Retail investors are not winners in the sense of profit

In January of this year, retail investors in the WallStreetBets community on the Reddit platform held a group to short-sell the hedge funds of game station stocks. This “epic” confrontation between retail investors and large investment institutions has attracted enthusiastic attention from all over the world.

On Wall Street, individual investors are often ridiculed as “stupid funds” and are destined to be “cut leek” by professional stock analysts and traders. However, in this confrontation mainly centered on the stocks of Game Station, the share price of Game Station increased by more than 1600% in January. Many investors on the WallStreetBets forum have tasted the sweetness of getting rich overnight. Melvin and Citron, the two major hedge funds shorting the game station, have become huge losses.

At the end of January, a reporter from Nandu Weekly interviewed a number of investors from the United States, the United Kingdom, and China who had personally participated in this epic long-air battle, and discussed with them the reasons for their investment decisions and their views on this “movement”. And do they think retail investors can really win?

The game starts now
Zhang Lin, who is a practitioner in the securities industry, bought the shares of Game Station in November last year. This investment decision is entirely based on his own value judgment. At that time, the game station, which has always been a physical retailer of electronic game hardware, proposed a more radical online transformation. However, due to the new crown epidemic that caused people to stay home from home, Zhang Lin found that its online order volume was obvious. rise. He felt that the share price of Game Station might be undervalued, so he decided to buy it at $18 per share.

In mid-to-late January this year, when the share price of Game Station rose to $50, Zhang Lin decided to liquidate his position. He felt that at this time the Game Station “valuation is considered to be repaired enough, it cannot rise any more, the risk is too high.” But he Unexpectedly, when he paid attention to Game Station again, its stock price had risen to $300 per share.

Zhang Lin thought that the price had been completely decoupled from the valuation and concept, so he searched the Internet out of curiosity. The search results took him to the WallStreetBets forum, which had already gathered 3 million users. Zhang Lin found that the various retail investors in the forum “are gathering frantically to do the market.”

WallStreetBets (hereinafter referred to as WSB) is one of thousands of forums on the social platform Reddit. The latter completed a D round of financing in 2019, led by Tencent.

Malcolm, an electronic engineer living on the East Coast of the United States, has been following this forum for more than a year. He thinks WSB is a “interesting” community, and active users like to laugh at themselves. Here, users will share their investment income, some may have made millions, but some may have lost so much. “WSB, as a forum, will accept you in a kind and critical way regardless of whether you have made a profit or lost.”

In recent weeks, almost all posts on WSB have been related to game stations. In fact, when Zhang Lin paid attention to the game station, many investors on WSB have also discovered the investment value of the game station. By November last year, the game station had become one of the most popular stocks on the WSB forum.

Retail investors’ enthusiasm for investing in game stations began with the emergence of entrepreneur Ryan Cohen. Ryan Cohen is the founder of Chewy, an online pet supplies supplier, and Chewy’s stock is also sought after by retail investors. Cohen bought the shares of Game Station through his investment company last year and joined Game Station’s board of directors. The share price of Game Station thus started a wave of rising prices last summer.

While retail investors feel that this company whose stock price has been hovering at low levels may usher in greater growth in the future, and actively buy through online brokerage platforms such as Robinhood, Wall Street hedge funds think this is an excellent one. Shorting opportunities.

They do not believe that the game station can regain its strength through large-scale online, so they believe that the value of the company’s stock will continue to fall. According to the statistics of financial analysis company S3 Partners, as of January 22, the short selling rate of the outstanding shares of the game station reached 140%.

Short selling can be understood in simple terms: When investors think that the price of a certain stock will fall in the future, they will borrow some stocks from other investors at a small rate and then resell them. After the stock price really drops, you can buy the stock back at a lower price, and then return it to the original investor, and finally earn the difference in price.

This is a very risky operation, because if the price of this stock does not fall, but rises, the short-selling hedge fund faces unlimited losses, because there is no limit to the rise in the stock price. Hedge funds will be forced to buy back the stock at a high price and return it to the original investor, and then exit the short trade.

For a stock that has been heavily shorted, once its stock price rises, the short-selling hedge fund will have to buy a large amount of stock to cover when the market has gone up, then this will cause the stock price to change. There was a sharp rise and a short-squeeze phenomenon appeared.

Game Station Stock went through all this in the weeks of January.

