Why Did Reddit Trigger a GameStop Stock Surge?

[Vanadium 50]

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

I would lump that - and arbitrage - into "out trading". My #1 is making money on the underlying asset, #2 is making money on the trade, and #3 is making money on the mechanics of the trade.

#2 is a zero-sum game. Before engaging in that, it behooves one to understand what they are betting on, what their counterparty is betting on, and it wouldn't hurt you to know a little bit about who the counterparty is.

If you have an "unbeatable system", and your counterparty is the big Wall Street banks and brokers, it might be worth rethinking this plan. The big banks didn't get that way by having a net outflow of money.

It's also important to look at the statistics in detail. If I have a trade that earns me money 99% of the time, what happens in the other 1%" In a zero-sum game, I lose 100x (ok, 99x) as much as the average trade. If that number is smaller than 99x, what's in it for the counterparty?

One last word on "selling insurance" - if your plan involves selling insurance to Allstate, you might rethink it as well.

 

[Office_Shredder]

I think selling insurance and doing arbitrage are very different. One requires you to be the best at executing a series of transactions, and understanding the costs of the trades well. The other just requires having a higher risk tolerance than the average market participant for large downcrashes.

 

[BWV]

The real problem with selling insurance to the financial markets is that the risk cannot be diversified - it’s like running a hurricane insurance book but with every property in Miami

But if the risk could be diversified then a return premium would not exist

Every time volatility spikes in the financial markets, you see headlines of short vol strategies blowing up.

https://amp.insurancejournal.com/news/international/2022/03/14/657966.htm

 

[kyphysics]

Sorry if I'm changing the topic, but for a slightly different flavor, what do people think of ridesharing/delivery stocks?

These are legitimate companies (Uber/Lyft, etc.), but they are money losing and have lots of competition and not a clear path to profitability that would justify their valuations.

They are in some ways "meme"-ish stocks in that people recognize these names in every day life and maybe a retail investor who wants to just invest and not look at 10Ks and 10Qs, etc. may buy into them.

Not as bad as GameStop, which is literally in a dying/dead industry, but also by no means a logical growth stock either. . .

What is the future for ridesharing and delivery stocks? I'm surprised Amazon isn't delivering food from restaurants by now.

 

[BWV]

Sorry if I'm changing the topic, but for a slightly different flavor, what do people think of ridesharing/delivery stocks?

These are legitimate companies (Uber/Lyft, etc.), but they are money losing and have lots of competition and not a clear path to profitability that would justify their valuations.

They are in some ways "meme"-ish stocks in that people recognize these names in every day life and maybe a retail investor who wants to just invest and not look at 10Ks and 10Qs, etc. may buy into them.

Not as bad as GameStop, which is literally in a dying/dead industry, but also by no means a logical growth stock either. . .

What is the future for ridesharing and delivery stocks? I'm surprised Amazon isn't delivering food from restaurants by now.

50 cent dollar business model? Crappy unit economics and regulatory arbitrage

 

[kyphysics]

50 cent dollar business model? Crappy unit economics and regulatory arbitrage

Can you elaborate on what you mean by "regulatory arbitrage" above?

FWIW, I've actually seen some analysts say that the future of companies like an Uber might not be in ridesharing/delivery at all. They theorize that the company just wants to get a huge customer base and then somehow use their data (like Meta, Google, etc. does). . .Some have said the same about Tesla, except Tesla is a legitimate company with their cars, batteries, and A.I./self-driving products/services. But, some people do say Tesla could turn into a data company too with their brand (super loyal followers willing to give up their data vs. Meta/Facebook users who often hate the company).

If not, I don't know how Uber becomes a decent profitable company. . .it's not economical.

eta: Between Gamestop and Uber stock - both of which suck - I might choose Uber, though, if forced to buy one on fundamentals only.

 

[Vanadium 50]

what do people think of ridesharing/delivery stocks?

Let's take Lyft's management at their word - they can make $60M profit annually. They have 355 million shares outstanding, for earnings per share of 17 cents.

McDonald's Corporation has an Earning-Per-Share of $8 on a price of $250. So one valuation of Lyft is (17/800)*250 = $5.30.

Lyft actually trades at $16.65. So this only makes sense if one believes that it's earnings will approximately triple, and do it soon. Or if you believe you can turn around and sell it to someone who doesn't care about earnings.

