A Mild Rant

By now you’ve likely heard about what some news outlets are making out to be a David vs Goliath sort of battle playing out in the stock market. Day traders (The Little Guy) are battling short sellers (big institutions, or simply Evil Incarnate) by pushing up values on a handful of stocks like GameStop and AMC movie theaters, even Bed Bath & Beyond.

Prices are currently far beyond reasonable for these stocks. It would be perilous at best to enter the fray, but oddly enough people still do, either lusting for a quick buck or trying to avoid the dreaded FOMO, or both. Ordinarily this kind of thing would end with people paying big fines or even going to jail for market manipulation, but nothing seems normal these days.

It’s unsettling for investors when stories like these make national headlines because, among other things, it causes reasonable people to wonder about the health of markets. What does it say about the system if stock prices can be swung around to this extent by people in online chat rooms? If they get together and agree to buy shares of a company’s stock in coordinated fashion to drive the price up, for whatever reason, shouldn’t that be illegal? If they can do it, why couldn’t anyone? Among the many problems with this is it seems to confirm what many already think: the system is rigged. It’s rigged by others who hoard all the goodies and only share with their friends. Except now it’s not only the Fat Cats on Wall Street gaming the system, but also retail investors congregating on sites like Reddit and elsewhere.

The “rigged” narrative is applied to many aspects of our society of late and it’s a shame that it’s also used to describe markets, but it’s true. Or at least partly true.

The true part has to do with exactly what we’ve been seeing with this group of stocks. Prices rose because a lot of day traders made a concerted effort to make them so. Previously, stocks like GameStop were heavily “shorted”, meaning investors such as hedge funds were (and still are) betting against them because they think the share prices will fall. Other traders started fighting this and, over time, many more followed the herd to create a “short squeeze”, or pressure on those firms betting against the stocks by driving up share prices and forcing the shorts to ante up more cash or simply sell at a loss. Regardless of their original intentions (some allude to the nobility of finally sticking it to the hedge funds, and that sort of thing), this is market manipulation, or rigging the system, and it happened in broad daylight.

Many of these traders follow, whether they admit it or not, something referred to as the Greater Fool Theory. The idea is that one could pay a ridiculous price for a stock today because some poor schmo would always be willing to pay more later. We know that throughout history this sometimes works for a little while and is where the theory came from, of course. It’s also what keeps people coming back for more. But most end up being too late and, ironically, become the fool they sought to fleece in the first place. 

Ultimately, it’s clear to just about anyone that prices can be manipulated in the short term through a variety of means, including this latest example. But all is not lost. As I mentioned last week, the real money in investing is made over time, through diligence and patience. Many today have a holding period of moments or days. Instead, think in years and decades. There will from time to time be those who luck into making a lot of money in a short period. History shows us those folks often end up losing their gains eventually because they lack a strategy and the discipline to carry it out. In other words, there are no shortcuts, only scams masquerading as effective strategies that usually end up making someone else rich.

Speculation is as old as time and it’s important to know when too much is exactly that. Lots of people out there in the markets right now have no idea what they’re doing. They think investing is a game. Some brokerage firms and the media reinforce this to make money (what a shocker).

For the rest of us, we’ll try to leave the shorts and other forms of trader behind. Their antics make for interesting reading and, yes, sometimes anxiety in the markets. But as long-term investors we’ll focus on controlling that which can be controlled and the truth that, over time, markets are efficient and always come back to financial and economic principles. That way we can have the best shot at de-rigging the game by not playing it like one in the first place.

Have questions? Ask me. I can help.