Gamestop Frenzy, Basics of Short Selling and More (Bad Bad News Podcast Guest)
Samira and I attend weekly (virtual) market discussions held by one of our former Pepperdine professors from the Master's program. After one of the weekly market discussions, we struck up a conversation to catch up on business life after Pepperdine.
We discussed the nature of our respective businesses. We had many things in common: changing our respective industry's business model to heighten our respective clients' experience and deep roots in ethics. Samira and I share the same ethical standard of providing unbiased information to our clients. Samira has extensive experience and a deep passion for Real Estate. Samira is the President of Rockwell Consultants, a Real Estate Consulting firm based in Reno, Nevada.
Samira invited me to be a guest on her podcast Bad Bad News to have the opportunity to discuss what is happening with GameStop, explain the basics of short selling, margin call, and a short squeeze.
Samira: Alright, so first off, thank you Aidan for agreeing to come back on the podcast. I know both you and I have received tons of questions regarding the GameStop debacle, so I'm really glad we can share this platform to answer most of the questions we've received.
Aiden: Yeah! I'm glad to be back. Thank you for having me. You know, the last time that I was on your show it was quite a different, you know, experience of what was happening in the real world. So it's totally shifted, so it's good to say that it's good to have something different on our minds now.
Samira: Yeah, I agree. So you know, let's dive right in! You and I have been discussing this whole GameStop thing since it first started and we've questioned each other back and forth on the ethical ramifications of it. But before we can really dissect that, I think we first need to take a moment and explain what happened to, you know, the whole thing and explain it in the simplest way to our audience.
Aiden: Yeah, so where do we start? Because it's one of those things that, it's like one of those advanced topics in investments, but we'll try to see if we can explain it. Because here's the thing, you have an institution out there betting against the market saying it's gonna go down in price, whereas now you have all these retail investors saying no, that's not right, it's gonna go with the market, it's going to increase in price. So how can we explain this? So let me ask you this Samira, what's a material item that you can’t live without?
Samira: My phone.
Aiden: Okay, so let me borrow that from you for the next couple of days because I've done some deep analysis of the company, right? The company that makes this phone. It will either come out with a better phone or it'll, you know, go out of business or they're doing something illegal. And therefore making your phone practically worth $0 and in the end what I can do also is I'll pay you some interest because I'm borrowing it from you. Because you want to be rewarded for it, you know you're lending it so then I go into the market to sell it. This is how I make a premium. And then I wait two days. And you know what? Newer model came out and that phone is practically worthless. So then I use that premium that I originally got. Let's say it was $100. And now I can buy back the phone for $75 and I give you back your phone. I make $25 and then if you add the interest to it that I paid you, $5 let's say, that's a net of $20. Hope it didn't get too confusing there.
Samira: Yeah, I think that's as simple as you can explain it. So what happens if you know your plan didn't go as planned and the value appreciated instead?
Aiden: Yeah, that's a great question. Well, I would be at a loss because let's say I got $100 for it when you lent it to me. Then I had to go back to the market to buy it at let's say, $125. So basically I lost $25. So add $5 interest for that, that's a loss of $30, so you notice how if the value continues to appreciate, it kind of makes a little, you know, puts you in a bind, if you are going against what the market is telling you.
Samira: Right, ok, so what if the price starts to move up too quickly and I call you concerned that I won't be able to get my phone back?
Aiden: Yeah, that's a very good question, so you are concerned because you want this back and you feel like you're not gonna get this back. So I either have to deposit some sort of money in good faith or buy the phone immediately from you at the market price. So essentially what you just did was you gave me a margin call and basically that means hey, you need to either deposit more money or buy the phone from me, or find an equivalent phone and put it in, you know have it with you in your possession, in order for you to feel much more calm. And basically what happened with me is what we call a short squeeze because I'm being squeezed out of earning a profit because now the price is moving up way too quickly and therefore I need to either scramble to find this product you know at a much more expensive price against me. You know, and I'm losing profits on that type of a a strategy trade, so hopefully it made a little sense. But that is as basic as we can try to explain it, but it's a little bit more complex and you know it if they if you want to do a deep dive, I'd be more than happy to explain that in my video that's coming out.
