2021 is almost over. There are only a few hours left. But boy was it a crazy year. It really was a year like no other. Truly. It started off with a real bang when a bunch of retail investors came together to prop up share prices of some companies that were less-than-investable. These companies were so rubbish that it really ain’t no surprise that they were also the most-heavily shorted stocks out there in the investment universe. Read here about the 5 dumbest ways in which you could’ve made a killing during 2021!
Pre-GameStop, anyone shorting this stuff (making money when the share price goes down) would’ve made some big bucks since these stocks (from Nokia to AMC) kept on falling. And falling. There was no future for them. Investors had given up. But the hedge funds made money on their downward spiral. After all, isn’t that what shorting is all about?
These companies were either about to go bankrupt, had terrible management or a combination both along with some other nasty stuff I reckon. But then came the WallStreet Bets. And the whole scene changed.
All the stock market fanfare with all its dramatics (‘twas great to watch from the sidelines) began with the trading app Robinhood. This single app really was the glue that stuck it all together. See, unlike the UK (and many other countries), in the US it’s perfectly legal for amateur investors (if you can even call them that) to trade options – a type of derivative contract with all that dangerous leverage stuff.
If you don’t know, say No
Call options (the ones used in GameStop) is basically a leveraged bet on an underlying stock which helps you increase the upside of the bet you’re trying to make. Theoretically, your gains (and losses) can be unlimited. And unless you’re working for an institution (like a hedge fund) and you know exactly what the hell you’re doing, DO NOT TRADE IN OPTIONS.
So thanks to these options contracts (being available and totally allowed on Robinhood) things got really messy, real quick. Robinhood controversially allows users to use leverage (take on debt) regardless of whether or not they actually know what they’re doing let alone know what an options contract even is. Their users are given zero financial education. In my mind this is pretty much like a gambling scene.
Not so long ago, a 20-year-old had tragically taken his own life since he had racked up $730,000 in debt on the app! And only yesterday I read of a (really painful) story of a guy who had lost $300,000 on one single trade. On Robinhood. This kind of thing should be banned. It’s unethical. And frankly, it’s preying on people who are uninformed not knowing what they’re doing.
And guess what? So many people that had joined in the ‘fun’ (more like FOMO) ended up trading options on GameStop and AMC landed themselves in a great bit pile of debt. What was once a hope of boosting returns, sending them to millionaire land, soon became their downfall.
Since they had loaded up on leverage, when Robinhood suspended the trading of GameStop (that’s a rant for another day!), their losses kept mounting. And mounting. Some were lucky enough to cut their losses and move on, but others weren’t quite as fortunate. And there were many of them.
See, in the beginning it was pretty. These stocks kept on going up and up. It looked like they were heading to the moon! And it looked like there was tons of money to be made. These Redditers wanted to show the Big Guys (aka the hedge funds) that the Little Guys can have their moment. So, what did they do?
They caused a ‘short-squeeze’ by pushing up the prices of the most heavily shorted stocks in the universe – GameStop (and the AMC sequel). The Little Guys ended up putting some of the Big Guys in some deep trouble. Some had to bailed out and it wasn’t looking good. But in the end, the Big Guys got the last laugh. Robinhood suspended the trading and the Little Guys ended up losing big time. The once untouchable stocks that never stopped climbing came crashing down to earth.
FOMO is real
When so many people are involved in something as unprecedented as the GameStop short-squeeze, you wanna join in the fun. I don’t blame you. It’s human nature. We don’t want to be the one who got left behind while everyone else was enjoying the spoils. We want to be part of it.
But the thing is, only investing what you can afford to lose seriously applies here. I reckon lots of people who had invested in these stocks did so with money they literally couldn’t afford to lose. And since it was almost impossible to time the market (and no one actually thought that trading would be suspended!), there were a bunch of fools that were left holding the bag. And trust me, you do not wanna be that guy.
So, as much as you shouldn’t invest more than you can actually afford to lose, it’s never a wise move to jump on trends. To invest in things simply because those around you are. It’s the surest way to lose money since you don’t have conviction in those stocks when they tank, you’ll just sell. Or, you’ll keep holding it till it eventually goes the moon. ‘Cause isn’t that what everyone is saying will happen?
Greed also played a part. People wanted the stock to go higher and higher. They didn’t sell when they had doubled their money. They wanted to make it Big so they held on. And for many, things didn’t really end up too well.
It’s not like we’re talking about companies with actual potential that you could hold for a while and hopefully make some whopping returns. And not settle for doubling your money. But these are nonsense companies with no growth in them. So those who managed to make a quick buck, why didn’t they just leave with their cash in hand? Why stay and risk it? Greed, I think. They wanted more. What they had wasn’t enough.
I think what caused so many folk to get sucked into this meme stock trading saga was thinking that they could actually get-rich-quick. Everyone’s looking for a quick fix, in the hope that they can make it overnight. It’s true of making money as it is dieting and learning a new skill. But the thing is, ‘easy come, easy go’. Many people who make their money in such a short space of time (like footballers, actors, athletes) have a tendency to lose it all. Just as quickly.
I know it’s not nearly as glamorous to get rich slowly but slow and steady always wins the race! You want your wealth to be sustainable and long-lasting. You want it to stick around for generations. To be able to give, long after you gone. As such, long-term investing plus waiting patiently is your ticket to freedom. So read here how you can do just that. Because get-rich-quick often comes right before lose-it-quick.
So, go at your own pace and embrace your unique timeline.
Good things come to those who wait. I for one will surely be waiting!
See you on the other side.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.