The investment world has always had a language of its own. But the recent market craziness has revealed jargon that even the world’s greatest investor (no, not me, I mean Warren Buffett!) would struggle to comprehend.
Though a lot of this new investment language is a bit strange (do we really need to be calling stocks “stonks”?), it’s the thought and philosophy behind some of these terms that’s disturbing. But before I get into that, I’d like to make a few more observations that I didn’t have time for on Friday about what happened last week.
Revenge or just another form of manipulation?
Many people, including those that were involved in the buying frenzy that drove up the stocks of troubled companies such as GameStop and AMC, look at what happened as the revenge of the ordinary investor on the big bad Wall Street tycoons and Hedge Funds. I think there was certainly a large element of that, and that was the intention of a lot of people involved. But I’m not sure that completely explains it or that’s how it completely worked out.
Yes, a lot of small investors, some very inexperienced and perhaps even investing for the first time, made a lot of money in the “short squeeze” that went on pretty much all week. Well and good. But I read a lot of stories over the weekend of people who bought near the price peaks, or worse yet who had a fortune on paper, only to hold onto these ridiculously overpriced stocks (or the corresponding options) too long and lost money; in some cases a lot of money.
And I’m not convinced there weren’t some of the Wall Street tycoons that people thought they were fighting against right in there making tons of money as well. I wouldn’t be shocked if some of them were even among the instigators. I’m reading all kinds of speculation in media reports using words like “market manipulation”. The Securities and Exchange Commission (SEC) isn’t real thrilled when things like that happen, nor should they be.
Who’s really behind it?
I’m not saying that big money was absolutely behind the stock run ups of last week, but as I said I won’t be shocked if we find out that was the case, at least in part. And if so….it’s a problem, and potentially a big one.
Whipping up an artificial buying frenzy to cause the price of stocks to skyrocket may (or may not) be legal, but it amounts to a sort-of market pyramid scheme that could have serious implications for the markets and the economy. It’s not completely a pyramid scheme, but the potential for harm to individuals as well as the economy is very similar.
Here’s what I am concerned about. People are taking legitimate investments, and using them to a) maliciously destroy businesses such as hedge funds, b) maliciously harm people such as wealthy investors or others deemed to be causing harm to markets/the economy/society, and c) make money by manipulating the emotions of others in a rather extreme way. This is not what investing should be about.
The implications are not good
I didn’t write this post to moralize to anybody, just to point out that there are dangers in what is going on at several levels. And I am no fan of hedge funds for many reasons, and I’d like to see them go away for reasons I’ll state in an upcoming post, but I don’t thing market manipulation is the way to do it. A lot of other people are also going to get hurt, and already have been.
I won’t explain pyramid schemes in detail, or why they are so destructive. And as I said, the parallels between them and what has been happening the past week are not exact, but here are the similarities I see: People that get in early and get out while they are ahead make money, in some cases a lot. But the later one gets in, or in this case the higher the stock price goes, the less profit there is to be made.
A game you wouldn’t find on GameStop’s shelves
Finally, the people that get in last, or close to last, when stock prices peak, are set to lose, and probably lose a ton. Let’s look at GameStop. This was a $17-18 stock when 2021 began. It rose to $40 for a few days, and a week later peaked at $483! Did something incredibly great happen to the company to double the price from $17 to $40? No! This is a distressed company that is closing stores left and right and can’t keep up with online streaming of games.
But people that bought in before the true skyrocket ride began, and who got out before the fall, made tons of money. As the price kept going up, more and more people jumped on board (which is why it kept going up so sharply). But what about the people that bought at $300, or worse yet, $483?
Eventually, when the nonsense is over, the company will still be in trouble, and the stock price will likely go back to reality. Some people make a lot some people lose a lot. Yes, that’s the way the market works in general, but the market doesn’t exist to artificially inflate and manipulate stock prices to the point of being a game, and an unfair one at that.
It’s the same with AMC. Movie theatres have been closed, or open at greatly reduced seating, for almost a year now. Because of this and other reasons I won’t get into here, AMC was talking about potential bankruptcy just a few months ago. Nothing had changed with the company’s financial condition, at least not for the better. But the stock jumped as if the company had invented a way to beam movies directly into people’s brains.
Wither the King Fool
This whole situation has a bit of a ring of the “greater fool theory” to it, where people buy things of little real value for higher and higher prices: examples include cabbage patch dolls in the 80s and beanie babies in the 90’s/early 00’s. Eventually the price rises to a point that nobody is willing to pay, which means the “king fool” has been found. That’s when the fun ends and the steep losses set in.
The Lingua Franca of craziness
Now back to the new Reddit/Wallstreetbets lingo and, more concerning, some of the mindsets and tactics I’ve been reading about. I’m not going to give you a glossary of terms, as there are plenty already out there (I found this one on CBS Marketwatch). I just want to make some observations about two of the terms I have seen a lot over the past week (and never saw before last week).
The first is “YOLO” or “going YOLO”. This amounts to betting all of your proverbial chips (i.e. everything you have) on one particular stock, or frequently one particular option. The point is to bet it all for maximum gain. YOLO stands for You Only Live Once, so of course why not go for broke?! Most of the time when I have seen people go for broke, broke is usually where they end up.
You might not be surprised to hear that I am not a fan of going yolo. However, if you are just getting started in the markets, and you’ve set aside a small amount of money you don’t need for rent/food/other essential items, I can understand wanting to pick a stock and put your entire amount into it. I would prefer though that you pick a legitimate investment, such as the stock of a sound company, rather than gamble that you won’t be too late to the Wallstreetbets show.
But I’ve read far too many stories the past few days of people taking their life savings, or legitimate investment accounts, and going yolo with it on one of the recent price manipulation schemes. That isn’t just going yolo, it’s going loco. People doing it might reason that they’re young and have plenty of time to make any losses they incur back, but why set yourself so far behind when it comes to building wealth? Why gamble with money you could be building on with less risk? I think it’s crazy, and I urge everyone not to do it.
Going yolo once with a small amount of play money…I don’t recommend it, but I can understand it. I hate to see people do it too much though, and delay building a portfolio that can improve your life, not just now but throughout your life. The longer you put it off by going yolo, the less you will eventually be able to build your account up to. Yes, you only live once, so why not make your financial life the best it can be?
Stonks? Really?
I’m not sure how or why the term got started, but “stonks” sounds like it has a pretty negative connotation to me. And a lot of what I’ve read lately from the Wallstreetbets crowd has been mocking stocks, as if options are the only real way to make money. If that’s really the message people are sending when it comes to Stonks….yikes!
As I’m sure you might guess, I would prefer that you buy mutual funds rather than individual stocks, but if it’s a choice between stocks and options…I advise most people to stay away from options. Options are gambling, pure and simple. The problem as I see it is that by calling stocks Stonks, many inexperienced investors are bowing to a sort of peer pressure to buy options instead. If this is you, please resist the pressure! More on options later this week.
What’s the real motivation?
Many people on Wallstreetbets are calling the kind of sound, wealth-maximizing advice such as what I provide on this blog as “Boomer Advice”, another derogatory term. I’m afraid that the ringleaders of Wallstreetbets are deliberately and maliciously trying to steer inexperienced investors toward their schemes to build huge profits for themselves at their followers’ expense.
Yes, my advice may be Boomer Advice, but it’s not designed to use or manipulate anyone. The advice I and many other investment professionals provide is designed to help everyone have a better financial future without undue risk, whether you’re a college student, young adult, or older adult. Following the Wallstreetbets army is to me just going loco.
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