Samira: Yeah, no, I think that was great and as basic as we can go trying to explain what it all meant you know and I really appreciate that. So now that we understand the basics, let's have you explain what happened with the Reddit users and the hedge funds that were shorting GameStop at the time. And let's clarify why they shorted it and who the hedge funds are. Are they truly the “bad guys” at the Reddit users are trying to make them out to be?
Aiden: Yeah, it's like the David versus Goliath type of thing right. The bad guys are out there. Yeah. You're trying to go up against them and so basically it all started off with someone on Reddit saying, you know, GameStop has proven fundamentals, obviously the market and the rest of the industry doesn't believe this. But the thing is, if you think about it like this, you know all of those that are on Reddit right now that are at home because of the pandemic, you know they're out of jobs. They feel the frustration of what happened back in 2008. So technically, they're putting all this level of frustration of 2008 on these hedge funds because of the fact of, you know, someone lost a house, the value of their portfolio drops because the market crash in 2008. So they have this level of frustration and so they came out storming and gusto against these hedge funds. But in actuality the hedge funds weren't the ones that found it, well, technically they did find some sort of irregularities in 08, but the thing is, the ones that were to be blamed were the investment banks. You know, most of these hedge funds actually did the legwork that regulators didn't have the opportunity to find because you know they didn't have the power to do it because they were perhaps stretched so loose so most of these hedge funds probably found this type of negativity and they were probably out there saying hey, this is what's happening so and then they were probably laughed out and one of the greatest movies that I can actually let your viewers or listeners kind of connect to this is the Big Short. In the movie you have one hedge fund going out there saying hey is this illegal? What's going on in the industry and they were left out. They were saying hey, you know what? And that's how it is right now. This is how it goes. So technically, are they truly bad guys? That's one of the hardest things to answer because it all depends on. Where do you see it? Because if they make money off of it, you know, but yet they're over here, you know, telling you what's going on, are they truly the bad guys? I'm neutral on this as you know I have to remain neutral on. But at the same time, it's like, okay. It all depends on how you see it.
Samira: Yeah, no that that makes sense and you know when you bring up the example of the Big Short, I think it kind of helps people understand. Oh, you know, maybe it's not the hedge funds we’re really mad at maybe it is the investment banks that end up, you know, making all of these bad loans at that time and you know we're frustrated with that. But you know now, a lot of people are asking, so what was the goal of the Reddit users? What were they trying to achieve by holding their stocks in GameStop?
Aiden: Yeah, honestly, I think they just wanted to be heard and the reason why they wanted to be heard was because they have felt that Wall Street has become a way where they make money and you know the little person ends up not being anything. But in actuality that goal was perhaps not completely thought out because when you're holding now GameStop stock, you are literally now stating that the fundamentals of where this company is trading at, let's say it's $500 is equivalent to those of big tech companies out there, so in actuality you're hurting yourself because if everyone is saying that the fundamentals point there, that can end up even worse for you because The thing is now you're stating that it should be making more than enough revenue and creating more earnings for you as an investor. Right? But in actuality, most of the numbers out there are stating otherwise. So I don't know about you, but the last time that I went to GameStop was years ago, I don't see anyone going you know, making huge lines out there, but then it's all, you know, it's all speculation out there, and that's the the key here. Where if you're able to speculate, you can buy this stock at whatever price. You buy it at $1000, if you believe it's worth $1000, but you need to have some sort of thesis towards it. And I believe everyone thinks that by holding it, it's going to shoot back up. And this is the drawbacks of what was called a momentum trade. When momentum trade builds up so much steam in the beginning and then all of a sudden at the end those that came or arrived to the party are basically the ones that are much more of a bigger loss. So in essence, holding the stock of GameStop may not have made sense for them, but again, it's whatever they believe in now. It's whatever they make the pieces of of whatever it is that people believe the company is worth. And again they have every right to say that the stock is worth $1000.
