Why Did Reddit Trigger a GameStop Stock Surge?

[Office_Shredder]

Bitcoin does have the advantage of not being infinitely printable.

 

[bhobba]

But, using her savings derived from daily living, she invested for the next 50 years into stocks she could understand and by the age of 101, she amassed $22 million that was donated to charity upon her death. https://www.washingtonpost.com/arch...ly-pays/ec000053-d7bf-4014-b841-546bd5847a80/

Nice story. I especially like the bit about bonds. Having a small amount in bonds (say 10%) make only a minor difference to returns - sometimes even increasing them. However, the risk is reduced by a not-insignificant amount. One of the strange results of portfolio theory and the efficient frontier.

I often discuss this with people who complain about a very popular ETF here in Aus by Vanguard - VDHG. It holds units in other Vanguard funds using a weighting decided by a very sophisticated AI program, so it is as close as possible to the efficient frontier. When rebalancing here in Aus, ETF's that holds other ETF's can't use profits to buy additional funds - it must return them as distributions. It is a high growth ETF that grows about 10% a year which is fine. But because of the rebalancing, it pays a whopping distribution - the last one 9%pa. It averages about 5%pa. Some hate this since unitholders must pay tax on at least part of the distributions. Me, I love it - high growth and high distributions suit me fine since I am retired. It should also be embraced by those still working, as I will explain in a post about leverage. But they ask why to rebalance. The reason is portfolio theory says it increases overall returns. It forces the selling of those assets that have done well and by regression to the mean is more likely to fall than rising, and the buying of those assets that have done poorly, which again by regression to the mean are more likely to increase. That is the whole idea of the efficient frontier. If they did not do it, their total returns would suffer. I do not know if it will suffer more than the tax unitholders may need to pay - but it will suffer.

Thanks
Bill

 

[bhobba]

Buffett has talked about him on occasion and said he had a bad strategy of trying to get rich with unnecessary risk and used a lot of leverage

There is good leverage and bad leverage. The good leverage is the one that reduces tax but does not have margin calls. It is suitable for high growth ETFs like VDHG that pay good dividends that investors have to pay tax on because they are working and in a high tax bracket.

It works like this. The way to reduce tax, increase returns, and accumulate more units in the ETF is to take out a NAB Equity Builder loan to buy the shares. It works differently than typical margin loans with no possibility of a margin call. You put in some money - for VDHG 20% of the amount you want to buy. They supply the other 80%. It is like a personal loan with the ETF as security. You take it out for 3 to 10 years but can pay it off quicker if you wish. There is no chance of the dreaded margin call - the only issue is like any loan making your payments. The big dividend is then used to help payout the loan, so the interest portion becomes a tax deduction rather than a tax liability.

Once paid out, you can do the same again - only this time you also have the first lot of units - so you have two dividends. You can keep doing this over and over, increasing the dividend each time. Eventually, over the long term, even with taxes, it will be self-perpetuating, and you will get a steadily growing number of units and passive income - taxed, of course. But as time goes by, the distribution will be so great you can retire and live off it. The Financial Independent Retire Early (FIRE) people love it. It, and similar strategies, is likely why the NAB Equity Builder is so popular here in Aus. There is an 8-month waiting list.

Thanks
Bill

 

[BWV]

There is good leverage and bad leverage. The good leverage is the one that reduces tax but does not have margin calls. It is suitable for high growth ETFs like VDHG that pay good dividends that investors have to pay tax on because they are working and in a high tax bracket.

It works like this. The way to reduce tax, increase returns, and accumulate more units in the ETF is to take out a NAB Equity Builder loan to buy the shares. It works differently than typical margin loans with no possibility of a margin call. You put in some money - for VDHG 20% of the amount you want to buy. They supply the other 80%. It is like a personal loan with the ETF as security. You take it out for 3 to 10 years but can pay it off quicker if you wish. There is no chance of the dreaded margin call - the only issue is like any loan making your payments. The big dividend is then used to help payout the loan, so the interest portion becomes a tax deduction rather than a tax liability.

Once paid out, you can do the same again - only this time you also have the first lot of units - so you have two dividends. You can keep doing this over and over, increasing the dividend each time. Eventually, over the long term, even with taxes, it will be self-perpetuating, and you will get a steadily growing number of units and passive income - taxed, of course. But as time goes by, the distribution will be so great you can retire and live off it. The Financial Independent Retire Early (FIRE) loves it. It, and similar strategies, is likely why the NAB Equity Builder is so popular here in Aus. There is an 8-month waiting list.