Malcolm believes that in the beginning, a group of retail investors on WSB bought the game station only out of their own value judgments. “Some investors on WSB have always had less responsible investment behaviors. They are willing to take some investment risks if they can afford it.” Malcolm was referring to the fact that they may have been “aponized” on the WSB forum. “The investor DFV.”

Beginning in November 2019, DFV has been arranging the game station. In the following year or so, the US economy has been hit hard by the new crown epidemic. The U.S. stock market has experienced several circuit breaks. The game station itself has been suffering from problems such as poor management. , But DFV has never reduced its holdings of Game Station.

In Malcolm’s view, it was the aggressive short-selling behavior of hedge funds that eventually led to the current backlash of Game Station’s stock prices against themselves. “Their public short-selling ratio is equivalent to propagating to retail investors that short squeezing will happen sooner or later, and posting posts on the forums about the proceeds gained from investing in game stations will further stimulate more retail investors to buy game stations, and the stock price will be pushed up. Higher. WSB will also gain more attention from the outside world in this hot market, attracting more retail investors to join this investment in the game station.”

On January 25, the share price of Game Station surged to $150 per share, an increase of 130%.

On January 27th, Tesla CEO Elon Musk posted on Twitter to express his concern about Game Station’s stock price and WSB Forum. Game Station’s stock price soared to US$345 per share.

Fight back against “reaped”
Mohamed A. El-Erian, Dean of Queens College, University of Cambridge and Chief Economic Advisor of Allianz, wrote an article on January 31 to analyze several reasons for this game station incident. He believes that the most direct catalyst is that retail investors have discovered opportunities for short squeezing. At the same time, the “financial democratization” promoted by the combination of information platforms, data, simplified tools, and trading software, and small and medium-sized investors have long been confronted by underdogs. The dissatisfaction of the Federal Reserve and major financial institutions’ joint “harvesting” also contributed to the occurrence of this incident.

On the WSB forum, retail investors can be seen everywhere strongly dissatisfied with large institutions. The hottest post on the WSB forum in the past month was an open letter directed at hedge fund Melvin Capital and the US media CNBC.

In the letter, the retail investor reprimanded the Wall Street institutions represented by Melvin Capital, saying that they caused great suffering to millions of ordinary people in the 2008 financial crisis, but were not punished, but were rescued. Openly and illegally shorted stocks such as Game Station and did not learn the slightest lesson from the crisis. The retail investor also accused mainstream media such as CNBC of accepting sponsorship from large companies to speak out for them and demonize individual stocks such as game stations that retail investors are enthusiastic about.

The retail investor also appealed to the American baby boomers to understand that the Wall Street institutions that are now being attacked by retail investors are the culprits that caused their children and grandchildren to suffer during the financial crisis. Retail investors are now seizing the once-in-a-lifetime opportunity to punish these institutions.

Malcolm also expressed similar thoughts to Southern Metropolis Weekly reporters. “When market entities with much more financial strength than ordinary people begin to make decisions for ordinary people in the name of’for your good, then ordinary investors will surely fight back.”

Malcolm decided to buy the shares of Game Station about a week ago. He currently holds 121 shares, but he is unwilling to disclose the price at which he bought it. However, he cares more about making money in this excellent investment opportunity than playing a sporty investment against big institutions.

“I’m not an early investor who bought at 30 or 50 dollars per share. I don’t expect myself to make millions like other retail investors on the forum. I just want to make money when a short squeeze occurs. Last point.” In Malcome’s view, the real short squeeze has not occurred so far. “If the short squeeze has occurred, last Thursday and Friday, brokers would not desperately restrict transactions. This is my judgment.”

He has already begun to look forward to his life after earning money. “If we can finally make money from the investment in the game station, we will use this windfall to do a small business to protect the future financial security of our family.” Malcome feels that his family is better than many other retail investors or Americans. Be rich, “but we also have our struggles.” His wife has a mental degenerative disease, and it is difficult to continue the normal eight-hour work.

Nick, a retail investor in London, UK, has only started buying shares of Game Station in the past two weeks. “I invested $10,000 on January 22, but I sold it on January 25. At that time, I didn’t know that its price would go so high in the future.” As for the reason for his investment decision, Nick went to Southern Capital. The weekly reporter said that it is not only to make money, but also to fight against hedge funds. “I made $10,000 when I sold it on the 25th, and then I used the $10,000 to buy the game station stock. The first decision to buy was for the profit, but the second time it was purely for Punish these institutions.”