Samira: Right, and that's what makes the markets kind of go is, you know, you have people on both sides of the trade, which is very important. And you know, looking at the fundamentals and if we just look at the fundamentals of GameStop, their stock shouldn't have been worth $500 at one point. You know, like you said, the pandemic has definitely squeezed them even more than what they were used to. I mean as a gamer, you know, and all of our gamer friends too, they you know buy their games online. You know, who needs GameStop anymore. So it's, you know, unfortunately the truth but GameStop was kind of that symbol of, you know, David and Goliath. So they definitely got, you know, all convoluted I would say but, so you know, moving on to the ethical parts of this, I think we both agree. You know, I think it's safe to say that we both agree that the risk that the amateur retail investors took on, that was something that was the big ethical dilemma behind all of this, and they were basically told to do something and it looks like now they've lost the most and you know, I understand that they're definitely trying to give you know the big bad guys a taste of their own medicine, but unfortunately they took on a risk not understanding it. So do you agree with that as being the biggest ethical dilemma?
Aiden: Yeah, well yeah you know, the thing is that in order for you to actually learn something, you have to do something right? And just like how you said that in Wall Street or just in investing, there's always someone on the other side of the trade. Someone will always benefit while you know you perhaps may not, right? So were they really, truly giving them a big bad taste to the, you know, the big bad guys maybe, but at the same time these institutions, that's the reason why these institutions are out there is because most of the investors that are part of, you know a hedge fund., they are the ones that have—they are considered to be sophisticated investors. So that means that these types of investors can stomach these losses, whereas a regular person may not, you know, and that's the ethical dilemma saying, ell, why is there some sort of a vehicle for ultra rich people, but at the same time these are not only just for the rich, right? You have pension funds that rely on hedge funds, whereas they provide the future cash flow to when you retire in whether you're in a union or teachers pension. You know, all those things come into play, but the thing is that the social dilemma behind this ethical dilemma is the fact that you know, they put, the amateur investors wanted to be on the same level, but the thing is, they're constrained by how they they incur—their own salary, their own limitations to their own cash flows. So that's the thing you know. Is it a taste? Right? Sure, they wanted to be voice, and they were right, but the thing is, now, it's like the ones that hurt the most are the retail investors and they do not have the means to continue on and stomach these losses. You know one of the things that I was going through on Reddit was some people were throwing in there and saying, hey, this is my whole retirement account. You only live once. This is my whole student savings account. You only live once. Yes, you only live once, but now you have to work twice as hard in order for you to gain this money. So it's hard, right? If you don't fathom the notion of what you may be doing because you get caught up in this. Right, so in essence, you know, is it an ethical dilemma, sure, but the thing is, who is more at risk here? The amateur retail investor or the sophisticated person that understands the notion of passing this on to a professional to handle their money, right?
Samira: I'm really glad that you brought up the the pension fund side of it and you know, that's a whole other dilemma that people can talk about. Like why are pension funds part of hedge funds and right now unfortunately, with the low interest environment, you know, that's one of the only ways they can produce a cash flow, but you know that's a whole different argument. But at the point of all of this is at the end of the day, it's ending up hurting us, you know the retail investors in multiple ways, so a lot of people lost their money. And now if they were trying to, you know, make these hedge funds collapse they might have lost, you know parts of their pension account, so you know there's a lot more to this than just I want to get back at Wall Street. There's a lot of other things that people need to to consider too, so I'm really glad you brought that that perspective up. And so you know, moving on from my perspective, it seems as though this is just the beginning of more to come from retail investors. Do you share that same sentiment?
