Learning is an ongoing process for me, even after 30 years as a trader. And this year was a doozy to reflect upon the lessons learned.
They say that history doesn't repeat but it does rhyme, so absorbing events helps one to recognize and adapt to something similar that may happen again. I wrote my novel, The Trading Desk, in part, to create a historical record of certain events so that traders and investors who haven't experienced firsthand the events described may recognize similarities in the future and better react.
As much as history is often a guide, I've never quite seen anything like the "meme stocks" GameStop (GME) and AMC Entertainment (AMC) . I can appreciate a "get shorty" mentality when an irresponsible amount of stock is shorted, as it was in GameStop -- around 120% of the outstanding shares at one point. I have a renewed respect for supply and demand along with behavioral economics, especially when it's the opposite of what microeconomics teaches -- in the stock market more demand can arise when the price goes higher. The quick spread on social media and ease for individuals to open accounts -- once a days-long process has been cut to minutes -- is a new phenomenon to witness.
Bottom line, people en masse will jump on a perceived winning trade in the making. Of course it's happened throughout history, but there always seemed to be at least a kernel of fundamental logic. AMC was a stampede of buyers knowing the fundamental case was not relevant. The stock price moving higher was the investment case, yet AMC's stock found a cult following at clearly overvalued levels. It is worth noting that buyers can create their own destiny when they help a company in dire financial straits raise money.
The stock price moving higher was the investment case.
A short squeeze is legitimate price action, but promoting a short squeeze as a movement, that seems nothing more than marketing. It's fun to be part of a movement with a great narrative -- like taking on evil hedge funds -- especially when it's profitable.
I still find the GameStop story clever opportunism that morphed into an ill-conceived mission. There are always winners and losers in trades, and in the case of GameStop, several hedge funds also won big.
In the end, some people want the power to influence the masses with false narratives. In the heat of battle, when the influence peddlers have the upper hand, it isn't easy to get traction refuting a story that makes little sense. Too often, the media would rather breathlessly count the money lost by short-sellers than get in the weeds on fundamentals.
I understand why people invest at uneconomic prices; investors often just need a good story to get on board. There will invariably be people who create narratives that sound terrific on Wall Street. Some will work out, most will not. For GameStop and AMC, the narrative was that they could move the stock higher as a group.
Investing because you believe that a stock can be manipulated higher, disconnected from fundamentals, and soar to irrational levels, seems like a tough racket. Caveat emptor.
Pigs Get Slaughtered, Unless It's Big-Cap Tech
There will constantly be "gurus" to tout that a stock can and will go higher no matter how much it's already rallied. But I find it amazing how no amount of gain will satisfy some investors -- GME at $500 is going to $1,000 -- they always want more. Perhaps since big-cap tech seems to always go higher makes people think that going to the moon is indeed possible.
The GameStop story was clever opportunism that morphed into an ill-conceived mission.
The success of GameStop achieved what I always found problematic on Wall Street: it spawned innumerable pump-and-dumps. The stable of meme stocks became quite large after GME hit. There hasn't been a successful trade or investment without someone of influence finding the "next one" or the "next GameStop." In my career, I can't specifically recall one of the "next ones" actually working for more than an opportunistic trade. Again, caveat emptor.
The lesson of the market staying irrational longer than one can stay solvent still applies, plus short-selling is a challenging game. But I think the larger lesson of this year is also that low-quality stocks chased higher by momentum find a way to eventually seek their level back lower. Of course, short-selling was declared dead after GameStop spiked in February, right at the peak of many growth stocks and SPACs -- perhaps the best shorting opportunity in years.In the end, meme stocks are just an example of stocks disconnected from fundamentals. There are a myriad of examples throughout history. For the most part, investors bought because they figured they could capitalize. It may be considered a movement but it doesn't "change Wall Street forever." That's just another fleeting narrative that makes little sense.