This may not be crazy: Lyft had $4B of revenue, and think they can get 1.5% profit on that. What's to keep them from going to 2%? 3%? McDonald's had $23B in revenue and $6B in earnings. It is much easier to imagine Lyft going from 1.5% to 3% profit than imagining McDonalds going from, 25% to 50%.

This is not financial advice, and in many cases one's goals are better served by other investments than individual stocks. Much less individual stonks.

 

[Office_Shredder]

Can you elaborate on what you mean by "regulatory arbitrage" above?

Regulatory arbitrage is when you take an action whose only value is that it let's you get around a regulation. For example classifying someone as an independent contractor when they are an employee. Or deciding that your drivers aren't driving taxis so you don't need taxi licenses. It usually is intended to refer to something that is actually legal but maybe not intended, but can also be something that is illegal but you know won't be enforced against you.

Uber especially has been famous for ignoring rules in its search for growth like this.

 

[kyphysics]

Regulatory arbitrage is when you take an action whose only value is that it let's you get around a regulation. For example classifying someone as an independent contractor when they are an employee. Or deciding that your drivers aren't driving taxis so you don't need taxi licenses. It usually is intended to refer to something that is actually legal but maybe not intended, but can also be something that is illegal but you know won't be enforced against you.

Uber especially has been famous for ignoring rules in its search for growth like this.

True re: Uber

But, in fairness, don't many (if not, most) corporations do the same? Google (Don't Be Evil slogan) even has some independent contractors (who have complained).

Big law firms hire bottom-of-the-class law school grads for document review and pay them crap salaries and treat them poorly oftentimes, knowing they are desperate for work.

Amazon hasn't didn't pay taxes for years, by purposely being unprofitable...etc.

 

[kyphysics]

In fact, the moment you show a profit, Wall Street often kills your stock if you're a growth company.

They want you to lose money, but grow the top line. CEOs have specifically been told NOT to show a profit or else their stock will tank, as it means the end of a growth phase/era and transition into a "value" stock/stable slower growing company.

 

[russ_watters]

True re: Uber

But, in fairness, don't many (if not, most) corporations do the same?

No, not to anywhere near the same extent. Uber was set up from the start to have legal problems as a normal part of doing business. Most companies try to avoid crossing the line - they straddle or even cross it on purpose.

The view of ethics you have in the two examples is shaped by personal (political) beliefs about how society should work. There's nothing unethical much less illegal going on in what you describe. Uber is different.

[Edit] Be careful getting your information/beliefs from Reddit/twitter. It's an echo-chamber of like-minded soundbyte-based arguments. The positions often come with little connection to real life, but heavy on emotional triggers.

 

[kyphysics]

No, not to anywhere near the same extent. Uber was set up from the start to have legal problems as a normal part of doing business. Most companies try to avoid crossing the line - they straddle or even cross it on purpose.

The view of ethics you have in the two examples is shaped by personal (political) beliefs about how society should work. There's nothing unethical much less illegal going on in what you describe. Uber is different.

Because of classifying drivers as ICs?

A lot of businesses do that (not w/ drivers, but other workers), including Google. Or, is it because their drivers really are more like regular employees that it corsses the line? Was there an additional issue other than ICs?

 

[kyphysics]

re: ethics/legality My post didn't imply (at least, not intended to) that Amazon losing money on purpose or Google using ICs, etc. was unethical.

I was only pointing out that lots of companies do things that take advantage of how the world works.

 

[BWV]

Amazon hasn't didn't pay taxes for years, by purposely being unprofitable...etc.

This is wrong on two counts
A) GAAP earnings <> taxable income
B) Amazon showed little or no income for many years because it reinvested its cash flow from AWS into R&D, which under GAAP is expensed, rather than capitalized. A car company investing the same portion of their income into new factories would show GAAP earnings as those investments get capitalized on the balance sheet and only appear on the income statement through depreciation. As AWS grew and the earlier investments paid off, AMZN began to show GAAP earnings

 

[kyphysics]

This is wrong on two counts
A) GAAP earnings <> taxable income
B) Amazon showed little or no income for many years because it reinvested its cash flow from AWS into R&D, which under GAAP is expensed, rather than capitalized. A car company investing the same portion of their income into new factories would show GAAP earnings as those investments get capitalized on the balance sheet and only appear on the income statement through depreciation. As AWS grew and the earlier investments paid off, AMZN began to show GAAP earnings

I'm 100% aware of that.

eta; maybe the way I worded it opened myself up to this? ...If so, good correction.

