similar.

Added Later:
Why do I do it? I don't need the money. Nor do I trade enough to make meaningful profits. In my case, I simply find it interesting and fun. And yes, I am making money - not much - but about $100 a month in the small amount I trade with options. I get more from the dividends of the much greater amount I have invested in two ETF's here in Aus, VDHG and YMAX. I have tried individual shares as I did in the old days, but to be honest, the hassle was not worth it for me at this stage. I found selecting and buying individual shares too much of a pain even though I used a stock selecting service. Besides, the marketing junk you got from the stock service annoyed the bejesus out of me.

Thanks
Bill