If you’ve read the news at all, you’ve probably seen that something is going on with GameStop. The Invested Dads are here to fill you in on what’s going on with GameStop stock and selling short. They answer all your questions about this trending news and then talk about the effects selling short could have on the future of the stock market. Listen now!
Main Talking Points
[1:21] – GameStop & The Short Squeeze
[6:22] – What is a Hedge Fund?
[10:10] – What is Selling Short?
[12:52] – Is Selling Short Bad for the Stock Market?
[17:29] – Is Selling Short Morally Wrong?
[18:44] – GameStop Stock’s Worth
[21:25] – Dad Joke of the Week
[21:42] – Restricting Trading
[28:50] – Should More Regulation Be Happening?
Links & Resources
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future today. In case, you haven’t been watching really any news, anywhere, even social media-
Josh Robb:
We’re talking about The Bachelorette.
Austin Wilson:
We’re talking about The Bachelorette, exclusively, the economics of the-
Josh Robb:
The Bachelor, I don’t even know which one-
Austin Wilson:
I don’t either.
Josh Robb:
… it is right now, it doesn’t matter.
Austin Wilson:
Someone’s going to cry, and there’s going to be a dramatic plot twist.
Josh Robb:
The most dramatic season ever.
Austin Wilson:
No, but we are actually, as you probably inferred from the title, talking about what short squeezing is, and the whole GameStop phenomenon we’ve seen recently in the stock market.
Josh Robb:
Yes. Quick question, short squeeze.
Austin Wilson:
Yeah.
Josh Robb:
I’ve seen that word thrown around, that’s when you get a hug from a kid, it’s usually a short squeeze?
Austin Wilson:
Yeah. Well, I do love hugs from my daughter, Juliana. So, hello, if your mom is making you listen to my podcast.
Josh Robb:
She should.
[1:21] – GameStop & The Short Squeeze
Austin Wilson:
She should, because you never start them too early, so three and a half, it’s time to learn about the short squeeze. But first, let’s talk about how we got here. So, Josh, what have you been seeing the last, really couple of weeks is kind of where it’s been huge.
Josh Robb:
So, depending on how you first heard about it, I mean, it’s been on national news, been on, watch the morning news shows, the evening news shows, doesn’t matter, it’s there.
Austin Wilson:
Social media.
Josh Robb:
And you’ll hear that this company GameStop, which, if you were a kid growing up in the ’90s, you may have gone to a store like this-
Austin Wilson:
That’s right.
Josh Robb:
… where you traded in old games and got new games, or got some money for your games, or bought used games. They’re a store-
Austin Wilson:
Still a store.
Josh Robb:
… to brokers transactions with used game equipment, buy new game equipment.
Austin Wilson:
Do we still have one in Findlay?
Josh Robb:
I believe there’s one in Findlay.
Austin Wilson:
Because I know a couple of years ago there was one and I haven’t been to the mall in-
Josh Robb:
I think there’s one-
Austin Wilson:
… ever, in a long time.
Josh Robb:
… it’s over by the Walmart, over by the high school.
Austin Wilson:
Really?
Josh Robb:
I think it’s a GameStop, because I went in there, this Christmas, and bought a Nintendo Switch from them.
Austin Wilson:
Really?
Josh Robb:
Yes. Yeah.
Austin Wilson:
Wow.
Josh Robb:
Okay.
Austin Wilson:
So the whole business model of GameStop.
Josh Robb:
It’s there.
Austin Wilson:
We’ll talk about that-
Josh Robb:
We’ll get into it.
Austin Wilson:
… in a little bit.
Josh Robb:
So, this store, though, right? It’s been around for a while.
Austin Wilson:
Yeah, not doing well, most of them are closing.
Josh Robb:
Doing its thing, trying to stay alive in a digital changing world. I mean, video games are moving online, there’s less purchased stuff. Anyway, it’s minding his own business, but then all of a sudden its price, its stock price started going up, relatively fast.
Austin Wilson:
Now, I think the first catalyst was actually the founder of Chewy, the old CEO/Founder of Chewy, who’s no longer at Chewy, but he joined the board of GameStop-
Josh Robb:
Right, they were looking-
Austin Wilson:
… so that was like, okay, great, he did some good things with Chewy. That can-
Josh Robb:
Maybe he’ll turn it around.
Austin Wilson:
Yeah, that can justify maybe a little bit of a bump. So, I think-
Josh Robb:
I think they also were looking at a CEO switch in the year before or something. There’s been some movement within their organization that could be seen as positive.
Austin Wilson:
But in general, the stock was trading at less than $20 a share prior to that, less than $20 a share.
Josh Robb:
And then, boom.
Austin Wilson:
Boom is right. So then the Chewy board guy got in there and that was a bump. And then, as we’ll talk about today, the short squeeze occurred. And really, so what happened was a lot of hedge funds, which we’re also going to talk about, were like, “Hey, just because this guy’s on the board, that doesn’t mean this thing’s worth 20% more than it was.” And they took big short positions, and a lot of them probably already had them anyway, because they’re like, “This company’s not going anywhere.” So, that’s kind of where they were just very bearish on the outlook of the company, in general, and well, the rest is history, I think the stocks up 1200% or something year to date.
Josh Robb:
So it’s doing, okay.
Austin Wilson:
It’s outpacing the S&P, slightly.
Josh Robb:
And that’s when some investors got involved from a group-
Austin Wilson:
Let’s not call them investors.
