January 28, 2021
While what is going on with GameStop seems like noise to me, this week everyone wants to talk about it. Should we buy it? Sell it? What does it really tell us? The only thing it tells me is that there is more evidence of the incredible amount of money being created by the Federal Reserve. There is more coming, and it’s the same story I have been describing since March 2020.
This money expansion allows even nearly worthless companies access to funding that they have not had before. It allows retail traders access to cash that they have not had before. This allows them to gamble with house money (unearned through labor). One of the places that this gambling takes place is in the equity market. Someone clever figured out that hedge funds have shorted some of these companies (using leverage) that are at likely to go bankrupt. They have realized that by encouraging enough people in aggregate to buy a stock, they can squeeze out these short positions (bets on a company to decline in price) in the market. As fortunes are made in the short term, the mob gets bigger, and the amounts of money going into these stocks gets much larger, hedge funds struggle to buy back their short position, and their lenders are requiring them to pay off the margin calls.
Having read some of the posts on Reddit, it seems there is an anti-Wall Street theme that runs through this crowd. Some believe there is a higher purpose in causing hedge funds to lose money. I won't make a moral argument for either side, but it is clear for the time being that the small retail gambler is winning. My opinion is that ultimately, the small guy will likely give back all his winnings, the same way that most gamblers lose money in casinos. It seems very similar from my perspective.
What does all this mean for the market overall? Some people say the market is broken, some people say we are in a stock market bubble and headed for a crash, but I will reiterate what it says to me is there is way more money being created now than at any point in recent history. Too many dollars chasing too few real and financial assets. So, if enough people buy an asset in fixed supply, and get some of their friends to do the same, they can make something, even with no intrinsic value, rise in price to extraordinary levels.
As any braggadocious gambler would say, the other guys that think they're so smart – all of the hedge funds – are so wrong. All this means is that, in the short term, a hedge fund manager will lose, and the retail investor will win. The end for the overall market and for the economy likely won’t matter. It does, however, change the dynamic for people that would like to short companies with borrowed money. That is a dangerous game with so much access to cash at present.
At August Wealth, we do not gamble, and we do not chase fashionable trends. Our efforts are focused on (hopefully) growing our client’s wealth overtime.
I have answered many questions about GameStop this morning with another question: “What are you trying to achieve with your money?” I am sure I sound like a broken record, but simple compound interest tells you, that if you invest $1,000,000 at an average annual rate of 7% over 20 years, you will have $3.5 million at the end of the period. It is boring, and it does not need to be complicated. However, to try and achieve such a return, it requires strict adherence to rigorous process, and a constitution to stay with your plan and your discipline.
My advice is do not get distracted by GameStop, CNBC, Reddit, or the dizzying heights of some stock chart or crypto currency. FOMO (Fear Of Missing Out) is an acronym that can do great damage. Action based on FOMO says to me: I do not know who I am, I do not know what I want, and I do not know what I am trying to achieve.
So, take a step back, reflect on what you want your money to do for you. Develop a strategy and have faith that over time you will be able to grow your wealth. This wealth can bring you the freedom of time to pursue more meaningful relationships, and you can spend less time worrying about money.
Joseph Cardello, Principal
August Wealth Advisors, LLC
The Loft, 101 Franklin Street, Suite A
Westport, CT 06880
Direct (916) 461-9451 toll free (800) 985-9477
jcardello@augustwealthadvisors.com
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