When Will the Game Stop?

It is not every day, heck not even every lifetime, that an opportunity to turn $10,000 into $100,000 in less than a month presents itself. If I told you there were four opportunities in the last month to do just that, you may ask me when’s my next flight to Vegas or what was my hunch to take Kentucky’s win total under 10 games. All that needed to be done was scour through posts on the popular Reddit community (AKA subreddit) WallStreetBets and invest in one of the four distressed, highly shorted companies it targeted. The caveat? You better know when to get out.

Retail investors swarmed the markets in 2020 as investing and day-trading increased in popularity after much of the country found themselves under stay-at-home orders and looking for outlets to keep busy. Empowered by zero-commission trading apps and stimulus checks, many individual investors took to online brokerages such as Robinhood to invest their money and partake in high-frequency trading. The market’s rebound from March lows enticed new investors to join the action as the S&P 500 posted five positive months in a row and popular stocks such as Tesla returned 473%. Some of these traders took to social media to boast their winnings and engage in discussions over which companies they believe are prime to take off. WallStreetBets (WSB) provided them a community to do just that.

Started in 2012, the WSB subreddit has long been an online community filled with investors pitching ideas and posting their winners. But as retail-investing grew in popularity, so did WSB. After beginning 2020 with just over one million members, the community quickly grew to over six million by early 2021. As the community grew, so did its collective influence on the markets as it amassed enough bodies and funds to drive unlikely rallies; all that was missing was a collective goal.

Citron Research founder Andrew Left gave them that collective goal. Left, an active short seller, shared why he believed GameStop (GME) was a failing company and why it’s share price would plummet. This thinly-veiled effort to manipulate members of the WSB subreddit was not received well and the WSB community saw an opportunity to “get back” at those who had a vested interest in seeing companies like GameStop fail. In response, many WSB members bought shares in the company, sending the price “to the moon.” The community focused on other companies with a high percentage of short interest such as AMC Entertainment Holdings (AMC), Express (EXPR) and Naked Brand Group (NAKD). The activity and price movement caused a short squeeze, forcing shorts to close their positions and become buyers, sending the price even higher. For WSB members that placed trades to trigger these short squeezes, the result was great. Hedge funds suffered heavy losses as GameStop’s price soared nearly 1,800% in just a matter of days, resulting in massive gains for those who bought the stock. Fast forward a few weeks and the GameStop rocket ship has come back to earth nearly as quickly as it blasted into the stratosphere. Shares of the company were trading recently at $45, well off its late January high of $483. Interest in the company has fizzled as trading volume has decreased and WSB members have set their sights on other opportunities. Speculators that either got in too high or held on too long are left holding the proverbial bag.

The speed at which this phenomenon transpired highlights the risk of chasing huge short-term profits and is a valuable reminder that there is a sizeable difference between trading and investing. While investing for the long-term does not offer the same endorphin rush triggered by speculative trading, investing in a diversified basket of suitable investments is far less likely to end in despair. At Unified Trust, we embrace the “slow and steady wins the race” approach to investing to ensure your portfolio is effectively positioned to achieve your financial goals.