Aiden: 100% and here's the reason why. Now that they understood the risks, and the nature of how the stock market works, that's going to put them more interested into learning more. Now the question is, do they want to make their own informed decisions or pass it on to someone else? To, you know, make this informed decision, retail investing is here to stay, and platforms like Robin Hood has made it much more feasible. And that's another topic that we can discuss because you and I both know about it. You know, we've gone back and forth can have discussed that of Robin Hood. But it's not veer off into that. But I do believe that retail investing is here to stay, and especially since you know the whole notion of they got the taste of if they were able to win big in the beginning, because obviously in order for a momentum trade to to work is if you get in in the beginning and get out in the beginning. If you are towards the end of it, you are at the very end and you're last to the party, so they got you know the taste of both the good and the bad. So again who ends up winning here? Right, one side wins one side loses. So in order for you to actually learn from this you more than likely will learn more from it, if you lose from it, but you will continue on pushing further if you continue winning. If it the probabilities are against you though, because we all know that you can't always keep winning, right? So yeah, retail is gonna be here to stay. And I have a feeling that they're gonna perhaps keep voicing their opinions like they have with Reddit so no one knows exactly which other company is gonna be out there that's gonna you know perhaps spike up in price? Is it even possible again? Sure, the probabilities of it working out again probably minimal though.
Samira: Yeah, no, that's a very good point that you've made and and at the same time we want retail investors to— we want those to come back because it helps the markets become more efficient. You know you have people not following a big trend of like, oh, you know this stock is going to fall or that company is undervalued. You have different perspectives, different opinions, and that makes the market more efficient. So on one hand I'm really sad that this happened to all these retail investors, but on the other hand, you know they've created a trend now that's actually going to help all of us at the end of the day. Sp I'm really happy about that, but for our viewers that you know might have gotten involved with this short squeeze, what advice would you give them right now?
Aiden: Wow, so if you were able to stomach the whole notion of—if you're still in it from the beginning to the end my kudos to you because I think the last time that I checked, the stock was around $80 so imagine going in at $450 and now you're at—you're down at 80 that's a big big drop, right? But if you were able to begin at the beginning ride it up and you were able to get out at the right time—this is what market timing does—more kudos to you because you were able to create a net gain out of that. Now if you were at the very very end of it, you know take this as a learning perspective of it because you can't time the market and especially if you day trade. Day trading is not meant for the individual that's busy or you know that that is just going to think oh, you know, if I leave it there by the time I come back it's gonna shoot back up. It moves much more volatile. It moves way up and down crazy, so it's not for the faint of heart. So in essence, if you were able again, if you were able to get in, in the beginning and out in the beginning at the right time kudos you made something you know, will this happen again? Probably not. The probabilities of another thing coming out like this may not happen. And then if you did end up at the very end of the party, as I like to say, just take it and take it as a grain of salt, as knowledge and hope to learn from it of not going into a trend type of momentum trade. Because if you get caught up in the wrong side of it, you can easily lose and it's hurtful that nobody really likes losing, actually.
Samira: No, not at all, so yeah, that's some good advice. Do you have any other advice for you know, our other listeners that may not have gotten involved in this?
Aiden: Yeah, so basically again the investing is out there for everyone as I like to say and you know since I am a financial advisor, that's why you brought me in the last time, you know all I can say is if you do want to begin your own investment account, it's easier now because of different platforms. And it's up to you to make that informed decision, if it's for you to do the research, do all these fundamentals do all of this and do all of that because it does take time. So now imagine working from home or having a family and you're trying to over here manage your portfolio, your own money, and you know it's time consuming and we can't do everything right now, right? So you have to make that decision. If you do have the time for it, that's great. Learn more from it. There is educational videos out there that tell you how everything kind of, works, but you know, make that decision. Whether do you want to continue, if you are currently managing it right now, move on forward, you managing it or pushing it off to a professional, say, hey, you know what this is too much for me, I'd rather not, you know, deal with it, I'd rather have my time back type of you know thinking, so that's all I can really advise to your listeners and viewers. Also the other thing that I'd like to just point out is just think about the the story of the tortoise and the hare. Right, if we all know the tortoise and the Hare, if nobody really knows it, the story, I don't wanna give a spoiler—well I kind of have to do, but the whole notion is that you can’t expect things to move up too quickly, right? If it moves up too quickly then something is wrong, right? If you're slow and steady, you know, as the saying goes, slow and steady wins. Sorry if you haven't heard that about the that story, but that's what I'm trying to make my point is, you can’t expect things to grow overnight immediately, like something like this. That's why the the probabilities of this happening again is very, very minimal right? When you plant a seed for a tree, you don't see a tree the next day it takes its time, right? And just like this, investing in your money is the same way it takes time. You shouldn't expect it to shoot up immediately like it's Vegas, right? So yeah, that's all I can really provide as some sort of advice to the listener and viewers.
