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  • Marcus P. Miller, CFP®

The problem with Wall Street Bets

I don't take issue with the non-wallstreet types investing in the stock market. Intelligent conversation about companies should be on Reddit. However, the loudest voices are not promoting investing based on intelligent conversation and analysis of the businesses. They're promoting risky outlandish bets using leverage. This is harmful to the average person as they do not understand the underlying dynamics of the investment. Whether it's market forces, basic fundamentals of how the market (options) work, or even how the price relates to the business. For example, Gamestop was a $5 stock for a reason. Yes, it was heavily shorted and primed for a short squeeze. Yes, perhaps a DCF model would have priced it between $20-30 using some accommodating inputs. Therefore if there was a conversation about purchasing to squeeze the shorts I would have been interested.

The issue is the lack of understanding which caused people to claim "Diamond Hands" and "Never Sell" on a company that was valued at 10x their future cash flows FOR LIFE. It was an almost guaranteed loss in the long run once it passed $30 (assuming the company doesn't have a major turnaround). So why did it go so high?

Momentum trading is a popular and well documented strategy. However, I would argue that even momentum traders knew to walk away once it passed $30. The volatility spiked and they knew it would become a prime target for another round of shorts. The put options had already been bid up by the big firms. This was like watching fish swimming into the whales mouth. So beyond momentum traders, we had a large number of call options requiring firms to buy shares as collateral. Technically the small players were buying 100x the shares they may have been able to. The issue is that it moves the other direction just as fast. When the stock was declining, brokerages like Robinhood had to sell client positions b