Why Did Reddit Trigger a GameStop Stock Surge?

[Vanadium 50]

why do so many individual people still insist on playing? Do they not really believe it is fixed?

There are two games.

One game is where you buy into a company and make your money through appreciation and dividends. I have made a lot of money playing this game. This is not a zero-sum game.

Another game is where you try and out-trade your trading partner. This is a zero-sum game. Expecting to win this game against a well-supported pro is like expecting to win one-on-one with Michael Jordan at his peak. Even without any cheating, I wouldn't expect to win. I wouldn't even expect to break even.

 

[nduka-san]

There are two games.

One game is where you buy into a company and make your money through appreciation and dividends. I have made a lot of money playing this game. This is not a zero-sum game.

Another game is where you try and out-trade your trading partner. This is a zero-sum game. Expecting to win this game against a well-supported pro is like expecting to win one-on-one with Michael Jordan at his peak. Even without any cheating, I wouldn't expect to win. I wouldn't even expect to break even.

except today it was mj vs hundredss of elementary or middle schools in this scenario, not very experienced but very good teamwork.

 

[BWV]

Except the pro zero-sum game is more like rock-paper-sissors than the NBA

 

[256bits]

HUH ? @nduka-san I don't think you understand what's going on. The "little guys" including teachers and nurses and so forth that have their life savings in pension funds that have invested in the hedge funds that got hurt are NOT going to share your belief.

Then the managers of those funds aren't worth their 6 figure salary if they got whopped by a bunch of amateurs.

 

[BWV]

Then the managers of those funds aren't worth their 6 figure salary if they got whopped by a bunch of amateurs.

Six figures? LOL, Try three comma

 

[Vanadium 50]

Next thing I'd like to challenge. There is no "Wall Street". There are banks, and brokers, and analysts, and so on. It's an interrelated system, to be sure, but it is made up of individual actors with their own motivations and reward structures.

Many of these people influence stock prices. A broker does so by putting buyers and sellers together. An analyst writes reports on the financial health and prospects of various companies as she sees it. This is not only legal, it is necessary. What they cannot do, however, is to collude. (This happened with LIBOR a few years back - billions of dollars in fines and 14-year prison terms for some of the bad actors.)

I think a good question is whether the Reddit folks colluded to manipulate stock prices. Is it collusion, or is it conversation? Certainly someone who bought the stock, then talked about running up the price on Reddit, and sold it while telling others to keep buying is in a worse position than someone who just talked.

 

[russ_watters]

HUH ? @nduka-san I don't think you understand what's going on. The "little guys" including teachers and nurses and so forth that have their life savings in pension funds that have invested in the hedge funds that got hurt are NOT going to share your belief.

Boy, I hope pensions aren't invested in hedge funds. My sister is an analyst for such funds and I'm pretty sure it's all fixed/guaranteed income; bonds and such.

 

[russ_watters]

One game is where you buy into a company and make your money through appreciation and dividends. I have made a lot of money playing this game. This is not a zero-sum game.

It's not zero sum, but measuring success isn't against a baseline of zero either. Most individual investors still lose if they measure themselves against market averages. That's what I mean when I say they think they are winning but they aren't.

 

[BWV]

Boy, I hope pensions aren't invested in hedge funds. My sister is an analyst for such funds and I'm pretty sure it's all fixed/guaranteed income; bonds and such.

not as much as they were 10 years ago before performance began to suck, but yes, large plans generally have some allocation to hedge funds. Most of the assets are stocks and private equity. No hope of meeting actuarial return assumptions of 7-8% with a large allocation of bonds

 

[Vanadium 50]

Boy, I hope pensions aren't invested in hedge funds. My sister is an analyst for such funds and I'm pretty sure it's all fixed/guaranteed income; bonds and such.

Oh yes they are. And it has not always gone well.

Even 401(K)'s can do so, (just this year in fact) in very limited circumstances.

Most individual investors still lose if they measure themselves against market averages. That's what I mean when I say they think they are winning but they aren't.

I don't know. My portfolio over the last five years has returned 12.33%. I think that's pretty good. In the same period with the same methodology, the S&P 500 returned 12.89%. So I came within 56 basis points of the market after fees, transaction costs and the like, with a portfolio with substantially less risk. If this is losing...

I am an accredited investor, so I have access to hedge funds. Do I have any money in them? Nope. They have very high fees, and the fraction that do well enough to justify these fees is about what you'd expect from chance alone. (I do have investments in funds with very high minimums, however.) That makes it hard to decide whether Fund X is better or worse than Fund Y based on past performance, so I stay away. I'll take my 12.33% thank you.