Josh Robb:
I’m going to call them investors, because they were investing.
Austin Wilson:
I’m going to call them speculators.
Josh Robb:
They’re not speculating. They’re investing money, real money is going in there, right or not. But they’re part of a group from an online forum Reddit. Reddit?
Austin Wilson:
Are you on Reddit?
Josh Robb:
Reddit? I’ve been on Reddit. I’ve seen it.
Austin Wilson:
Once this whole thing started, I created a Reddit account.
Josh Robb:
I don’t have an account, I’ve just seen it.
Austin Wilson:
So-
Josh Robb:
I’ve been on.
Austin Wilson:
… Reddit is like an online forum/kind of social media, and you can read really anything. But it’s like a free-
Josh Robb:
You create a little-
Austin Wilson:
It’s a free forum.
Josh Robb:
… group or forum, where you say, “Hey, you know what, anybody here want to talk about donuts?”
Austin Wilson:
Exactly.
Josh Robb:
And then just have a donut forum on Reddit everybody-
Austin Wilson:
I guarantee there’s five.
Josh Robb:
… can throw stuff on there. Yeah, so it’s crazy.
Austin Wilson:
If The Invested Dads… If anyone’s a Reddit user and The Invested Dads are on Reddit, screenshot it and send it to us.
Josh Robb:
We’ll comment.
Austin Wilson:
We will totally do-
Josh Robb:
You have an account, now.
Austin Wilson:
… something. I have an account. I can comment. So, anyway, yes, that’s Reddit. It’s actually very popular among… It’s kind of its niche user base, but it’s got millions of users out there. And so, anyway, there’s this page, which is kind of driving a lot of the action here, and the page is called WallStreetBets. And the WallStreetBets page is nothing new, it’s actually a couple of years old, but really they’re-
Josh Robb:
That might’ve been why I couldn’t find it. I think I was looking at Wall Street Pets, and I was getting like a bunch of animals. I don’t know what… I was like, how do you learn anything from this? I was off.
[6:22] – What is a Hedge Fund?
Austin Wilson:
You were a little off. So WallStreetBets is a page, and they were talking about how… Obviously, they’ve had stock market discussions and stuff, and a lot of speculative discussion for a long time. But really over the beginning of this year, they started looking at, what are the most heavily shorted stocks in the market? And that was really what they decided to be as a target to say, “Huh? I have an idea. I bet I can make some hedge funds lose a lot of money,” and we’ll get into all the details of how that worked. But let’s… The word hedge fund has come up. It’s all over the news. It’s all over this whole discussion about GameStop, specifically, Josh, what is a hedge fund?
Josh Robb:
Yeah. So they’re bushes that go around your house-
Austin Wilson:
Keep them nice and trim with a little-
Josh Robb:
Yep.
Austin Wilson:
Yep.
Josh Robb:
No, the hedge fund is what we call an alternative investment. Meaning, alternative is different than the normal investments like stocks and bonds. All right, so what you do is, you have this hedge fund manager who has some idea of what he wants to do to make money, and you’ll pool a bunch of investments together. Meaning, you’re going to take your money and your money and your money, and I’m going to put it in a bucket, and I’m going to invest in a way to try to earn some money.
So a hedge fund takes a bunch of people’s money, puts into this bucket, and essentially, just tries to do something to outperform the market. And normally it’s not… you can’t access it unless you’re an accredited investor, meaning, you got millions of dollars or you’re an institution or something, it’s not just out there for anybody. But they’re trying to do something different than you can get in stocks and bonds.
Austin Wilson:
Exactly.
Josh Robb:
And usually they make bets using options, derivatives, things you just don’t normally do as a normal trader. And that’s part of what their appeal is, is they’re doing something different.
Austin Wilson:
Exactly. Yeah. And they’re notably, extremely volatile.
Josh Robb:
Yes.
Austin Wilson:
And, I guess, in environments where equities, specifically, are doing pretty well, hedge funds are kind of off the radar, because they don’t do a whole lot, but in times of equity turmoil. So think, the bear market from COVID in 2020, I think the market sell off at the end of 2018, obviously, think of global financial crisis. Those were times where, if you were a hedge fund and you had sizeable strategic bets against the market, you performed exceptionally well.
Josh Robb:
The big one is the big short-
Austin Wilson:
Exactly.
Josh Robb:
… which there was a movie and a book about and everything, and his concept was, in a sense, shorting or betting against the mortgage industry.
Austin Wilson:
Yep, exactly.
Josh Robb:
And so that’s a big example, and there’s been a lot of stuff written and even a movie about all that.
Austin Wilson:
Yeah, exactly. So, that’s kind of hedge funds. I do want to note, if you’re thinking about getting into hedge fund investing, first of all, it takes a sizeable chunk of money to be on their pool of available investor list. There’s a big threshold there, but also they are not cheap. Now, I’m sure actually in years that they don’t do that well, you probably pay an expensive fee, but not an absurd fee. But in years where they outperform, there’s what’s called a hurdle rate. And, generally speaking, I’m not going to go into details of hurdle rates, but if that investment beats whatever threshold it sets or whatever, the more it beats it, the more they earn, and there’s a threshold where they just make a ton of money, and it’s great, for them. It’s expensive for people paying it.
Josh Robb:
Yeah. In the industry, kind of the well known as is called a 2 and 20. So they charge two percent fee, no matter what. Two percent, they’re getting it.