 

[russ_watters]

Because of classifying drivers as ICs?

And by operating a taxi service without taxi-licensed drivers.

 

[russ_watters]

I'm 100% aware of that.

eta; maybe the way I worded it opened myself up to this? ...If so, good correction.

It's not the wording it's the example itself. Amazon isn't breaking any laws or even coming close to any legal gray areas, so the comparison to Uber makes no sense. Either you think Amazon is doing something wrong or Uber isn't - neither is correct.

 

[Office_Shredder]

I think this is really a question of taste/ perspective. Regulatory arbitrage is really trying to identify times when your actions are far from what the rule intended.

Does there exist *a* person that is an independent contractor at Google who should be an employee? Probably. Does this describe most of their workforce? Not that I'm aware of. Does Amazon take advantage of a tax break that wasn't really designed for their business? Probably. Fundamentally, is the tax code designed to not tax companies that grow the way Amazon has? Yes, it is designed to look like this intentionally.

 

[kyphysics]

https://www.investopedia.com/terms/short-termloss.asp#:~:text=Key Takeaways,price received for selling it.

Whatdya think, Russ?

Should I sell my shares of $META. I'm embarrassed I even own this piece of crap.
I'm fine to get a short-term loss and buy something else.

Post-Apple privacy changes, numerous scandals, Tik Tok and Snapchat taking engagement time away on social media, stalled user growth (expected to be fair...only so many people on planet Earth), new competition in the online advertising space (Netflix, Disney, Amazon, etc.), ...no immediate gains from metaverse investments, etc. ... this stock sucks. I bought the dip this year (thankfully, it was a small position), but wish I bought something else.

The main thing enticing to me is the valuation. It's cheap, but I don't have a ton of faith/confidence in the metaverse panning out to be a huge hit. It still seems very niche. Not only that, there are competitors trying to build it too. No guarantee Meta creates the best version. Even VR/AR headsets have strong competitors like Microsoft.

eta: Obv., not asking for unlicensed financial advice...rather just initiating informal chat about stock/company prospects of Meta/Facebook here.

 

[Vanadium 50]

I'm not sure a good use of PF is asking for unlicensed financial advice.

I also think that your lack of stated goals makes it difficult even to do that. So far as I can tell, you're hoping to "strike it rich" playing the market. Advice for a sudden windfall is no better and no worse than saying "Bet on 23 Red".

If you don't know where you are going, any path will take you there.

 

[russ_watters]

Whatdya think, Russ?

Should I sell my shares of $META. I'm embarrassed I even own this piece of crap.
I'm fine to get a short-term loss and buy something else.

This can't become a stock picks/unlicensed financial advice thread.

 

[Vanadium 50]

Against my better judgment...

Presumably there was some reason you bought a given stock - for example, expectation of a regular dividend (I picked this example specifically because META does not pay a dividend). Is that reason still valid?

Further, presumably before you bought the stock, you had in mind some conditions for when you would sell it. Have these conditions materialized?

If you bought it because you were egged on by Reddit and podcasters, well, all I can say is "I'm happy to be your counterparty."

 

[kyphysics]

This can't become a stock picks/unlicensed financial advice thread.

lol...that's just a "manner of speech" on my part...which is why I did the ETA...

I mean, you're sitting here saying NOT to buy crypto and what not and support dollar cost averaging, etc. That is recommending something (albeit, general advice and not super specific). . .

We have debated the merits of companies/stocks like GameStop...FWIW, I always make my own decisions, but just enjoy chatting/debate on stocks.

I also think people here (everyone - not singling YOU out at all) need to stop being word Nazis, have some common sense, and learn reading comprehension/social skills for every day life. It's amazing how people on this forum supposedly have high levels of education and cannot pick up on social/informal conversational cues/intent.

Please (anyone - not singling YOU out) don't respond with a lengthy/critical super nitpicky word parsing rebuttal or anything like that...I have zero interest in debating asinine semantic minutiae that can be the domain/interest of certain toxic personalities on this forum. Okay, back to the topics at hand...continue on w/ whatever we were talking about!

 

[russ_watters]

I mean, you're sitting here saying NOT to buy crypto

I don't think I've said that.

 

[kyphysics]

I don't think I've said that.

Ah, okay. I stand corrected then. Thought you may have.

 

[russ_watters]

Whatdya think, Russ?

