Meme Stocks, Crypto and Other Bad Choices – TSMP #71

Intro: Meme Stocks and GameStop Insanity

Wikipedia: Game Stop Short Squeeze

  • Ahhh GameStop. A happy place for gamers.
  • Prior to January 2021, GameStop as a company had been struggling due to competition from online game distribution centers, as well as problems with COVID-19 reducing the number of people who shopped in-person. As a result, GameStop’s stock price continued to decline and many institutional investors were short selling the stock. In April of 2020 GameStop stock had dropped to $2.80/share
  • What is SHORT SELLING a stock?
    • First, what is GOING LONG on a stock? Pretty straightforward. You buy a stock, hold it until it hits the level you want, then you sell it on the market and make a profit (hopefully)
    • Okay, what is SHORT SELLING a stock? A little more complicated. You borrow stock from a broker that you don’t own and sell it on the market. Then when the price drops you buy the stock back at a lower price (called covering) and pocket the difference.
  • Why do you SHORT SELL a stock? Basically because you think the company is having trouble and you believe it’s going to go down in value.
  • What is a SHORT SQUEEZE? 
    • A short squeeze happens when something happens that influences public opinion positively (ie. Good earnings, news of a new and exciting product, Elon Musk says he’s going to buy your company, etc) and the stock jumps up in price.
  •  On January 22, 2021, approximately 140 percent of GameStop’s public stock had been sold short, meaning some shorted shares had been re-lent and shorted again.
    • Think about that one. Before the craziness happened more than 100% of GameStop stock had been sold short. This is a company NOBODY believed in

Enter r/wallstreetbets

  • The subreddit r/wallstreetbets is an online community on Reddit 
    • Are you on Reddit yet? No? Seriously? Go now. We’ll wait. 
  • The Wallstreetbets community is known for discussion around meme stocks and high-risk stock transactions.
  • At the beginning of January GameStop was trading at $17.25 per share. Many members of Wallstreetbets believed GameStop was significantly undervalued, and they came up with a plan: If the majority of Wallstreetbets traders all invested at the same time – and could convince everyone else they knew to do the same – they could trigger a short squeeze, driving up the price to the point where short sellers would panic and have to cover (buy back) their stocks at large losses.
  • It worked. Spectacularly. On January 8 GameStop was worth $17/share. On January 15 it was up 100% to $35/share. A week later it was up almost another 100% to $65/share. Then it doubled. And doubled again. 
  • Everyone was now talking about GameStop. It was the number one news item on every financial media outlet. r/wallstreetbets broke the single-day Reddit record for most views (73 million) and added over 1.5 million new users in less than 24 hours. 
  • By Jan 28 the pre-market value of GameStop was over $500/share – Up over 3000% from the beginning of the month
    • FYI: If you bought GME at $2.80/share in April of 2020, you could have made 17,000% on your money. Ie. If you bought ten shares at $2.80 (a $28 investment) you would have made $4,760.
  • GameStop lost a lot of money for big financial institutions but the individual retail traders who bought in at the ground floor of GameStop made a small fortune.

What Goes Up…

  • However, 3000% gains just aren’t rational. No stock can keep going up forever. It only took a few days for the frenzy to die down and a week later on February 5 GameStop had lost 90% of its value – dropping from $500 all the way back to $53/share. 
  • This drop caused a lot of people to lose money….hopefully you weren’t one of them (like my buddy was.)

Hope Springs Eternal

  • Even if they lost money on the GameStop drop, a 3000% percent gain on your money is too good for people to pass up and soon Wallstreetbets was at it again. This time they found their next meme stock in the movie company AMC.
  • On May 7th 2021, AMC was worth $9.51/share. The stock went viral and by June 18 it was worth $59.26, a 623% increase!
  • …but by July 16th 2021 it was back down to $34.96. Still a great pop from $9.50/share but if you bought at the top…ouch.

Day Trading (and Why You Shouldn’t Do It)

  • We all know someone who has been day trading stocks. I have multiple guys I know who have made thousands doing it. One buddy has made several grand this last year. His brother is up 20 grand.
  • Heck if all you did was catch a little piece of some of the recent meme stocks like AVIS or Bed Bath and Beyond you’d be up at least 300% your money.
  • It’s exciting. It’s fun. It’s trendy. Everyone’s talking about it. 
  • BUT… It’s a TERRIBLE idea.
  • Why? Because of the math
  • Jay’s background on day trading
  • Matts thoughts
  • Here’s the brutal statistics
  • Can you become profitable day-trading stocks? Yes, but only if…
    • If you’re willing to invest at least a year to learn…
    • If you’re willing to spend thousands of hours studying the market and do it every single day…
    • If you’re willing to spend thousands of dollars buying the research material, renting the monthly software, purchasing a subscription to a trading group, upgrading your computer hardware and other related costs.
    • If you’ve saved at least $30,000 cash THAT YOU CANNOT TOUCH to day trade on the US stock exchanges so you don’t violate FINRA’s “pattern day-trade rule”
    • If you have a high risk tolerance and willingness to lose everything

Crypto

  • Bitcoin, Dogecoin, Etherium, Solana, Terra…
  • Bigger gamble than meme stocks or even day trading.
  • In December of 2021 Bitcoin was worth $64,400…it’s currently worth $29,550 and it’s still going down.
  • Nobody knows what the fuck is going to happen to cryptocurrency values.
  • If you want to play Crypto, play it like a slot machine. Put in a few dollars that you don’t mind losing and have fun.
  • If you like to gamble, put in a hundred or two that you don’t care about losing.
  • DO NOT put in a thousand or more.
  • NEVER take out a loan to buy Crypto (or meme stocks, or day trading). EVER.
    • It doesn’t matter how sexy it sounds or how much money someone else has made. As Admiral Ackbar said: “It’s a trap!”
    • The same goes for meme stocks
    • Ditto NFTs or other blockchain “business opportunities”

How To Actually Invest Correctly

  • Investing experts, including Warren Buffett and brilliant author and economist Benjamin Graham, say the best way to build wealth is to keep investments for the long term. Don’t try to time the markets by “buying the dip” or “selling the peak.” This means no meme stocks!
  • Use dollar-cost-averaging – Invest a set amount monthly, regardless of the market value.
  • According to global investment bank Goldman Sachs, 10-year stock market returns have averaged 9.2% over the past 140 years.
  • It’s much safer to invest in a stock index fund rather than individual stocks. Tesla might be a cool company that you like but there’s no guarantee that Tesla stock is going up for the next ten years.
  • A good potential place to start is to consider investing in the S&P 500 (biggest 500 companies in the US)
  • S&P 500 yearly averages over the last decade
    • 2010 15.1%
    • 2011 2.1%
    • 2012 16%
    • 2013 32.4%
    • 2014 13.7%
    • 2015 1.4%
    • 2016 12%
    • 2017 21.8%
    • 2018 -4.4%
    • 2019 31.5%
    • 2020 18.4%
    • 2021   21.4%
    • 2022  -14.5% (so far…)

CONCLUSION

  • Be safe with your money. Be smart with your money.
  • If you want to gamble, go for it. Have fun. Throw in a few dollars in some meme stocks or crypto and see what happens. You might get lucky. But you probably won’t so be ready to lose whatever you put in.
  • If you want to make money long term, your best bet is to investing using dollar cost averaging on an index fund
  • Talk to your financial advisor before you make any decisions about your financial future. If you don’t have a financial advisor, get one!!
  • Stay Superior!

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Meme Stocks, Crypto and Other Bad Choices - TSMP #71 1

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