 

[BWV]

And no decent hedge fund will accept someone who only is an accredited investor

 

[bhobba]

is it a good news letter

It is illegal to offer financial advice, at least here in Australia where I am, unless you are licenced so I will need to be carefull about what I say. I subscribe and it is the main tool for my investing strategy with the Donnelly Zone Charts:
https://investingtimes.com.au/wp-content/uploads/2015/04/The-Zone-System-research-paper.pdf

It contains other tools as well:
https://investingtimes.com.au/evidence-of-nine-investment-strategies/
But I only use the Zone system.

For example at the beginning of the pandemic about March the market was oversold which is a buy signal in my strategy. It is now close to being overvalued and, again in my strategy, that is a signal to sell or shift to defensive assets like a blue chip international bond fund. For small cap shares that I use it is way overvalued - buying a small cap ETF in March and selling now would would have given a cool 40% profit. It contains all sorts of other interesting information including the same charts for the US markets - which is at the moment moderately oversold so another strategy would be to switch out of an Australian small cap fund to a US ETF. It is basically a tool for dynamic asset allocation. A good book to use figuring out your strategy is:
https://www.amazon.com/dp/B005XM6NRY/?tag=pfamazon01-20

It provides a lot of information for many different strategies, you chose the one that suits your risk tolerance. This is for informational purposes only, and is not to be construed as financial advice.

Thanks
Bill

 

[Jarvis323]

Doesn't AI control most trading? This whole fiasco will probably end up being useful training data. The AI will just get better at shorting stocks and dodging redditors.

https://www.google.com/amp/s/www.fo...-long-and-short-consumer-stocks-using-ai/amp/

 

[Vanadium 50]

decent hedge fund

I am not sure such a thing exists. Are there more funds than can be explained by chance and survivor bias? It appears not? And becoming a rich hedge fund manager is not the same as becoming a rich(er) hedge fund client? The 2&20 fee structure guarantees it.

Put another way, for a hedge fund to match my yield (12.33%) it needs to return 17.4% just to take care of the fees. Bridgewater Pure Alpha doesn't come close, and the risk (for any hedge, not just this one) is much higher.

While it is possible that hedge funds might serve some people's financial needs, it's hard to see how they serve mine.

 

[BWV]

I am not sure such a thing exists. Are there more funds than can be explained by chance and survivor bias? It appears not? And becoming a rich hedge fund manager is not the same as becoming a rich(er) hedge fund client? The 2&20 fee structure guarantees it.

Put another way, for a hedge fund to match my yield (12.33%) it needs to return 17.4% just to take care of the fees. Bridgewater Pure Alpha doesn't come close, and the risk (for any hedge, not just this one) is much higher.

While it is possible that hedge funds might serve some people's financial needs, it's hard to see how they serve mine.

I don't disagree, but hedge funds were great before they got discovered by institutional investors in the early 2000s and money flowed in. Your 12.3% was thanks to a bull market, but there used to be fairly simple trading strategies, like merger or convert arb that put up net of fee returns like that every year with bond-like vol.

 

[bhobba]

For many, day trading and individual stock picking is gambling wrapped with a sense of financial responsibility marketed by big institutions.

Day trading - forget it - and that is from the experience of giving it a go. I used CFD's (evidently illegal in the US). Basically it was a slow way to losing your money. I did OK overall because just before I gave it away I had some short positions during a major market correction in I think 2007. I just let it run until I thought it had stabilised - that was a big profit that made up for my losses. I should have let it continue - it dropped a lot more in the following weeks.

Short/medium term trading is less gambling - some strategies like the Jim Berg strategy are OK. You can look him up on the internet if you want - for an overview see the following video: .

It actually does work - I just wasn't suited to actively managing it each day as was required. Do not get too carried away by the returns though - because stocks are rarely held more than a year you pay full tax - at least in Aus - keep over a year you pay half the tax - or simply buy and hold and you pay none. After tax returns were no better than long term trading/investing I eventually settled on. But if you want to trade full time then it is an option - just not one suited to me.

Long term investment/trading using funds and dynamic asset allocation was what worked best in my situation. In my dynamic allocation for tax reasons I rarely actually sell - just put in new money to the asset class most out of whack with what it should be. I do not know why but people seem to rarely take into account tax considerations in their investing/trading - but it is very important.

Thanks
Bill

 

[bhobba]

I am not sure such a thing exists.