Should I sell my shares of $META.

I mean, you're sitting here saying NOT to buy crypto and what not and support dollar cost averaging, etc. That is recommending something (albeit, general advice and not super specific). . .

We have debated the merits of companies/stocks like GameStop...FWIW, I always make my own decisions, but just enjoy chatting/debate on stocks.

Ok, I've had more time to think about it and I'll elaborate/clarify and maybe walk it back a bit.

I have certainly said I think bitcoin/crypto is a scam, which whether I actually said it or not, means I think at least in general, nobody should buy it. To me, that's not even investment advice, to keep someone out of a scam. But if someone asked: "look at these crazy people pumping up this trash! I think I can profit from their foolery!" I probably wouldn't offer advice not to. And it's also not the same as asking/saying someone who's already in should sell immediately. I have friends who own some. I don't know the details, don't want to, and haven't told anyone I think they should sell immediately. Because I don't know. Maybe they're really the lesser fool? Maybe they bought it as a lottery ticket and don't really care if it goes to zero? Once they're in the quicksand, it's too late to advise someone to stay out, so I just hope they know what they are doing.

Stocks are different. Facebook/Meta is a real and valid company. Trading/investing in it is valid. But you asked, very specifically, "should I sell my shares". That's specific advice with serious implications. I've been thinking of selling my own shares in Meta, but even if I do, I still wouldn't advise you, and it's not a good idea to even ask internet strangers for such advice. Talking about the general health of the company should be fine though...as long as you don't over-interpret what you are reading (which you are prone to do). And by the way, I don't actually think owning individual stocks is a very good idea in general, even though I do it.

Stonks! are also different. They're essentially a pump and dump, whether anyone ends up in jail for it or not. But again, maybe someone is good at reading crowds and really is the lesser fool? Or they're already in? Or it's a lottery ticket? Not for me (though I do occasionally buy a lottery ticket), but as long as someone has their eyes open, maybe it can be for them.

DCA investing in an S&P Index fund is sort of a default/baseline investment strategy. A strategy for people who don't want to put together a strategy. It's generic/basic and non-specific. Brush your teeth. Look both ways before crossing the street. Don't run a balance on your credit cards. Max out your 401k contributions and invest in a diversified/broad, low load fund such as an S&P Index Fund. None of these are situation-specific and they are not necessarily always applicable. But if you asked me "should I sell some of my S&P Index Fund holdings?" I would not answer such a question either.

 

[Vanadium 50]

But if someone asked: "look at these crazy people pumping up this trash! I think I can profit from their foolery!" I probably wouldn't offer advice not to

As they say about playing poker, "If you're don't know who the patsy is, it's you."

 

[BWV]

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.

But at best DCA with periodic contributions, like in a 401K, adds no expected value
say the realized return (geometric mean) of the S&P 500 over the next 30 years is 7% with 18%σ and you invest $1 per year for 30Y

we agree that its better to invest $30 up front if you have the cash

but compared to a hypothetical alternative investment that pays 7% with no vol, DCA wins when the returns in later years are higher than in the early years and loses if the returns are higher in the early years. As either outcome is equally likely, DCA is neither good or bad (but worse than a 0-vol return of the same amount, as no one wants the risk of a large decline toward the end of the saving period)

Spending down your savings in retirement is just the inverse of this

 

[russ_watters]

But at best DCA with periodic contributions, like in a 401K, adds no expected value

...DCA is neither good or bad (but worse than a 0-vol return of the same amount, as no one wants the risk of a large decline toward the end of the saving period)

So, what exactly did you mean by this?:

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

Lower than what, exactly? If it's neither good nor bad, how does that square with being a losing strategy? If it returns 7% how is it a losing strategy?

Lump sum and DCA are generally situational and largely mutually exclusive (are you getting the money as a lump sum or increments over time?). The key for either is that it's better to invest now than to wait.

 

[BWV]

So, what exactly did you mean by this?:

Lower than what, exactly? If it's neither good nor bad, how does that square with being a losing strategy? If it returns 7% how is it a losing strategy?

answered that in #703 - relative to a lump sum investment

Lump sum and DCA are generally situational and largely mutually exclusive (are you getting the money as a lump sum or increments over time?). The key for either is that it's better to invest now than to wait.

True, but you hear many talk about DCA benefiting from investing incrementally through bear markets, but that benefit is offset by the risk of poor returns coming late in the investing period