As many of you know, I have been a consistent critic of those who promote and profit from traditional active investing strategies marketed dishonestly to individual investors and corporate retirement plans.
The data that supports my view is easy to find for those who seek it. Hopefully, it will never be censored to keep it from those who continue to challenge the richest and most powerful forces in our industry that consistently exploit uninformed investors.
This is not to say I’m against active management. Active management enhances market efficiency, which we exploit to our long-term advantage.
Speculators in GameStop, for example, have a right to express their opinions of the company through buy and sell orders to their heart’s content. As long as it’s their own money and I don’t have to bail them out when they lose, I say speculate on, Garth.
Short selling is just another way to sell. But it’s more aggressive. You not only have lost confidence that the stock price will rise; you now want to profit on its decline. So you borrow shares from another investor, sell them, and then hope to buy them back cheaper.
If you’re right, you buy back the cheaper shares, return them to their owner, pay a vig to the lender, and bank the difference. Hedge funds like to sell short to offset their long (buy) positions. Several funds had big shorts in GameStop, and a bunch of “little guys” through social media hyped the stock as a “buy” to “squeeze” the shorts. It worked—for a while—and had a cute “steal from the rich, give to the poor” Robin Hood feel to it. Many even executed their trades through the popular Robinhood app.
Lot’s of small investors thought they could take down the rich and powerful. Most, no doubt, are poorer for the attempt. That’s not illegal, just naive.
But there is likely a more sinister side of the GameStop game. Some prominent social media personalities might be engaged in “pump and dump” schemes, which are illegal. Elon Musk’s promotion of GameStop and Bitcoin and Mark Cuban’s hype of Dogecoin are suspect, in my humble opinion. Whether the appropriate government officials agree remains to be seen.
Of course, all the social media hype leading to these massive jumps in stock prices could be legit. Whatever the motives or means, it’s certain that many smaller investors who can least afford it will be on the losing end of these speculative games.
Jason Zweig wrote a brilliant perspective on this in the February 12 edition of The Wall Journal titled “How the Stock Market Works Now: Elon Musk Tweets, Millions Buy.”
Jason calls these social media hypesters the “outsiders,” in contrast to Wall Street “insiders” who used to lure retail investors with their supposedly brilliant insights. He writes “Decades ago, an iconic series of television ads made stockbrokers seem omniscient, with crowds dropping everything just to hear what brokers thought: ‘When E.F. Hutton talks, people listen.’”
He goes on, “Wall Street analysts and fund managers have always claimed to base their predictions on original research and fundamental analysis. Yet those have seldom been better than educated guesses. The result, over the decades, has been billions of dollars in overcompensation for trillions of dollars in underperformance.”
Sound familiar? He goes on:
“My own take is straightforward. The new messiahs of momentum, with their charisma and huge followings, can unite the buying power of scattered investors better than anyone who came before them. For a crowd of followers to be wise rather than foolish, though, those who lead it must have an unusual information edge.
“And I’m not sure why the predictions of today’s powerful outsiders should be any more accurate than those of the insiders who came before them. Fame and fortune in other fields are no assurance of success in the financial markets.”
We couldn’t agree more, Jason.
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