The GameStop Effect

(Reuters) - Retail traders chalked one up versus Wall Street on Wednesday as hedge funds took heavy losses on short positions in GameStop, and regulators and financial professionals called for more scrutiny of trading fueled by anonymous social media posts.

In the latest skirmish in a week-long battle between Wall Street and Main Street, funds sold long positions in stocks to pay for losses shorting Gamestop, contributing to a slide of more than 2% in Wall Street’s main indexes.[.N]

“We are moving to a world where ordinary folk have the same access as professionals and can come to the same conclusion or maybe the opposite,” technology investor Chamath Palihapitiya told CNBC. “The solution is more transparency on the institutional side, not less access for retail.”

The market turmoil caught the attention of the White House, with press secretary Jen Psaki saying President Joe Biden’s economic team - including Treasury Secretary Janet Yellen on her first full day on the job - was “monitoring the situation.”

Massachusetts state regulator William Galvin, called on NYSE to suspend GameStop for 30 days to allow a cooling-off period.

“This isn’t investing, this is gambling,” he said in an interview. “This is obviously contrived.”

Nasdaq chief Adena Friedman said exchanges and regulators should watch whether anonymous social media posts could be driving “pump and dump” schemes.

“If we see a significant rise in the chatter on social media ... and we also match that up against unusual trading activity, we will potentially halt that stock to allow ourselves to investigate the situation,” Friedman said on CNBC.

The U.S. Securities and Exchange Commission said it was aware of the market volatility and working with fellow regulators to “assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.”

Reddit has not been contacted by authorities over stock surges driven by a message board on the platform, a spokeswoman said.

The war began when famed short seller Andrew Left of Citron Capital bet against GameStop and was met with a barrage of retail traders betting the other way.

Factbox: Stocks shunned by Wall Street surge as 'GameStop Effect' snowballs

White House monitoring situation involving GameStop, other firms

Citron has been a target for some on Reddit’s “Wallstreetbets” thread, where posts helped drive gains for several niche stocks.

Left said in a video post that Citron abandoned its bet against GameStop after the video game retailer’s value soared almost tenfold in a fortnight.

“I have respect for the market,” Left said in the post.

Melvin Capital Management closed out its short position in GameStop on Tuesday after taking a huge loss.

WINNERS AND LOSERS

Shares of GameStop surged 135% on Wednesday, bringing their gain since Jan. 12 to about 1,700% and ballooning its market capitalization to $24 billion.

U.S. shares of BlackBerry Ltd jumped 33%, bringing their gain in 2021 to 279%, while movie theater operator AMC surged 300% and is now up over 800% year to date.

Along with Finnish technology firm Nokia Oyj, those companies were among the most heavily traded, with Reddit threads humming with chatter about the stocks. Nokia said it was not aware of any reason for the continuing surge in its share price.

Such inflated stocks will eventually fall back to their fair value, predicted Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina.

“It does have a David and Goliath feel, where the Reddit crowd is taking on the most shorted stocks by the largest hedge funds in the world and winning.”

BlackRock Inc, the world’s largest asset manager, could have made gains of about $2.4 billion on its investment in GameStop. Its share holdings amounted to roughly a 13% stake as of Dec. 31, 2020, a regulatory filing showed.

“It’s a dangerous game to play from both sides of the spectrum, whether you’re long or short,” said Matthew Keator, managing partner in wealth management firm the Keator Group in Lenox, Massachusetts.

“You get close enough to the fire you’re going to get burned ... it won’t matter what social media is cheering the stock on.”

According to research firm S3 Partners, total short interest in GameStop was $10.6 billion as of Wednesday. In the last seven days the short has increased by $117 million, or 1.1%, as the stock price surged.

Year-to-date, GameStop shorts have lost $19.15 billion, including $9.85 billion on Wednesday at a $285 share price, according to Ihor Dusaniwsky, S3’s managing director of predictive analytics.

“These large mark-to-market losses will be squeezing many existing shorts out of their positions, but we are still seeing new short sellers taking their place as they look to short at the top and ride a windfall of profits,” he said.

Long dismissed as “dumb money,” retail traders have made stocks move in ways that defy fundamental analysis. Global bets worth billions of dollars could be at risk as amateurs challenge bearish positions of influential funds.

The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% on average so far this year, easily outperforming the market, a Reuters analysis of Refinitiv data shows.

Europe’s most-shorted stocks also saw big price swings on Wednesday.

Experts are debating whether these massive share moves should be considered ominous signs for the market.

Reddit co-founder Alexis Ohanian said the rise of retail investors is healthy, however.

“That’s the sentiment, the public doing what they feel has been done to them by institutions,” Ohanian said in a tweet on Wednesday.

5 pieces of financial advice from Warren Buffett

“I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.” Most people chase what’s hot. As euphoria builds money pours in. Until it collapses. Buffett does exactly the opposite. He buys when most people are selling. And waits when most are buying. Incredibly difficult to do. And incredibly rewarding.