Mathematician James Simons of Chern-Simons fame might disagree on that:
https://en.wikipedia.org/wiki/Renaissance_Technologies

But you or me making any use of it is so close to zero it's not worth even thinking about. The average hedge fund is IMHO useless, although some financial advisers recommend them as an anticorrelation asset in a diversified portfolio. Personally I want nothing to do with them.

Thanks
Bill

 

[Vanadium 50]

Mathematician James Simons of Chern-Simons fame might disagree on that

I'm sure he would. I expect he would agree with the comment that it's easier to make money running a hedge fund than investing in a hedge fund, although it might be impolitic to say so.

Long term, most hedge funds trail the market. Often by a lot. Most close after just a few years. The remainder can be explained by survivorship bias.

In this environment, the best one can hope for is "yes, most of these are turkeys, but this one is different. It's the real deal. It's the one that has found the magic formula to justify these fees." It might even be true, but how do you pick that one out among all the other ones that are saying exactly the same thing?

 

[BWV]

I'm sure he would. I expect he would agree with the comment that it's easier to make money running a hedge fund than investing in a hedge fund, although it might be impolitic to say so.

simons kicked out all his investors 20 years ago and the firm only manages employee’s money. Compounded at something like 60% net of trading costs and gross of fees since the 90s, by far the best investment record of anyone - but no other hedge funds come close, even competitors like DE Shaw who employ similar quant techniques

 

[russ_watters]

Whelp, it's 9am, the market is opening soon, and Robin Hood is letting redditors buy Stonks! again, so it could be another wild one.

 

[Astronuc]

Whelp, it's 9am, the market is opening soon, and Robin Hood is letting redditors buy Stonks! again, so it could be another wild one.

I watched a couple of minutes this morning right after the open.

GameStop Corp. GME 399.95 +206.35 +106.59%
                   410.96 +217.36 +112.27%
                   354.35 +160.75 +83.03%

I think trading halted for about 5 minutes, then it varied between 300 and 325. A lot of volatility.

 

[etotheipi]

 

[Vanadium 50]

OK, the last of the split messages:

There has been a suggestion that somehow short sales are, while legal, immoral. I'd like people who think this to expound on this.

Are other transactions betwen willing partners immoral? Why or why not?
If so, which ones? Put and call options?
Is one side of the transaction OK but the other not?
Is it OK for institutions to trade with each other but not individuals?

In short, I am very interested in why people think short sales are wrong, and how this might (or might not) be generalized.

 

[BWV]

OK, the last of the split messages:

There has been a suggestion that somehow short sales are, while legal, immoral. I'd like people who think this to expound on this.

Are other transactions betwen willing partners immoral? Why or why not?
If so, which ones? POut and call options?
Is one side of the transaction OK but the other not?
Is it OK for institutions to trade with each other but not individuals?

In short, I am very interested in why people think short sales are wrong, and how this might (or might not) be generalized.

Farmers have been short selling their crops since Hammurabi's day

 

[Vanadium 50]

Thales of Miletus invented options trading. When he wasn't inventing mathematics.

 

[gleem]

Just found this article reviewing the history of "WallStreetBets" on CNN Business as well as some of the reasons it has become so popular and why it is dangerous to participants.

 

[kyphysics]

Whelp, it's 9am, the market is opening soon, and Robin Hood is letting redditors buy Stonks! again, so it could be another wild one.

Still limited buys on GME, though.

I wonder what'd happen if they didn't have limits?

 

[kyphysics]

GME losses now ~$20 billion for hedge fund shorties and they are still not backing down:
https://www.cnbc.com/2021/01/29/gam...te-nearly-20-billion-in-losses-this-year.html

• Short-selling hedge funds have suffered a mark-to-market loss of $19.75 billion year to date in the brick-and-mortar video game retailer, according to data from S3 Partners.
• Still, short sellers mostly are holding onto their bearish positions or they are being replaced by new hedge funds willing to bet against the stock.

 

[Vanadium 50]

some strategies like the Jim Berg strategy are OK.

He appears to be an advocate of what is called "technical analysis", a school of thought that holds that one can forecast future prices from historical data, primarily price, but also volume and sometimes open options contracts. I think Wikipedia's statement is fair: "Whether technical analysis actually works is a matter of controversy."

Even granting that it works in all cases, it would fall into my "out-trade your partner" category. Surely JPMorgan Chase will be better at it than I am.

 

[kyphysics]

Question: Why aren't (or, are they?) the hedge fund clients exposed to these GME losses not just pulling their money out (or, can they?)?

How are these fund managers exposed able to continue to fight on (yes, I know Melvin was infused with capital from several other funds)? . . .Wouldn't this freak out all their clients?