Austin Wilson:
Which is high, if you were comparing it to like a mutual fund or an ETF, or even an active-
Josh Robb:
Yep, Vanguard, if you look at a passive fund like Vanguard, you’re paying-
Austin Wilson:
Basis points.
Josh Robb:
… point zero whatever-
Austin Wilson:
Two basis points.
Josh Robb:
… and two percent. And then the 20, of that 2 and 20, is that hurdle rate that Austin was talking about, is if they beat whatever that rate is that they set, let’s say, they say, “We got to get a 10% return,” anything above that return, they take 20% of that.
Austin Wilson:
Of the above.
Josh Robb:
Yeah.
Austin Wilson:
So, if they get-
Josh Robb:
If they get 12, that two percent, they’re going-
Austin Wilson:
They’re getting 20%.
Josh Robb:
… to take 20% of that two percent.
Austin Wilson:
Yep. Suppose they get 20%, so that 10% they get 20% off, that’s two full percent.
Josh Robb:
That’s crazy.
Austin Wilson:
And it can be billions of dollars.
Josh Robb:
Yeah. So it’s a steep, steep fee they charge for what they’re doing.
[10:10] – What is Selling Short?
Austin Wilson:
So, let’s kind of put the brakes on a little bit, let’s say, what is selling short?
Josh Robb:
Yeah. So, you’ll see a lot more in the summer. There’s a lot more selling shorts in the summer than there is in the winter. And you get great deals in the winter though-
Austin Wilson:
Yes. There are more-
Josh Robb:
… if you’re selling shorts-
Austin Wilson:
No.
Josh Robb:
… in the winter.
Austin Wilson:
Not those kinds of shorts.
Josh Robb:
No, selling short. So the easiest way to describe this is to say, I think something’s going to go down in value and I want to capitalize on the movement downward.
Austin Wilson:
Correct.
Josh Robb:
So I’m going to say, we’re going to use Austin as an example. I’m going to say Austin, “Can I borrow some GameStop stocks…” That’s hard to say.
Austin Wilson:
It is.
Josh Robb:
That’s probably they messed up.
Austin Wilson:
I know. I kind of… There’s the meme game stunk-
Josh Robb:
Yes. That’s might be easier to say.
Austin Wilson:
… that might be how it happened.
Josh Robb:
So, “Can I borrow some stock of-
Austin Wilson:
Yep.
Josh Robb:
… GameStop, please?” Because I’m going to borrow from you, and let’s say, it’s trading at $10, so I’m going to borrow it and I’m going to sell it, I’m going to make $10, because I sold your stock. But I promise I’m going to give you it back in a little bit. My hope is it goes down to five dollars. I’m going to buy it back, give you your shares back, but I just made five dollars on that transaction.
Austin Wilson:
Exactly.
Josh Robb:
… you got to cut in half. That’s selling short, is I’m borrowing some stocks, selling them on the market, with the hope to buy them back in the future at a lower price.
Austin Wilson:
And it only works, if the price goes down.
Josh Robb:
Well, I mean, it works. It’s just, you didn’t move your job-
Austin Wilson:
If the price goes up, you’re in the negative, because you still have to give that stock back at the price. So if goes to the wrong way, and you lose money.
Josh Robb:
Yes.
Austin Wilson:
So selling short is, it’s essentially unlimited liability.
Josh Robb:
Yes.
Austin Wilson:
It can be very bad.
Josh Robb:
Yeah. So if I buy a stock, my liability… Let’s say, I buy a stock for $10. I bought that GameStop stock-
Austin Wilson:
GameStop stock.
Josh Robb:
Oh, geez, it’s so hard.
Austin Wilson:
GameStop stock.
Josh Robb:
It’s like Fox in Socks, that’s my favorite book by the way. Great riddle book. Let’s say I bought it for 10, my risk is 10, goes to zero. I don’t get negative-
Austin Wilson:
Correct.
Josh Robb:
… stocks can’t go negative, once I’m out, it’s out.
Austin Wilson:
Oil’s another story.
Josh Robb:
Yeah, don’t even worry about that. But when I own that stock, it could go to zero. The company could go bankrupt. I lose my $10.
Austin Wilson:
Yes.
Josh Robb:
If I’m selling short, because I have to, I’m obligated to buy it back, at some point, to refund the person I borrowed from, my risk is, like you said, unlimited, because that stock price could go to anything.
Austin Wilson:
If it went to 1000-
Josh Robb:
I have to buy it-
Austin Wilson:
… you’ve got to buy it back at a 1000, and then give your stock back.
Josh Robb:
Yep.
Austin Wilson:
Which, then you’re out-
Josh Robb:
A lot of money.
Austin Wilson:
… the whole spread, and that is precisely what is happening here. Yes, so it’s that selling short, you’re borrowing stock and you’re only hoping that it goes down, because if it goes up, you’re just-
Josh Robb:
No.
Austin Wilson:
… out of money.
Josh Robb:
Then, no.
[12:52] – Is Selling Short Bad for the Stock Market?
Austin Wilson:
That’s not good. So is selling short bad for the stock market?
Josh Robb:
That’s a great question.
Austin Wilson:
It’s a loaded question.
Josh Robb:
It’s a loaded question.
Austin Wilson:
It’s a loaded question.
