Welcome to the month of February. For a year that is just a month old, 2021 sure feels like it has been around for a while.
I am very certain that, many of us followed with rapt attention the GameStop, Robinhood and Reddit WallStreetBets saga. The saga was seen by many as a fight between the “big boys” hedge funds and the lowly retail investors or if you like; a modern day David versus Goliath battle. David in this case are three million retail stock traders using platforms like Robinhood. Goliath, this time are the institutional traders and in particular hedge funds.
Early last month, a short seller – Citron Research published their monthly stock play and they made it known they will be *shorting* a few stocks – GameStop and AMC. Reddit users got to know a few hedge funds will be making this same stock play and so they decided to band together and go the opposite direction. They formed a single body and decided to punish the hedge funds; they have succeeded as hedge funds have lost $19 billion year to date.
Depending on the side of the divide you were on; the saga truly captivated investors globally. Today’s newsletter will focus on the money lessons we can glean from it:
- Always read the fine print: Many users of the Robinhood (Webull inclusive) trading platforms were outraged to discover that they were unable to trade in certain stocks last week. This action led many to accuse Robinhood and others of marginalizing retail investors by changing rules concerning the use of the platforms.
However, many analysts defended these companies by explaining that the rules were not changed but rather enforced.
They referred to the contracts signed by users, which allows the likes of Robinhood and Webull the flexibility to intervene in order to protect themselves and so the companies simply did what they had to do.
This position took many American retail investors by surprise as many had obviously failed to read the fine prints of the agreements when signing on to these platforms.
This situation is very similar to what happened locally in 2020 when investors in several Agritech schemes realised that the insurance policies taken out by the companies did not cover repayment of their funds.
Many times, we fail to read the terms of service or the entire contract when making purchases.
For me, the major takeaway is that the need to thoroughly scrutinize documents when carrying out transactions – financial or otherwise; can never be over emphasized.
- Be fearful when others are greedy: This vintage quote of Warren Buffet holds true here.
Whilst it makes sense to buy shares of companies on a growth trajectory, it is also conventional wisdom to pause if you cannot explain the drivers of this growth.
Even the most experienced analysts will find it difficult to explain how a stock priced at $17 early January 2021 rose to $325 as at close of business January 29, 2021.
From all indications, the GameStop stock price has been artificially inflated and since the aim for many is to build wealth in a consistent manner; buying a volatile stock is definitely not advisable on the long run.
Although those who bought the stock at low prices will clearly stand to make a lot of money whenever they sell (provided prices remain high); no one can safely say how this will all end.
The lesson for me here is to always remember my investment philosophy and risk temperament no matter how good the deal seems. If they align, fine; if not I walk away.
After all, as Richard Branson famously said, “business opportunities are like buses, there is always another one coming”.
- The world is truly global: Technology and the emergence of trading platforms such as Robinhood (US), Bamboo, Trove and Rise (Nigeria) have given many retail investors access to data, information and markets even beyond their countries of residence.
This has, in turn, made trading and investing in some stock markets easier.
An investor can easily participate in these activities with just a smart phone and internet access. Many Nigerians were able to benefit from last week’s trading activities and make considerable profit because of this.
A friend who actively follows Reddit Wallstreetbets had bought $1,000 worth of Blackberry stock in December 2020 based on information she had read on the site. As at the morning of January 29, those stock were valued at over $3,000.
The lesson here for me is that fortune truly favours the brave and that technology and trading portals are tools that I can intentionally leverage on to achieve my wealth generation objectives across countries and markets.
Going forward, I am very sure that like me; many people will be paying close attention to information shared on the Reddit Wallstreetbets page.
- What is good for the hedge fund, is good for the retail investor:
Short sales have never been popular in advanced markets, most particularly because it is a method hedge funds have been known to use to influence stock prices whilst making huge profits in the process.
For many of the retail investors, it was not just about pushing back or beating these hedge funds at their game but simply about levelling the playing field.
Many investors in the US have had personal experiences of selling good stocks prematurely based on a short seller’s advice and this is what the push back is all about.
This push back has been successful in my opinion as it has punished several hedge funds who have made huge losses in the process of offloading the shares.
My takeaway here is twofold:
- Investing can be risky and there are no sacred dogs; i.e. anything can happen. Even the best of us can make the wrong investment calls and the earlier I remember that, the better.
- Knowledge is key – the Reddit followers had done their research and knew that some short sellers had been taking position in GameStop since 2019 and used that knowledge to their advantage. Simply put, they waged their battle with knowledge!
Although we are yet to see the end of this saga, I am certain that many articles and case studies will still be written about how a band of retail investors were able to beat Wall Street at its own game whilst making money in the process.
Please be reminded that the COVID-19 virus is still spreading around the Nigeria especially in Lagos State and that more importantly, the vaccines are currently still unavailable in the country.
As such, we must continue to take personal responsibility for ensuring our safety and those of our family members.
I wish us all a fruitful week and month.