For retail investors who buy game stations at a relatively low level, obtaining investment income and penalizing institutions are two parallel goals. For Zhong Nan, who bought at a high position, his investment decision is entirely to support the “movement” initiated by retail investors Baotuan against Wall Street institutions.

Zhong Nan is a native of Northeast China, now lives in New York, and runs his own business. He paid attention to the WSB forum when the share price of Game Station saw its first surge on January 25. Two days later, he decided to join the “game.” He bought Game Station at a price of approximately US$300 per share, with a total investment of more than US$9,000. He thinks that the little money he invested is likely to be in vain, but he doesn’t care. In the comment area of ​​a WSB post, he wrote: “Take the money brought from Shanghai and burn it at the game station. We are here to support Western investors in winning this confrontation.”

The story of fighting against the giants has aroused the resonance of retail investors all over the world. In addition to international investors like Nick and Zhong Nan who have chosen to participate in the struggle of the game station, there are also international retail investors who have chosen to “.

Last Saturday, a group of influential Korean retail investors launched a campaign called K-streetbets, following the example of retail investors on the WallStreetBets forum, and vowing to make the Korean stock market’s short-selling ban permanent.

Can retail investors really win?
The two major hedge funds suffered huge losses in this confrontation. The Financial Times reported that Melvin Capital lost 53% in January and the company’s assets shrank by US$4.5 billion. On January 27, Melvin Capital announced the liquidation of its short position in GME. The loss of Citron is currently unknown, but on January 29, this well-known short-selling institution in the United States announced that it would abandon its more than 20-year-old bank and no longer release short-selling reports, focusing on individual long-selling opportunities for individual investors.

Two large short positions were closed and exited. However, statistics from the financial analysis agency S3 show that the short positions have not decreased overall. Ihor Dusaniwsky, Managing Director of S3 Forecast Analysis, said: “I have always heard from the market that the short positions of Game Station have been closed, but the data shows that the total number of net short positions has not changed much. In addition, there are new short positions. Keep joining.”

On the long side, some market analysts believe that not only retail investors, but institutions and large investors are also involved. Senator Elizabeth Warren said in an interview with the media in late January that many people are happy to describe the recent move in GME’s stock price as a group of aggressive retail investors against the stock market of a huge hedge fund empire, but it is not completely certain that this is. not real. “Are you sure that there are rich people on both sides? Are there no hedge funds on the side of those who drive up GME’s stock price?”

Carson Block, the founder and CEO of Muddy Waters, a well-known short-selling agency, said that the parabolic trend of Game Post’s stock price is less like the behavior of retail investors on WSB, but more like hedge funds’ short-squeezing behavior against other hedge funds.

If this situation exists, it is still unknown whether the victory of the bulls will eventually fall into the pockets of retail investors.

An analyst in the securities industry, who did not want to be named, said in an interview with a reporter from Southern Metropolis Weekly at the end of January, “The operation and profitability of the game station itself is determined, and its stock price will fall sharply in the future. Now it is who runs the high position first. Whoever wins is the winner. The big shorts have already withdrawn, and a group of blind longs will have to compete with one another to run faster.” He said that the situation like this is actually not uncommon in A-shares. “For example, the big Vs in those stocks have a bunch of gold masters behind them. Most of the small sellers don’t have the ability to analyze. As long as the big Vs say a few words and the stock price rises, they will believe it and they will buy it frantically. This At that time, the gold master behind the big V calmly ran away from the high position, and finally left a piece of chicken feathers for these small people. The retail investors are likely to be the last losers.”

But Zhong Nan believes that retail investors are the ultimate winner in this confrontation, but not in the sense of profit. “Some retail investors will inevitably lose money in the end, but at least they have gained more investment-related expertise in this confrontation. This is also helpful for them to make investment decisions in the future, at least for me. .”

Zhong Nan believes that the more important significance is that this confrontation will allow supervision to take rectification measures on the capital market that currently has structural problems. “The current US capital market design is to make most retail investors lose money, but Fortunately, more and more people are aware of this, and they are actively speaking out, prompting the supervisory authorities to punish some companies and financial institutions that manipulate the market.”

Obviously, some American politicians have already seen this. “Hedge funds, private equity firms, and large investors who have been frustrated in the GME transaction this time have used the stock market as their private casino for many years, but it is other market players that pay the price in the gambling game,” Senator Elizabeth Warren said. A press statement stated that “The SEC and other financial regulatory agencies should have awakened long ago and do their supervision work.”