Josh Robb:
It’s a hard question to answer. Is it bad? Well, in my opinion, if you look at a capitalist society where you kind of don’t have limits on as smart or dumb as people want to be with their money, no, it’s not bad. Because when you’re selling short, someone’s buying, so someone is going to capitalize on the upside of that, someone’s losing out of the downside, and then somebody is going to get their stock back and be just like, “What happened? I just was sitting here with nothing.” And so is it bad for the market? I don’t think it is, but I think it can be used or abused in ways that hurt people or can hurt companies, in the long run.
Austin Wilson:
I think that it, I think it’s always check, right? So there’s always… If you have… Especially, if your company… All stocks, I wouldn’t say all socks, but I would say most stocks have some short interest in them.
Josh Robb:
Some.
Austin Wilson:
Some, maybe, could be very, very thin, but some people who are thinking it could go down, I would say that having some short interest is probably a check for the market to not get out of hand. Now, I think when it gets out of hand, which in this example, Game stock.. See I’m doing it too.
Josh Robb:
It’s hard.
Austin Wilson:
Game-
Josh Robb:
Stop.
Austin Wilson:
… Stop stock had over 100% short interest. So, that means-
Josh Robb:
Over 100%.
Austin Wilson:
That is it… It is illogical, but you know how you said, you are borrowing that share to sell short, right? Well, I could borrow the share that you borrowed again, and then-
Josh Robb:
From who?
Austin Wilson:
… someone else can borrow it from me, so then there’s three or four or whatever-
Josh Robb:
That’s crazy.
Austin Wilson:
… shorts on one share of stock. Now, in the example of GameStop, I said it right there-
Josh Robb:
Yes.
Austin Wilson:
… there was about 140% short interest. So that means, for every share that was outstanding, there was 1.4 shares sold short.
Josh Robb:
Wow.
Austin Wilson:
And that was the number one short stock in the market.
Josh Robb:
Yes. The most shortest out there.
Austin Wilson:
The most shorted stock. So, all of these WallStreetBets people, the Robinhood traders that we’re talking about, they saw this as an opportunity. They said, “Well, if all of this short interest is there and we go in… This is a small company, we can go in and we can buy, buy, buy.” And when you buy stocks-
Josh Robb:
The price goes up.
Austin Wilson:
… the price goes up. “We can make the stock go up in price,” because it’s a small stock, “All of these hedge funds that-
Josh Robb:
Stick it to the hedge funds.
Austin Wilson:
… have…” Yeah. “These hedge funds have short positions on this stock, if we just make it go crazy, then they’re going to have to,” so then we’re talking short squeeze, “buy it higher, as it keeps going up to keep covering themselves. And then, they’re buying is also going to send it higher,” so it just gets parabolic. And that’s exactly what’s happened this year. And that is what is a short squeeze. The short squeeze is that there’s a ton of short interest, but the price goes up, and then the people who have shorted it, actually, have to continue to buy it higher.
Josh Robb:
Yep. They have to keep it going up.
Austin Wilson:
And that continuing to keep buying, continuing to set it higher. And we’ve seen this in the past, but to the level that we’ve seen, really recently, not just in GameStop, but in a couple other stocks, like AMC, even American Airlines, that happened this week, it’s been crazy.
So that’s the short squeeze. That’s what selling short is, and that’s how you can have over 100% short interest in a stock, and I think that’s bonkers.
Josh Robb:
Crazy.
Austin Wilson:
The crazy thing is, it’s all legal. So as we said… So selling short, that’s legal.
Josh Robb:
Yes.
Austin Wilson:
And what the Robinhood traders are doing, they’re essentially… They’re within the SEC legal requirements, I guess there’s kind of a gray area for them, as long as they are not intentionally trying to-
Josh Robb:
Manipulate.
Austin Wilson:
… manipulate market prices, then they’re probably fine. That’s probably what they’re doing, but they’re going to use it guise-
Josh Robb:
If you want to stick it to-
Austin Wilson:
Then that’s-
Josh Robb:
… the hedge fund… That’s what they’re-
Austin Wilson:
… probably legal. That’s what they’re… They’re saying-
Josh Robb:
…”I’m not manipulating the market-
Austin Wilson:
… “I’m just sticking it to the man.”
Josh Robb:
… I’m just sticking it to the short seller over there.”
Austin Wilson:
Exactly. So-
Josh Robb:
I mean, if you think back to Herbalife had a big thing, because there was a big short on that, and there was two hedge funds kind of battling it out on either end. And the SEC was like, “Eh, whatever-
Austin Wilson:
Good luck.
Josh Robb:
… one of you is going to lose on this.” But the idea was, one of them was kind of just doing it to spite the other one, and I guess that’s at least a legal motivation…
Austin Wilson:
Right.
Josh Robb:
… say it. That’s why I’m buying this or that’s why I’m shorting this.
[17:29] – Is Selling Short Morally Wrong?
Austin Wilson:
So I guess, that begs the question… So I just said that according to SEC requirements-
Josh Robb:
As of right now.
Austin Wilson:
… selling short and really doing what the traders are doing, the sending it higher-
Josh Robb:
Propping it up, yeah.
Austin Wilson:
… it’s legal. I’m saying-
Josh Robb:
Ish.
Austin Wilson:
Legal-ish, but is it morally wrong? That’s really up for you to decide.
Josh Robb:
Yes.
Austin Wilson:
Like I said, the people who are doing the buying, they know what’s going on, they know what they’re doing, they’re doing it intentionally. But the hedge funds have also been taking advantage of some of these down and out companies for years and decades.
Josh Robb:
Yeah. And some of them would get on the board and then force the price lower to make that short-
Austin Wilson:
And then the profit from it.
