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  • Writer's pictureMarcus 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 before it went negative. They had to recoup the money some traders borrowed. Not to mention they had to limit trading on some stocks because behind the scenes RH was getting hit with immense clearing fees.

So now we have a large number of people complaining because they made decisions without the prerequisite knowledge of how the system works. I personally would hold the moderators of the Reddit page responsible. They created an environment that promote irresponsible behavior and ultimately cost unwitting people large amounts of money.

Perhaps making bets on Wall Street is the new normal. Perhaps it's just the 1920's rhyming with the youth of today.

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