Thanks
Bill

Had not heard of that - apparently its an aussie thing - nothing like this exists in the US, SEC rules mandate margin calls. Much of the benefit of private equity is using the company balance sheet to leverage rather than the investor assuming the liability - and with the disappearance nce of financial covenants, the only way the ‘margin call’ occurs is if a missed interest payment or the debt matures and cannot be refinanced

 

[bhobba]

Had not heard of that - apparently its an aussie thing - nothing like this exists in the US

Only one bank here in Aus does it - NAB. As I said it is so popular there is an 8-month waiting list. I put my name down and will give it a go with a small loan to start with. It could prove interesting.

Thanks
Bill

 

[woopydalan]

I've used Zoom and Google Meet before. I didn't feel either one was that much better than the other that I'd want to consistently use that one or pay a premium for it.

My church used Zoom during the pandemic and continues to on a smaller scale now (Sunday service is live and in-person, while some small fellowship meetings are sometimes done on Zoom still). I think I very, very slightly prefer Google Meet over Zoom. But, it could just be familiarity, as I used it pre-pandemic (back when it was also Google Hangouts or whatever it was called).

The familiarity is sometimes a component of what business/stock analysts call a "switching moat." One of the "pains" of switching from one software type to another is the annoyance of having to relearn an entire system or way of doing things. Lazy me would prefer to just use the one I'm already using, unless there is a BIG noticeable improvement in the other one (not that Zoom is tough to use or anything - quite the opposite)...If forced to choose, I'd rather stick with Meet for familiarity and especially if Zoom is going with ads now on their freemium version. I hate ads, so that'd be reason for me also sticking with Meet.

A lot of schools/universities were using zoom as well. I think it has to do with the fact that you don't need an account to log into a room. So minimum amount of work to get kids into the conference room.

 

[woopydalan]

Bitcoin does have the advantage of not being infinitely printable.

Is there a difference between printing more dollars vs. coming out with bitcoin 2.0, 3.0, 4.0, ...?

 

[Office_Shredder]

Is there a difference between printing more dollars vs. coming out with bitcoin 2.0, 3.0, 4.0, ...?

Yes.

Everyone can just agree that Bitcoin 2.0 is not valid currency, so has no effect. If the government prints more dollars, they are effectively indistinguishable, so people can't just choose to ignore them.

Bitcoin 2.0 would be like another baseball card company printing their own cards - people can just decide the original company's cards are the valuable ones, and the new company's cards are not collectible.

 

[woopydalan]

Yes.

Everyone can just agree that Bitcoin 2.0 is not valid currency, so has no effect. If the government prints more dollars, they are effectively indistinguishable, so people can't just choose to ignore them.

Bitcoin 2.0 would be like another baseball card company printing their own cards - people can just decide the original company's cards are the valuable ones, and the new company's cards are not collectible.

Or people decide Bitcoin 2.0 is vastly superior to Bitcoin and now your original bitcoins are worthless

 

[phinds]

Or people decide Bitcoin 2.0 is vastly superior to Bitcoin and now your original bitcoins are worthless

And pigs might learn to fly, but it's unlikely.

 

[woopydalan]

And pigs might learn to fly, but it's unlikely.

Who knows? It was unlikely that bitcoin was ever going to be worth anything, and look where we are today

 

[Office_Shredder]

This isn't any different than like, people might decide Bitcoin is better than us dollars so your dollars become worthless.

It's pretty likely that if a better currency came around, it would include an air drop to current Bitcoin holders so they weren't devalued anyway (or current Ethereum holders, or whatever)

 

[fluidistic]

What do you make of regulation risk - the extreme negative end being government banning of cryptos?

Not sure what the question is about, you mean what effect on cryptos in general? I can only speculate (as you, too). My take is that this won't stop cryptos. For this to happen, all governments on Earth would have to act in unison, effectively preventing absolutely everyone from participating in stacking/mining/trading and saving seedphrases with not a single person kept out, and probably have to erase our memory and everything related to cryptos in general to prevent anyone from recreating it. Not going to happen unless we disappear as a species.

Regulations can make price swings... but hey, no big deal.

 

[fluidistic]

Some random thoughts to "kill cryptos" as we know them today. Government would have to create their own centralized cryptocurrencies and convince us to swap/switch our traditional cryptocurrencies to use theirs. Or try to crack some hardly fixable weakness in a particular cryptocurrency, if that is feasible at all.