Josh Robb:
Yeah, there’s some fuzzy stuff going on-
Austin Wilson:
Exactly.
Josh Robb:
… on both ends. And I think too, to me, I see this as a giant game of musical chairs. Somebody, when the music stops, it’s going to be left holding $320 shares of GameStop-
Austin Wilson:
Which are ridiculous.
Josh Robb:
… which are not, in my opinion, worth that. And so, somebody’s going to be losing. They’re betting… The individual investor betting is going to be the hedge fund, but again, there’s a lot of traders moving money around, and the price moves quick, you could be stuck holding.
[18:44] – GameStop Stock’s Worth
Austin Wilson:
So, let’s talk about that. So, yes, as we’re sitting here on the 29th of January, GameStock-
Josh Robb:
Happy birthday dad.
Austin Wilson:
… is… GameStock? GameStock stock-
Josh Robb:
… it’s so hard.
Austin Wilson:
Ticker, GME.
Josh Robb:
Just GME.
Austin Wilson:
They are trading at about $320 per share, so is GameStop’s stock-
Josh Robb:
Nailed it.
Austin Wilson:
Say that 10 more times-
Josh Robb:
Fast.
Austin Wilson:
… nailed it. Is that worth $320 a share? No, I’m just going to say that right now. There is not one-
Josh Robb:
Wait a minute, Austin’s analysis is not a recommendation for… No, wait, in this case, it pretty much is straightforward. If you look at an earnings ratio-
Austin Wilson:
There’s no way.
Josh Robb:
… and look at their balance sheet, it’s a little far-fetched.
Austin Wilson:
It’s a little far-fetched, yes. There is no way, by any stretch of the imagination, that this company that was trading at $20 a share a couple of weeks ago, is worth $320 per share.
Josh Robb:
Nothing changed fundamentally or outlook horizon-
Austin Wilson:
Correct.
Josh Robb:
… to make it justified.
Austin Wilson:
In fact, they’ve got a couple of things going against them. Number one, they are a brick and mortar video game seller and reseller.
Josh Robb:
I know, I went there.
Austin Wilson:
Brick and mortar, meaning, they’re physical. It’s a physical company. So they’re not like an e-commerce company, which can justify higher multiples, because people like that, and it’s really trendy right now. It’s actually… and everyone uses it. So that’s strike one, brick and mortar. Strike two, they sell physical video games, and in today’s environment, if you have a high-speed internet connection, you can download every single video game you want directly to your console, and never leave your couch. Oh, it’s beautiful. Now, it’s faster if you plug in your X-Box, by the way. Doing it over, the-
Josh Robb:
It is-
Austin Wilson:
… wifi can-
Josh Robb:
… slow.
Austin Wilson:
… get a little slow.
Josh Robb:
I need to run some network cables around, is what I need.
Austin Wilson:
Sometimes I move my X-Box to the room with the router, just to get something to download and then I’ll put it back where it was.
Josh Robb:
There you go.
Austin Wilson:
Because I don’t like to play online, but when you want to download something that’s-
Josh Robb:
You need it.
Austin Wilson:
… 40 gigabytes, you need it.
Josh Robb:
Takes forever.
Austin Wilson:
So, anyway, two strikes against it right now. Now, the tailwind is that the video game industry is growing quickly, but the things that they have going against them are not helping them. And if you even want a physical copy of a game, you ordered it on Amazon, and it’s there the next day to your door. Now, that’s pending USPS slowness, which is horrible.
Josh Robb:
Now, I will say, and I think part of maybe that Chewy appeal was, I mean, you think about dog food and dog supplies, you can get that anywhere, but they found a way of doing it online-
Austin Wilson:
True.
Josh Robb:
… and if he can get GameStop to be the online store for video stuff, maybe they have a chance. But at 350, 320 that’s-
Austin Wilson:
How many multiples do you want it to be? It’s crazy. Yeah, and even used games, like I was saying, you can have ordered to your door-
Josh Robb:
Yeah, you can get them.
[21:25] – Dad Joke of the Week
Austin Wilson:
… or even from Amazon, so it’s crazy. All right. So, that’s kind of state of where we’re at. Josh, I am going to crack your face up with the dad joke of the week.
Josh Robb:
Let’s hear it.
Austin Wilson:
All right, Josh, why should you never buy anything with Velcro?
Josh Robb:
Ooh, man. Velcro, why shouldn’t you buy anything with Velcro?
Austin Wilson:
Because it’s a total rip off.
Josh Robb:
Rip off, classic.
[21:42] – Restricting Trading
Austin Wilson:
So, a lot of the traders, speculators call them what you want, who have been bidding the price of GameStop stock up, they’ve been using… Really Robinhood is the main kind of the vehicle.
Josh Robb:
Not the guy-
Austin Wilson:
Not actual-
Josh Robb:
… but the trading platform.
Austin Wilson:
The fox is in the Disney movie, right?
Josh Robb:
Yes.
Austin Wilson:
Robin Hood was a Fox. So Robinhood’s kind of the main brokerage solution that people have been using to buy and sell.
Josh Robb:
It’s been promoted for the small beginning investor, as way of getting there cheap to free trades, those types of things. Yep.
