See, it was rigged all along. If that's your attitude after watching stocks of ViacomCBS (VIAC) , Discovery (DISCA) , Tencent (TME) and Baidu (BIDU) get crushed, some before the market even opens, it is totally understandable. It's pretty difficult to imagine that there could be one firm, some outfit called Archegos, that you most likely never heard of, that could bring down all of these stocks and more with a margin call. That's right, one hedge fund was allowed to borrow so much money from so many different firms that, apparently, when one of its position broke badly, the stock of ViacomCBS, many of its big positions came tumbling down.
That sure does seem rigged as does the fallout to the firms that allowed Archegos to borrow money. After all what bank would let one hedge fund borrow so much money that it couldn't pay back its margin loans, let alone a whole bunch of big banks that sold the collateral quickly to limit the hurt to their own bottom lines.
In reality it's not rigged although the banks and the hedge fund obviously had a problem with risk controls. It's likely, also, that each independent bank didn't know the extent of the losses Archegos may have had so they had to act quickly to try to salvage whatever they could before the losses deepened even more. Witness today's further debacle with ViacomCBS.
But let's go back to that first assumption, that it was rigged "all along." What happened with Archegos is, in many ways, a microcosm of what happened to many growth stocks that were incredibly expensive at the highs. A lot of them were owned by younger investors who borrowed money to play the hot stocks, stocks like Unity U and DoorDash (DASH) and Twilio (TWLO) or Zoom (ZM) , stocks of great companies that got crushed by the rotation of larger Wall Street funds, that took their profits and went elsewhere. Many people had come to believe that the younger investors were having such a big impact on the market that they could move stocks. It looks like they did, but perhaps with borrowed money, like Archegos, or even with risky options, call positions that were wiped out by the sudden decline in prices.
Of course, I would be remiss if I didn't mention that the stock of GameStop (GME) is pretty much the mirror image of Archegos. How did the stock of the so-so video game accoutrement retailer get to $400? When a hedge fund that had been betting that GameStop would fall couldn't put up enough collateral so the brokerage firms brought the hedge fund in, basically closing out its position for the hedge fund, and perhaps others, who had been betting against the stock.
Once they were out of the picture GameStop suffered its swift fall from unsustainable heights. There are still plenty of people who think that GameStop's stock belongs in the $400s, just like there are people who believe the great growth stocks that traded at unsustainable heights should return someday to those levels.
But that might not happen for years and years or at all.
Here's why this all matters. If you think the game is rigged you are most likely going to put your statements in a drawer and just say "the heck with it, I will look at it when these stocks come back."
That's a loser's point of view, though. It's the one that many younger investors adopted in 2000 and 2001. Fortunately, a lot of these companies are much better than those back then, although the plethora of SPACs are beginning to challenge that assumption.
I don't want you to do that. I want you to stay focused, look for opportunity, understand that the business isn't rigged, it just, at many times lacks effective self-policing or policing by the government.
But I think this Archegos event will hasten what I most feared in the five stages of grief, the last one, acceptance. Lots of young people are accepting their lot and leaving. That's never good. You must always pay attention to your positions. Positions forgotten are positions that rarely come back.
I can't change your mind about the rigging as an explanation for the paper losses you may have experience. If I couldn't do it back then -- and I failed -- I will fail now. I just urge you to keep a level head and understand the Great Reopening busted so many pure growth stocks, and recognize it wasn't some vast conspiracy against you. It was just a reminder of how hard it really is to make money and how vital it is to listen when I say take something off the table. I wasn't trying to hurt you. I was just trying to warn you. And I sense that I failed in doing so. Is it too late? No, these stocks will have their spikes up. But then you have to sell something, even if it is at a loss. Then you can start afresh rather than abandon the stock market, the greatest wealth creator of all time.