Edit: Trash my thoughts in the dustbin. Some people will still want to buy the original "BTC" even if it has no use (in a "pessimistic" future), like a collectible.

 

[kyphysics]

Nice story. I especially like the bit about bonds. Having a small amount in bonds (say 10%) make only a minor difference to returns - sometimes even increasing them. However, the risk is reduced by a not-insignificant amount. One of the strange results of portfolio theory and the efficient frontier.

Morgan Housel (behavioral finance expert and frequent investment writer) has lots of stories of everyday millionaires: teachers, janitors, plumbers, etc. He's fun to listen to (lots of lectures/interviews on YouTube). I like when he contrasts the unexpected millionaires with failed rich people. It gives you a sense of how important principles are. You can have it all, but mismanagement of your personal habits and finances can ruin you.

Speaking of which:


This is a fascinating concept. I don't have the reference off-hand, but there's been statistical work done on Warren Buffett's "secrets to success" and it was found that it wasn't his awesome stock picking or awesome returns (he had the best vehicle to do it with too - a holding company with an operating business(es) generating float with which to invest into stocks - which is a huge advantage over traditional money managers having to deal with client redemptions at the worst times), but rather Warren's lack of huge lingering losses that have contributed to his outsized performance.

I don't know if that was in his mind when he famously said that the first rule of investing is to not lose money and the second rule is to never forget the first rule, but it can be critical to long-term success. If you don't protect yourself, huge lingering drawdowns can ruin your performance. A big cause of that is buying expensive equities that take many years to recover or buying stuff you don't fully understand.

Good reminder for me to not get greedy and start buying cryptos that I don't understand. Gotta stay patient and principled. Don't want to suffer some huge loss.

 

[bhobba]

And pigs might learn to fly, but it's unlikely.

There is no doubt that bitcoin is a high-return, high-risk play, including going out the back door. That is why I have only a tiny amount in a bitcoin ETF and watch it like a hawk. Having only a small percentage of such in your portfolio can increase your returns over the long term with only a slight increase in risk:


How it affects the return and risk depends on correlation with other asset classes. You do not expect (but I have not seen research into this) bitcoin to be correlated with, say, Australian Shares. So including a small amount of bitcoin may be a good thing I am taking the punt.

Interestingly my high growth extremely diversified ETF VDHG (and rigorously managed using Markowitz Portfolio Theory including AI) is still increasing while the rest of the Australian market, including my bitcoin play (CRYP), is declining.

Thanks
Bill

 

[bhobba]

You can have it all, but mismanagement of your personal habits and finances can ruin you.

True.

But the most robust return comes from reducing the risk in your portfolio? OK, invest in the nearly riskless investment, government bonds and see your returns. The best return is to decide on a reasonable risk profile - like high risk with virtually no risk of going out the back door, but not a very high risk with a real chance of going glug glug. Then find the portfolio that gives maximum return long term for that risk.

Thanks
Bill

 

[kyphysics]

and came to roughly about $200/share as an entry point I'd be willing to take a small position in (using no margin of safety).

I've maybe slightly soured on Zoom since...but definitely think they are in much better shape than Peloton.

Wow, $ZM hit my price target today...fell almost 20% in one day.

I did NOT buy. Wondering if growth will be flat to smallish now.

Saw an interesting question posed a while back: Is there any business that wants to subscribe to Zoom that hasn't already? (i.e., Hasn't everyone who would want to use them for enterprise already done so? The whole world knows about them already and nothing is stopping anyone from buying their service.)...If so, growth could be dreadfully slow going forward on the enterprise front.

 

[kyphysics]

As Cathie Woods' $ARKK implodes, Julian Brigden explains why. Will she become the Neil Woodford of the 2020's?

$GME also looks dead. RIP

 

[mfb]

$GME also looks dead.

It's still at 140, far higher than it was before January. It has been around 150 for most of the year now.

 

[kyphysics]

It's still at 140, far higher than it was before January. It has been around 150 for most of the year now.

Yeah, but crashing fast. $136.88 technically.

No plans for profitability as far as I can see. It's a money-losing, meme stock pushed up by short and gamma squeezers. Brick and mortar stores are dying as far as the eye can see. GameStop's business model doesn't offer much in the way of a huge turnaround. It feels the same old, same old. ...Hopes of the new CEO working some kind of new magic have gone out the window now with no new plans.