Austin Wilson:
Yep. Another name that did a similar thing that we’re going to talk about is TD Ameritrade. What these companies did in the midst of all of this crazy volatility is, they restricted the trading. So they’ve actually… Like the handful of stocks I mentioned, there were even more, but these companies said, “Hey, we’re going to restrict either you can’t, or you can only a little bit of buying and selling of these stocks for a period of time.” And this has happened, actually, multiple times now this week, off and on, different people doing different things. So, why did they do that? Well, there’s really a couple reasons. And a couple of reasons that I think are pretty shady. One reason is that these companies legitimately have capital requirements from the SEC that they have to maintain levels to cover… When the stocks are sold short, when they’re short interest out on a stock, they’ve got to be able to cover that with their capital requirement.
Josh Robb:
Yeah. So my example, I borrowed from Austin, but in real life, you borrow from that trading platform-
Austin Wilson:
Yes.
Josh Robb:
… the custodian or whoever you’re… that’s who you’re borrowing from, not an individual person.
Austin Wilson:
They’ve got to have the capital requirement to cover that share, and if the shares are going up, their capital requirements are going up, so there is some legitimacy there. The other reason-
Josh Robb:
I saw Robinhood had to reach out to investors to get about a billion dollars of cash to help with this.
Austin Wilson:
They did. They did, they got some additional investment.
Josh Robb:
I mean, it showed you they needed cash, because they were short on what they had to do. Yeah.
Austin Wilson:
Which probably just goes to show how sizeable the swing was, because on a normal day-to-day business operation, they’re fully covered on what they need-
Josh Robb:
Yeah, they’re good.
Austin Wilson:
… to have, and they would have never anticipated this sort of thing to happen. The other, I’m going to call it a guise, that Robinhood and TD Ameritrade have used, is that they are trying to protect investors who don’t know what they’re doing, pretty much. They don’t know what they’re in for.
Josh Robb:
That’s so nice of them.
Austin Wilson:
And on paper, that sounds nice, doesn’t it? But you know what? There are people who, A, got stuck. They wanted to sell and they couldn’t, or they didn’t want to sell and they were forced to do something. It was just crazy. I saw screenshots, on Reddit, where people were actually having positions liquidated by Robinhood for them.
Josh Robb:
Oh, wow. That seems… That does seem shady.
Austin Wilson:
It seems wrong. It seems wrong. And in my opinion, as a capitalist, this is a free market, the market is… you can do… you shouldn’t punish or I guess, hinder or punish stupidity, let the market do what the market will do. And if you want to ride the GameStop wave up to a 1000, it’s going to pop, but-
Josh Robb:
I’m sure with Robinhood, to play devil’s advocate on this one… Because, I mean, I agree with you… restricting people’s ability to make their own decision as adults, seems crazy-
Austin Wilson:
It’s their money.
Josh Robb:
… but Robinhood got in some issues in the past on how they promote their trading platform to minimize risk, or to make an appearance that they’re minimizing risks, when really they’re not, and so, they’ve had some issues. In fact, they had someone commit suicide a year ago or so, because he was trading options and thought he had-
Austin Wilson:
Didn’t know what he was doing.
Josh Robb:
… lost a lot of money and didn’t realize it. In fact, he hadn’t lost as much money, but the way it showed it on the screen, he thought he was and he ended up committing suicide, which is horrible and tragic. And I think those things are probably… If you’re an investor in Robinhood, because it’s this new trading platform, maybe there’s that concern of, hey, maybe we do need to put some place cards on, we’re a little different than everybody else. I don’t know. But yeah, it just seems weird that you’re pausing trading… have those restrictions on their trading.
Austin Wilson:
So that’s kind of something that’s been going on and it’s really irked some people.
Josh Robb:
Well, and the fact that it was just these platforms, so if you’re on Schwab or Fidelity or any… let’s see what’s the other one, Scottrade or… all those still traded.
Austin Wilson:
Well, and you know what-
Josh Robb:
You’re at a disadvantage.
Austin Wilson:
… you know who’s on those platforms, it’s the hedge funds you’re betting against, and they have the benefit, which I think is another total disconnect in the market, if those hedge funds can trade 24 hours a day, they’re trading after hours and all of that stuff, on the platforms that have not restricted them, so when these Robinhood people are bidding up the price during the day, in the after hours, hedge funds are bidding it back down, and then it just happens again the next day.
Josh Robb:
Crazy.
Austin Wilson:
It is absolutely crazy. So, that brings another discussion.
Josh Robb:
Yes.
Austin Wilson:
After hours trading, some people can do it, some institutions, some people and institutions can’t.
Josh Robb:
Now I did see a commercial awhile back, I don’t know this was temporary, but Fidelity was allowing retail after hours trading for certain things. And I don’t know what they were or what it was, but when I first saw it, I was like, “Why would you want to do that?” It just seems weird that when the market’s not open, some people can still continue to place trades. I don’t like it.
Austin Wilson:
It seems interesting. And I think that’s one of the… So one of the appeals of Robinhood is the ease of trading, and that anyone can get into it, and it’s easy to do. Now, should there be some training on some of these things, options specifically, some of these stocks? Yes, probably, there should be. But it’s easy to use, and I think one of the discussions is that, I think, I heard that this week, the average holding window, total for all the full stock market, for a stock right now is like, literally, under a minute, average.
Josh Robb:
The average holding period for-
Austin Wilson:
And I’m talking… I think I heard that there was seconds.
Josh Robb:
That’s crazy.
Austin Wilson:
And because of high frequency trading and stuff like that.
Josh Robb:
That’s crazy.