Samira: Yeah, no, and I just wanna add to that. You know we're in this this time of misinformation on social media. So if you're gonna learn about finance and and the stock market, you know, please be careful of where you're getting your your sources from. Number 2, you know as you just mentioned, and you know, there's an opportunity cost with everything, so either you can spend your days, you know, trying to be a retail investor, and you know do it yourself—and I applaud you for that really, but sometimes we are too busy for that kind of stuff and we're gonna need a financial advisor like Aiden to do that. And if you hadn't listened to our last show with Aiden, he's a fee only financial advisor, meaning he does well when you do well, so he has that incentive to make sure that he does what's best for you because at the end of the day, it will help him. He's not commission based, you know it's not something that he's just going to profit off of whatever. So he really has your best interest in mind, so you know you can reach out to him at Wolfpack Investment Management and I'm sure he'd be more than happy to talk with you.
Aiden: Yeah, I'm always glad to take any type of meeting with any of your viewers or listeners. I've actually gotten some viewers and listeners to actually reach out, so I'm kind of happy about that and I appreciate coming onto your platform to discuss what it is that I do. And, you know, at the very very end we all want, you know, to be like the Reddit users, right? We all want to have our part right, but at the same time you can't really make your part be done so quickly right like, you made the statement great, you know, now this is a way for you to continue on making your voice be heard and be part of you know the movement and albeit it may not be as loud, but you know you are part of whatever they were going after, right? They felt like they needed a voice because they lost so much in 2008 right? And it's natural, it happens and you know all I can think about is just, you know, just be safe out there and as Samira just said there's misinformation out there. I think I heard that the SEC is now looking into things that were posted on Reddit that were perhaps manipulating people to continue on and nudging them to keep going with all this information so. At the very end though, the person that makes that important decision is you, the individual that you know, if you want to invest in this or not. It all falls down to you and then really it's your vetting process that you need to create if you want to do it all on your own.
Samira: Yeah, no it's—I definitely agree with that and you know with that I'd like to really say thank you again for coming on and we'll definitely have you back again, especially with more crazy stuff that happens in the in the market. I think you explain things in a very simple way and I hope my my listeners agree with that. I'm pretty sure they will and hopefully we don't have something crazy like this happen again, but if we do, we know that we can always count on you to come back on and talk about it.
Aiden: It feels like 2021 is still kind of like the twin of 2020 so far, but we'll see what happens. But yeah, I'd be more than happy to come along and try to explain as best as I can. You know, in simple terms and using everyday vocabulary, non sophisticated jargon in order for your listeners and viewers to actually understand what's going on because essentially everyone is interested. You want to make sure that that you're providing as best as possible some sort of information that they can take some value out of it and learn from it, actually.
Samira: So yeah, no for sure you know that's great. Yeah, I like that we ended on that and because this podcast is just dedicated to explaining things in the simplest way to everyone. So thank you again Aiden. And you know, I look forward to talking to you soon.
Aiden: Sounds great, me too. Thank you for having me.
Written with permission from Ms. Samira Fatehyar, President of Rockwell Consultants LLC & host of Bad Bad News Podcast.