At least they took the surge in share price to sell equity and play down debts earlier. Other than that, they are a stagnant, money-losing business whose valuation is too high and will get hurt as the Fed tapers its asset purchases and market liquidity dries up I think...Then again, that WSB army is relentless...

 

[bhobba]

No plans for profitability as far as I can see. It's a money-losing, meme stock pushed up by short and gamma squeezers.

Yes. That's what makes me laugh. Value investing has been proven to beat the index and other methods like growth investing:
https://en.wikipedia.org/wiki/Value_investing

Thanks
Bill

 

[kyphysics]

Yes. That's what makes me laugh. Value investing has been proven to beat the index and other methods like growth investing:
https://en.wikipedia.org/wiki/Value_investing

Thanks
Bill

$GME will be interesting for the history books.

It was a ridiculous moment in time that combined social "justice," psychological investing mania, a very smart short squeeze, and a mass of people tangled up in the drama for all sorts of reasons (from the get rich trader to the big Wall Street whales closing rank and backing each other up against the masses and retail investors).

I thought Aswath Damodaran ("The Dean of Valuation") had an interesting valuation of $GME. He could imagine a very optimistic case and every single thing going their way and then some and getting to about $140-ish. But, that was the absolute best case scenario (with some improbable, borderline luck and good fortune sprinkled in).

Sadly, GameStop kinda is a dying company. What does it offer?

 

[kyphysics]

Will these retail investors ever run out of money?

Will the $GME Ponzi-esque scheme ever conclude?

 

[bhobba]

Will these retail investors ever run out of money?

Will the $GME Ponzi-esque scheme ever conclude?

Options trading, when used correctly is a valuable tool for value investors to get paid for trying to get shares at a cheaper price. It is also valuable when selling using covered calls. In fact, people have developed whole systems around this simple idea and value investing:



That is no issue at all. The trouble is when people get together and misuse it like what happened in Gamestop. You can never stop it - people are always trying to come up with get-rich-quick schemes. Trouble is in the share market there are only get rich slowly schemes. I am doing an advanced course on options at the moment from a Wall St trading firm. I thought I knew about options reasonably well - how wrong I was.

Thanks
Bill

 

[russ_watters]

Will these retail investors ever run out of money?

Will the $GME Ponzi-esque scheme ever conclude?

Aunt Carol gave me $50 for Christmas, what else am I going to do with it?

 

[kyphysics]

You can never stop it - people are always trying to come up with get-rich-quick schemes.

I'd be interested to see how these "got rich" folks spent their money.

In behavioral finance, there is something called the "found money effect." If you win the lottery or find money on the ground or something - where you didn't earn it - you're more likely to treat it more liberally and spend it irresponsibly. Whereas, if you earned the money the old fashioned way, you're more likely to respect its value.

It's not what you make, it's what you keep (and increase).

Time will tell who the real winners are. Warren Buffett always says time is the best friend of a great business and the enemy of a bad one. In the short-term, anything can happen. Real winners stand the test of time.

 

[mfb]

Yeah, but crashing fast. $136.88 technically.

$136.6 now. Zero loss in almost a month is not what I would call "crashing fast". It's still very volatile, you can always pick a timespan where it lost something. But it also keeps gaining in between, so focusing on the first only is producing a misleading picture.

 

[Astronuc]

Game Stop may go the way of BlockBuster video, which apparently turned down an opportunity to buy Netlfix for $50 million.
https://www.inc.com/minda-zetlin/ne...marc-randolph-reed-hastings-john-antioco.html

The share price, which opened Friday 0930 EST at $159.77 and ending $140.62 with an intraday low of $132.50, is certainly volatile.

However, in the near term, there is a strategy to turn GME into an NFT marketplace.
GameStop Stock (GME) Up With News of NFT Marketplace Launch
https://moneymorning.com/2022/01/07/gamestop-stock-gme-up-with-news-of-nft-marketplace-launch/

GME's business model is one of entertainment, and like many enterprises, finding ways to extract money from its customers with as little value in return as possible.

 

[scompi]

However, in the near term, there is a strategy to turn GME into an NFT marketplace.
GameStop Stock (GME) Up With News of NFT Marketplace Launch
https://moneymorning.com/2022/01/07/gamestop-stock-gme-up-with-news-of-nft-marketplace-launch/

A desperate move to try to stay relevant. PC gaming today is virtually all digital (via Steam, for example). Sony/PlayStation and Microsoft/Xbox have been trending in that direction over the last few years, now offering digital only consoles.