Austin Wilson:
Where we preach, we’re long-term investors-
Josh Robb:
Give it at least an hour, man.
Austin Wilson:
At least 20 minutes or… I don’t know. No, I mean, long-term investors, you should hold that stock until something fundamentally changes. But that’s the truth of where we’re at right now, and I think it is causing some churn in the market, which is causing some volatility. So, yeah, after house trading a little bit of a side note. So I guess-
Josh Robb:
Do you think also has to do with the popularity of index tracking, ETFs and funds, where that as new… I mean, historically you look, a bunch of money’s been flowing into these index tracking funds, and if they’re buying as things come in, and then rebalancing periodically to keep in line, I wonder if that has a little bit to do with trade volumes.
Austin Wilson:
Some. I’m sure it does in some way, shape, or form. So I guess another fallout of this whole situation is that people in Washington, people-
Josh Robb:
Oh, got there attention, huh?
Austin Wilson:
… in other states, all of these regulators are now saying, “Wow, this doesn’t look great.
Josh Robb:
This is weird.
[28:50] – Should More Regulation Be Happening?
Austin Wilson:
This doesn’t make sense. Some people are going to get burnt from this. What should we do in terms of regulation?” Because, like we had mentioned before, as of right now, this is on top of the table, you can do this, this is how the market’s set up, this is legal. Should more regulation be happening? That is the question that is not really up to us, that’s up for the people we’ve elected to decide for us. But I guess that brings up the moral question, should short-selling even be allowed? Because, okay, so I’m… Obviously, Elon Musk is a big name in, not just the car world, but the finance world, wealthiest man in the world, right?
Josh Robb:
Mm-hmm (affirmative).
Austin Wilson:
He said something in a tweet this week about how, “Well you can’t sell a car you don’t, you can’t sell a house you don’t own, so why can you sell a stock you don’t own?” I don’t think short selling is going to become illegal, but I think that there’s going to be some look into how things like this happened, and why? And one of the definite low hanging fruits that I see, is the ability to, essentially, because you’re borrowing, borrow a borrowed share. So having-
Josh Robb:
Over a 100%.
Austin Wilson:
… anything over a 100% of short interest sounds like something that’s ripe for regulation.
Josh Robb:
Yep. And I think too, transparency as well, is, if you’re taking a short position on something, do you have any ability to affect the stock price? Whether you sit on a board or something that you could, in a sense, I don’t want to call it leverage our trading, because it’s really not. It’s not illegal.
Austin Wilson:
No, yeah. No, you’re leveraging-
Josh Robb:
But you’re leveraging your position to force, in the end, changes to a company that moves the stock price down, that then helps you with your short position, and… I don’t know, there may be a little harder to look at that, because that’s… Part of these hedge funds are activist investors pushing change that may benefit the position they have on either side. That’s what activist investors do-
Austin Wilson:
Exactly.
Josh Robb:
… they take a position and then force change in order to make some money off of it.
Austin Wilson:
Oh yeah. And they do-
Josh Robb:
Oh, yeah.
Austin Wilson:
… most of the time. So, yeah, is regulation coming? That’s not necessarily saying anything’s going to change. I think this is kind of generally going to be viewed as a short-term thing. It’s going to unfold itself. Here’s what’s going to happen, some hedge funds are going to get burnt and lose billions of dollars, some people are going to get burnt and lose whatever money they put into their account, buying GameStop stock, other people, in the middle of all of this, probably made millions of dollars.
Josh Robb:
So I was reading an article, I think it was the Wall Street Journal, but they were talking about one of the early investors in this Reddit group. And he had been buying GameStop stock-
Austin Wilson:
Man that’s a mouth full.
Josh Robb:
Yes. Last year, and his original thesis was just, when they do find a new people to get on the board, there’ll probably be a bump in the stock price. And he’s thinking, $6 or $10 or whatever, he started buying at. And so he puts some money into it, and he was one of those guys that would like post his screen shot of his account on… And so like a year ago, way before any of this became news, he had like $50,000 invested in, I forget what it was on the article, but something like that, and people were like, “Hey, what are you doing with that?”
Austin Wilson:
That sounds crazy.
Josh Robb:
And he pretty much had like GME YOLO like, “I’m just… Who knows?” And when all that started happening, he started continuing to post and talk about it, and he ended up having a $20 million gain on his GameStop position one day-
Austin Wilson:
Man, I hope he sold.
Josh Robb:
Then the next day he posted, and he had a $15 million loss from that high.
Austin Wilson:
Oh, wow.
Josh Robb:
And again, it’s just crazy, but in this article, they’re just talking about just the craziness and he was one of the ones that started pushing this idea, not really to get at the hedge funds, originally, his thesis, but as it grew, it became kind of this like rally cry to hold the line and keep going. It was interesting, but there’s some people out there, like you said, that got in at the right time, and if they get out of the right time, will walk away with a lot of short term capital gains-
Austin Wilson:
Man-
Josh Robb:
… and income tax owed.
Austin Wilson:
… think about the people in this. So these are the people who hold a ton of this in their portfolio, and obviously, they’re probably feeling pretty okay right now, if they got in at the right time, but they can add some Bitcoin to lower their portfolio volatility.
Josh Robb:
That would be… Yeah, “I’m going to diversify it out to Bitcoin, because it’s a little too much for me.”
Austin Wilson:
This is a little too much.
