GameStop, Citadel, And The Fleecing Of Small Investors | Spencer Jakab
Sep 26, 2023
01:31:33
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Financial journalist and author Spencer Jakab discusses the fleecing of small investors, problems at the clearinghouse, gamma squeezes via out-of-the-money short-dated call options, the r/wsb strategy becoming a movement, the influencers Dave Portnoy, Chamath Palihapitiya, and Jack Farley, the theories of conspiracy, and how to beat Wall Street actually.
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Quick takeaways
The stock market is rigged against small investors, benefiting large institutions and hedge funds at their expense.
The meme stock squeeze, such as the GameStop frenzy, enriched Wall Street while leaving many retail investors at a loss.
The role of short sellers in the market is misunderstood, as they cannot destroy a company, highlighting the importance of understanding risk and the need for regulations to ensure fairness.
The meme stock movement started as a rebellion against Wall Street but evolved into a broader revolution seeking to reshape the financial system, emphasizing the need for caution, informed decisions, and market regulations.
Deep dives
Wall Street's fleecing of small investors
The podcast episode discusses how the stock market is rigged against small investors, with large institutions and hedge funds benefiting at their expense. Wall Street's system of incentives often transfers money from inexperienced individual investors to experienced institutional investors. The meme stock squeeze, including the GameStop frenzy, enriched Wall Street while leaving many retail investors at a loss. While some individuals did make money during the episode, Wall Street as a whole profited significantly. The podcast also explores the role of short sellers in the market and debunks the myth that they can destroy a company. It highlights the importance of understanding risk and the need for regulations to ensure fairness in the market.
The mechanics of the meme stock squeeze
The podcast delves into the mechanics of the meme stock squeeze, focusing on the GameStop frenzy. It explains how a group of retail investors on Reddit's Wall Street Bets forum coordinated to drive up the stock price, primarily targeting heavily shorted stocks. They used options trading and social media to amplify their actions. The episode discusses the role of brokers like Robinhood and the clearinghouse in the market. Robinhood's decision to limit buying was due to collateral requirements from the clearinghouse, as trades take time to settle. Many different players, including institutional investors, value investors, and even insiders, made money in this volatile market situation.
Profits and losses of the meme stock movement
The podcast examines the financial outcomes of participants in the meme stock movement. It suggests that Wall Street insiders, such as famous value investors Michael Burry and Joel Greenblatt, were among those who profited from the stock price surges. However, it notes that the majority of retail investors likely sold at some point during the frenzy, as sustaining large profits proved challenging. The episode also explores the phenomenon of 'loss porn,' where some forum members share stories of their losses, which became somewhat celebrated within the community. It underscores the difficulty of timing trades and highlights the importance of understanding market dynamics.
The evolution from rebellion to revolution
The podcast traces a shift in the meme stock movement, from a rebellion against Wall Street to a broader revolution. Initially driven by a desire to 'screw over' large institutions and hedge funds, the movement expanded rapidly, attracting millions of participants. It became an ideological movement, seeking to reshape the financial system and challenge traditional market practices. The podcast emphasizes how the movement's initial goal of empowering retail investors and exposing Wall Street's flaws shifted to a more speculative focus. It highlights the need for investors to be cautious and well-informed, and the importance of regulations to address market inequalities and protect all participants.
The Rise and Fall of the GameStop Movement
The GameStop movement, driven by the rise of retail investors, was a unique phenomenon in financial history. It transformed from a simple stock trading scenario into a movement that attracted a younger generation of investors. The movement was fueled by a sentiment of rebellion against Wall Street and a desire to stick it to the "man." Influential figures like Elon Musk and Dave Portnoy played pivotal roles in encouraging and supporting the movement through social media. However, the movement eventually lost its momentum, and many participants ended up losing money. Despite the downfall, the allure of speculation and the desire to outsmart Wall Street continue to lure individuals, leading to the persistence of risky investment behaviors.
The Aftermath and Conspiracy Theories
After the frenzy surrounding GameStop, there were ongoing discussions and conspiracy theories within the retail investor community. Some believers in the movement still hold on to the notion that there will be a 'mother of all short squeezes' that will lead to massive gains. However, these theories are often based on misinterpretations of short interest data and lack a solid foundation. Although the movement has experienced a significant decline, there are individuals who continue to engage in speculative trading and hold on to hopes of massive profits. These gambling tendencies are driven by a desire for quick riches and the temptation to outsmart Wall Street, even though statistics show that the odds are often stacked against them.
Passive Investing versus Speculation
Simultaneously, the rise of passive investing has been gaining momentum over the past few decades. With more than 50% of US dollars invested in the stock market being passively managed, investors are adopting a long-term approach and avoiding excessive trading. This trend aims to eliminate the behavioral pitfalls associated with active and speculative trading. However, despite the growth of passive investing, the allure of speculation remains strong. Many individuals still believe that they possess the skill or insight to outperform Wall Street, while others engage in these risky behaviors for the thrill or a chance at a big win. The challenge lies in educating individuals about the benefits of passive investing and the potential risks associated with speculation.
Spencer Jakab, editor of Heard On The Street for The Wall Street Journal, joins Forward Guidance to share what he learned writing his latest book, “The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors.” Jakab and Farley discuss meme-stock mania in all its aspects: the outwitting of hedge funds by individual investors, the transformation of r/WSB from a trading club to a “movement,” the shameless promotion by influencers, and the tallying of who ultimately got rich. Filmed on September 19, 2023.
(31:13) Gamma Squeezes via Out-of-the-Money Short-Dated Call Options
(38:19) Who Was Still Short?
(51:02) The r/wsb Strategy Become A Movement
(56:28) The Influencers: Dave Portnoy, Chamath Palihapitiya, and Jack Farley
(01:06:10) The Theories Of Conspiracy
(01:13:44) How To Beat Wall Street (Actually)
-- Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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