“Price is what you pay. Value is what you get. I like buying quality merchandise when it’s marked down.” Most people chase price. The higher the price the more money flows in. Until the value can’t sustain the price. Buffett chases value. Looks for investments priced under their worth. Then buys and waits for others to discover their value.

“I don’t look to jump over seven foot bars. I look for one foot bars I can step over.” Most people try to hit home-runs. They speculate on the next big hit. And keep striking out. Buffett instead invests to build wealth steadily. Rare home-runs. Lots of singles that win games.

“Successful investing takes time, discipline and patience.” Most people want to get rich quick. So they continually take long bets that frequently blow up. Buffett takes a long term view. He’s happy to build wealth over a lifetime rather than a year or decade.

“What we learn from history is that most people don’t learn from history.” Most people whether euphoric or depressed refuse to learn from those who were successful. And they pay the price. Buffett always learned from others. And reaped the rewards.

-- Doug Armey via Quora

move over Buffett?

"Move Over, Warren Buffett: This Is the Star Investor You Should Be Following."

So read the headline on a year-end article from retail investing advice site Motley Fool touting the performance of fund manager Cathie Wood. Variations on the "Buffett is done" theme have been around since at least the tech bubble, while the cult of star mutual-fund managers goes back to the 1960s. Such commentators have eventually eaten their words.

Not that Ms. Wood's performance is anything to sneeze at. Her largest exchange-traded fund, the ARK Innovation ETF, surged by almost 160% last year, growing assets 10-fold -- unprecedented inflows for an active fund of that type. She made concentrated bets on hot stocks such as Tesla, Roku, Square and biotechs boosted by the Covid-19 pandemic. An ARK Invest spokesperson wouldn't elaborate, but Ms. Wood told an interviewer last month that she expects to nearly triple unit holders' money over the next five years.

That is unlikely. In fact, similar star managers' performance has tended not only to be mean-reverting but actually worse-than-average after their runs end. Bill Miller, who famously beat the S&P 500 from 1991 through 2005, drawing huge inflows into Legg Mason Value Trust, spent the next few years as one of the worst fund managers in the country.

Come-uppances are especially harsh when a manager has ridden a hot category as Ms. Wood's firm has done. The fate of mutual-fund firm Janus is instructive: Between the end of 1998 and the end of March 2000, it went from being the 20th largest mutual-fund firm to the fifth largest -- an incredibly rapid ascent. It bet big on tech highfliers such as Cisco Systems and AOL. As the bubble burst, some of its funds lost two-thirds or more of their value.

Fund managers are often compared with dart-throwing monkeys. That might be too flattering for those who get the most attention. Hot funds' performance is often worse than random on the downside. A regularly updated study on the persistence of investor performance from S&P Dow Jones Indices shows that just 0.18% of domestic equity funds in the top quartile of performance in 2015 maintained that through each of the next four years -- less than half what one would have expected by pure chance. And of course most actively managed funds lag behind the index to which they are benchmarked because of fees and taxes.

This explains the amazing rise of index funds. It is mainly the supposed existence of stars such as Ms. Wood that has staved off an even bigger exodus from actively managed funds. Studies have shown, though, that actual stock-picking skill is very rare and is only provable after decades -- the sort of record that Mr. Buffett has established.

An academic study by Jerry Parwada and Eric Tan that examined the Morningstar Fund Managers of the Year between 1995 and 2012 showed that winners got big inflows but that their future performance was unremarkable. Indeed, one fund manager who later stumbled blamed the difficulty of deploying the extra cash for his poor results.

That makes sense. If one looks at Mr. Buffett, his results when he ran a modest partnership in the 1960s were far better than those of his huge, diversified conglomerate recently. But, unlike a share of Berkshire Hathaway, the dollar-weighted returns of a growing fund are worse than the stated results because more people are around for the stumble than the ascent.

Hot funds can burn you.

Elon Musk

Elon Musk just became the richest person in the world, with a net worth of more than $185 billion.

Thursday’s increase in Tesla’s share price pushed Musk past Jeff Bezos, who had been the richest person since 2017 and is currently worth about $184 billion. Musk’s wealth surge over the past year marks the fastest rise to the top of the rich list in history — and is a dramatic financial turnaround for the famed entrepreneur who just 18 months ago was in the headlines for Tesla’s rapid cash burn and his personal leverage against the company’s stock.

Musk started 2020 worth about $27 billion, and was barely in the top 50 richest people.

Tesla’s rocketing share price — which has increased more than ninefold over the past year — along with his generous pay package have added more than $150 billion to his net worth.

Meanwhile, Amazon’s share price has remained more subdued due to the potential for increased regulation from Washington.

Elon Musk passed Warren Buffett in July to become the seventh-richest person. In November, Musk raced past Bill Gates to become the second-richest person. Musk has gained more wealth over the past 12 months than Bill Gates’ entire net worth of $132 billion.

Tesla’s shares closed Thursday at $816.04, up nearly 8%. The company’s market value has grown to more than $760 billion.