Josh Robb:
You know what I thought too is the outlier of this is, there’s like ETFs attract the video game industry. We’ve talked about this in our video game podcast. They got a bump, because GameStock, I’m sure is a piece in there somewhere-
Austin Wilson:
That’s a great question.
Josh Robb:
… and I did see it in, I’m talking about the-
Austin Wilson:
GME or GAME or-
Josh Robb:
Yeah.
Austin Wilson:
Yeah. Gamer.
Josh Robb:
And they’ve seen a little bit of a bump. Now, I’m sure whoever’s managing that piece, probably keeps the weighting in check, so there’s probably been some selling there along the way, but, man, there’s an outlying effect for people who may not have realized it, who may have just been in the right industry, who experienced some fallout from this whole thing.
Austin Wilson:
Absolutely.
Josh Robb:
Or if you’re in the airline industry, like you mentioned, an airline gets shorted like that and its price jumps, because they start targeting some other highly shorted stocks. There’s an airline, JTF, yep. That had a little bit of a change.
Austin Wilson:
From American, yeah.
Josh Robb:
The weightings are there, so it’s not like it’s a 6000% gain, but it does have an impact. So it’s kind of…
Austin Wilson:
But it also means the fall, when things correct, isn’t as bad.
Josh Robb:
Yes.
Austin Wilson:
So-
Josh Robb:
Smooths it out there.
Austin Wilson:
… it smooths things out.
Josh Robb:
That’s why diversification matters people.
Austin Wilson:
Diversification matters. I am-
Josh Robb:
So spread out among all your short positions, and… No, I’m just joking.
Austin Wilson:
I actually think that that’s something that could be a fallout is that hedge funds are going to be more cautious. They may be like, “Shoot, I shouldn’t have… that was a little bit too aggressive. I’m going to spread my shorts out over-
Josh Robb:
That’s right.
Austin Wilson:
… 10 names and it’s going to help me, because…” Yeah, I’m sure that some hedge funds are just out billions of dollars.
Josh Robb:
Oh yeah. I mean, it’s already been known, some have already announced have closed their position out and it costs them billions of dollars. So, yeah, it’s crazy. I think-
Austin Wilson:
They’re not earning their 2 and 20, tonight.
Josh Robb:
Yeah. The idea is to… I mean, hedge funds have been disliked for a while and this just didn’t help.
Austin Wilson:
It kind of, I mean-
Josh Robb:
Their image hasn’t changed.
Austin Wilson:
They’re kind of… Yeah. The image that they have with a lot of people is, it’s dirty money.
Josh Robb:
Mm-hmm (affirmative).
Austin Wilson:
It’s money that is made off of the benefit of someone else, or they’re benefiting themselves and then hurting another company or people. So that’s kind of… And that’s why people like WallStreetBets wanting to go after them.
Josh Robb:
Yeah. Because, if I buy a stock, I do well when the business does well, the stock price goes up, usually, because the business is growing and improving. If I short something, I’m just hoping that something bad happens to that company.
Austin Wilson:
You’re wishing ill will on some company.
Josh Robb:
Yeah, which is not nice.
Austin Wilson:
It’s kind of sketchy. Okay, so I will leave this discussion with one hilarious tweet.
Josh Robb:
Can you short heads funds?
Austin Wilson:
Like short the shorts.
Josh Robb:
I want to short hedge fund.
Austin Wilson:
Are you along then, if you short a hedge fund?
Josh Robb:
Yeah, probably.
Austin Wilson:
Net long.
Josh Robb:
Long the economy.
Austin Wilson:
Long the economy. So it’s just bullish to short a hedge fund. Here’s the tweet I will leave you with, “I know this GameStop stuff is funny, but you have to remember, this is hurting real people who own multiple boats.”
Josh Robb:
Which is true.
Austin Wilson:
Which is true-
Josh Robb:
You solved hedge fund-
Austin Wilson:
… the hedge fund managers.
Josh Robb:
They were on the TV like, “Oh, woe is me.” And I’m like, “Yeah, is it really?”
Austin Wilson:
I thought that was really funny. Also, I just got back on the Twitter, so if you want-
Josh Robb:
You’re back on.
Austin Wilson:
… to follow me on Twitter, Austin AWN 91.
Josh Robb:
There you go.
Austin Wilson:
We’ll tweet it up. All right. Well, as-
Josh Robb:
The Invested Dads is on Twitter as well-
Austin Wilson:
Well, of course it is.
Josh Robb:
… and we’re tearing it up on Twitter.
Austin Wilson:
Sure are. Well, as always, check out our free gift to you, it’s a brief list of eight principles of timeless investing. These are overarching investment themes to keep you on track to meet your long-term goals, and guess what we don’t talk about, shorting stock does not help you meet your long-term goals.
Josh Robb:
Yeah, that’s a short term goal.
Austin Wilson:
Actually, we’re not saying that’s helping you. Yeah, we’re just saying, not in our people.
Josh Robb:
No, don’t do it.
Austin Wilson:
So check that out, it’s free on our website. Josh, how can people help us grow this podcast?
Josh Robb:
Make sure you subscribe. We’re dropping a new episode every Thursday, leave us a review on Apple podcasts, and if you have any cool ideas or questions, if you said, “Hey, okay, I understand shorts, but I also heard this…” shoot us an email, hello@theinvesteddads.com, and we would love to answer that question.
Austin Wilson:
All right, well, until next Thursday, have a good week.
Josh Robb:
Talk to you later.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future, doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode, and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest, are solely their own opinions, and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
