Ask HN: Tell me why wallstreebets is wrong
and why hedge funds will hold out longer than the mob which will blink first
and why people who bought in at 200/300/400 will lose their YOLO money
and why people who bought in at 200/300/400 will lose their YOLO money
Simply because the stock isn't actually worth 400.
A few players made a smart play on wallstreetbets, and they got lucky when the hedge funds were stubborn enough to keep going deep into the red while the subreddit gained 3m new subscribers and was able to keep squeezing them.
But buying in at 400 today seems like idiocy. It would be akin to joining a pyramid scheme right at the end. Maybe you are not last, but it's likely.
Sooner or later it will pop, it's not like the GME business suddenly got 50x more valuable (and it's not looking to get, any time soon). So the last suckers will be left with an expensive paper that pays little to no dividend, or they can try to sell it to a market where no one wants it.
Try to train a HFT algorithm to account for this.
Take Walmart for example, it would take 70 years for you to get back your money from the stock from its dividends which are extremely stable. Do you think that is worth it? No, you pay for the stock since you know someone else will also pay for the stock when you sell, not because you want to get those sweet dividends.
Why are u valuing a stock by its dividends alone? There are stocks without dividends.
I agree we are in a bit of a bubble right now, but your valuation method seems a bit lacking. Walmart has a P/E of 20 which while also too basic on its own would give you a far more realistic 20 years.
The way I look at it, it’s a shame it’s a missed opportunity. But it didn’t cost me anything either. So there is that.
Because they caught only a few of them in a trap, not all of them. Even if the shorting ones end up going belly up, they'll just restructure, shift people around, and be back in business as if nothing ever happened.
> and why people who bought in at 200/300/400 will lose their YOLO money
Because the stock is not worth it, and they won't all be able to pull out in time.
That said, I can't say WSB is wrong. Many of the players don't mind losing the money - the current sentiment seems to be, at least overtly, to show a giant middle finger to established financial institutions, and make "them" suffer for 2008. I think WSB is likely to achieve that goal to some extent. At the very least, they're sending the message. Personally, I'm only worried about second-order consequences for the stock market at large (wouldn't want it to trigger the next 2008). I'm also worried if they get shut down from the top by more "uncoordinated" corporate shenanigans, this may spill over and turn violent.
Which makes the fact that they stopped allowing buying the stock criminal imo. It means another squeeze is impossible, and the funds can safely now sit on their short orders.
*All the below are hypothetical scenarios, I have no specific reason to suspect any of them will or won't happen. This is not financial advice. Trade at your own risk.
1) Hedge funds may have been buying GME alongside WSB. Once the shorts stop out, the funds will know before WSB does. And get out ahead of them. The size of the position suggests this is a possibility.
2) GME management will announce an equity offering. This is arguably the economically/financially correct thing to do. And is also aligned with management's incentives. With more shares in the market, the shorts would no longer be squeezed.
3) GME has become too volatile to easily manage counter-party risk via daily margin posting. This makes options and cash equities much harder to transact. Which is what we saw yday. This could limit the ability of non-professionals to access the market. Killing the squeeze.
4) Robinhood could face solvency (or the perception thereof) issues. This could cause a rush to close out accounts while people still can. Generally, even having to deny you have a liquidity problem is a bad sign.
5) Some truly massive player or a group of them (Citadel and Melvin are only middle size fish) will come in and crush the longs. Gamma works in both directions.
6) The index funds that currently hold the stock will make an exception to their usual rules and sell it because the market is so clearly dislocated. Or alternatively the providers could kick out GME. This would again significantly reduce the squeeze.
7) The regulators will set the stock to liquidation only. The exchanges have the power to do this. And this is the sort of situation that said powers are contemplated for.
So there's quite a bit that could potentially go wrong. And so a good chance that the squeeze participants could lose their investments. Part of the problem is that it isn't clear just how large the short positions really are at this point. While I have zero sympathy for the hedge funds on the other end of this trade, if you live by the sword you die by the sword, the regulators may decide this presents a systemic issue. In which case they're going to shut it down.
Mgmt would be silly to not although this is all so emotional and not political that they'd be skewered.
It is however very interesting how all this plays out and I think many people will have learned a lot afterwards.
Also, you can't run a company into the ground by shorting it. A firm's stock price has no inherent effect on its day to day operations. There are plenty of operating companies that are bankrupt. Equally so, GME doesn't benefit from the run up in its stock price at all. The only time the market price actually effects a company is when its time to raise or return capital. So the only way GME will actually benefit from this episode is if it sells stock.
Gamestop selling shares at this price would, all else equal, be the best thing for gme to do for the company's future prospects.
That being said, I don't know who was long by accident going into this (eg an investor who saw gme as a value or deep value investment) who didn't already sell because this is the accidental win of a lifetime.
I agree that GME don't really benefit by the current stock price. However the benefit from the publicity for sure. What would they lose by sitting this out? It for sure be better for their image than creating "a way out" for the traders sitting on their shorts. You say the will still pay a price.. sure but what price they will pay if GME does nothing is still open.
TLDR I am not convinced that this would be their best play. It at least would have a massive loss of image for their customers(many of which currently are invested).
The firm has an opportunity raise a ton of capital very cheaply that it can use to fund productive investments. That's good for the firm, and its good for the people who work there.
I have no sympathy for the short sellers. They're paid a lot of money to understand the game they're playing. And if they lose, that's too f*cking bad. But the same goes for WSB. If they're gonna be pissed off that the company makes what is unequivocally the right decision for the firm, then they're just as hypocritical as the short sellers.
Whether justified or not if they get blamed for letting the hedge funds off-the-hook it will not be good for their business.
I'm pretty sure the real situation is far more complex than the simplified story that is passed around and the final result therefore not nearly as inevitably positive for the mob. One possibility is that some lenders of the stocks may accept a guaranteed lower direct payment instead of insisting on getting the stocks back and risking that the short seller goes bankrupt and they get nothing.
> why people who bought in at 200/300/400 will lose their YOLO money
Mostly because there is absolutely no guarantee that they will be able to sell in time when the crash comes. Many of them don't even seem to understand how stock trading works.
In extreme situations, a stop loss order to sell at 500 could easily get executed at 100 because nobody is actually willing to buy anywhere in between at that time.
Not an expert or even a participant in this whole thing, but it seems to me that if there is a short squeeze (as i understand it after a week of reading the news) that is only bad if there is a limited amount of stock. If GME release new shares and the hedge funds buy up those new shares at a lower price than the WSB 300/400 buys, that could be bad for the WSB crowd.
NB - Not at all sure this is possible, or that GME would want to sell their stock for 100 when there are buyers at 300/400.
Sometimes shareholders have to approve the new issue, sometimes they have first rights on purchase.
Given that the shorters aren't actual shareholders, that might not help.
Then there's the question as to why GME would forego revenue by issuing stock under market price. They're not at any risk at present, so why leave money on the table?
I'm not blaming WSB about this, because the issue was there before them, and I'm not an expert and maybe we're very far from this scenario, but it's something that worries me...
Energy is hard to maintain long term.