The Reddit rebellion appears to be over, or otherwise headed toward a quiet end.
The GameStop squeeze is winding down — the share price of GME has stayed below $100 for days — and the Reddit silver squeeze appears to be winding down, too.
In many ways, the GameStop saga was not what it seemed (for reasons we’ll examine shortly). But it was, certainly, one of the wildest market events of the past 100 years.
To find a comparable drama, one has to revisit the Volkswagen short squeeze of 2008 — an event that cost hedge funds tens of billions in aggregate. Going back further, one can look at the Hunt brothers’ attempt to corner the physical silver market in 1979-80.
And yet, both of those events were different in their own way. One was executed by a corporate insider (Porsche), and the other attempted to hoard a physical commodity (silver) without full control of the futures markets.
To find a comparable short squeeze that could be called retail versus the establishment, or man against Wall Street, one has to revisit the early 1920s and the battle of the Piggly Wiggly.
The Piggly Wiggly supermarket chain was founded as the first “self-serving store” in 1916, and there were more than 600 outlets by 1921. Piggly Wiggly stores are still in operation today, with more than 530 locations across 17 states.
Nearly 100 years ago, in 1923, the outlook for Piggly Wiggly had turned bearish, and Wall Street was ganging up on the stock. The repeated bear raids greatly irritated Clarence Saunders, Piggly Wiggly’s founder and CEO — and Saunders decided to fight back.
Saunders went after the bears by engineering a massive short squeeze of Piggly Wiggly stock. Saunders loaded up on debt to finance the purchase of all the Piggly Wiggly shares in the open market, leaving the shorts high and dry.
But the exchange changed the rules on Saunders, much as brokers like Robinhood changed the rules on buyers of GameStop. Instead of requiring the shorts to close their positions within a certain timeframe, the obligation to cover was suspended.
The delay in getting the shorts to cover then worked against Saunders, who lacked the capital for debt service payments after leveraging up to buy all the Piggly Wiggly shares. Eventually Saunders cracked (for lack of ability to carry the debt), and the Piggly Wiggly corner was broken.
It’s hard to bet against the establishment, mainly because the establishment can change the rules. The Hunt brothers found this out the hard way, too, when the Chicago Mercantile Exchange (CME) made it impossible to keep the squeeze going in silver futures.
In a similar way, we won’t know what might have happened if the brokerage firms not restricted GME buying in a critical time window. They did it to save their own skins for lack of equity capital, but still — you have to wonder.
Either way, there are numerous potential lessons to draw from the GameStop drama. Let’s look at a few of them now.
The Popular Narrative is All Too Often Wrong
When Robinhood first restricted trading in GME, the immediate assumption was that they were doing the direct bidding of firms like Citadel, or otherwise trying to help the hedge funds that were short.
Dave Portnoy, a prominent sports-bettor-turned-day-trader with a large online following, even said he thought Robinhood’s actions were criminal and that the CEO should go to jail.
In reality, Robinhood more or less panicked because of a firm-wide margin call. Robinhood didn’t have the necessary clearing capital on hand to handle the incredible volume of GME call options and shares being purchased, with financial risks being amplified by the two-day settlement process known as “T+2.”
But Robinhood couldn’t admit to its margin call state of affairs outright — at least not at first — for fear that the billions in new capital they need to raise would not be available if investors were scared off. (The best time to raise capital is when you don’t really need it; if a financial entity is seen as desperately needing capital, there is a fair chance it dies.)
Big problems certainly existed in the way Robinhood handled things, and upcoming congressional hearings will likely shed some light on that. But the narrative that dominated the headlines, and the hot takes of the politicians on both sides of the aisle, was wrong.
Hindsight is Not 20/20
There is an old saying that “hindsight is 20/20,” implying that everything is clear in the rear-view mirror. But this often isn’t true: It can be just as hard to analyze the past as it is to guess the future..
In a complex system with a swirling mix of variables, and especially when many of those variables were never before seen — like zero-commission trading, trillions of dollars in stimulus, the gamification of online trading apps, and so on — it can be very hard to see what is coming.
The thing is, it is also hard to see what just happened. Not only can complexity create an impenetrable fog of war in terms of upcoming future events, it can do the same with events that already happened.
Take the assumption, for example, that the hedge fund shorts won and the Redditors lost. This is somewhat accurate in certain respects, but in other respects it isn’t true at all.
We can first note that some in the Reddit army did spectacularly well.
For example Anubhav Guha, a 24-year-old graduate student at MIT, managed to turn a $500 stake into $203,411 in less than three weeks, according to the Wall Street Journal.
Guha’s early experiments with trading, near the start of the pandemic, were mostly failures, costing him half of an initial trading stake in the low thousands; but he more than made up for it with GameStop.
There were no doubt many others Redditors, though not necessarily a majority, who either scaled out or cashed out to sufficient degree to come out ahead on GME — in some cases way, way ahead.
At the same time, and in further contrast to the assumed narrative — long retail bulls versus short hedge fund bears— one of the biggest GameStop wins was a hedge fund wager on the long side.
Senvest Capital, a hedge fund formed in 1997, had started developing a bullish thesis on GameStop a full year earlier, based on fundamental analysis that suggested the bear case was overdone. By October 2020, Senvest had accumulated a substantial position amounting to nearly 5% of GameStop shares, at an average purchase price below $10 per share.
Senvest Capital then watched in awe as the GameStop squeeze unfolded, and when Elon Musk tweeted a single word — “GameStonk!!!” — the move got so heated they decided to cash out and book $700 million in profits.
So, a portion of Redditors won rather than lost; and some hedge funds won big from the long side, rather than the short side; and then, too, at least a handful of bearish hedge fund firms were decimated. Melvin Capital, a $12.5 billion fund, was down 53% in January due to losses on GME and other shorts, for example — and other large hedge funds also saw losses well into double-digit percentage territory.
That makes for a far more subtle hindsight wrap-up than just, “the hedge fund bears won and Reddit lost.”
It gets more subtle still when considering the fact that, even among the Redditors who walked away empty-handed, some of tomorrow’s great traders and investors could be among them. Failure can be a better teacher and motivator than success — especially for someone in their 20s and 30s.
If You’re Going to Bet the Farm, Have Two Farms
Some cautionary types say “never bet the farm.”
We prefer the expression: If you’re going to bet the farm, have two farms.
The translation is, sometimes it really does make sense to bet big; and yet, it rarely if ever makes sense to bet so big one’s financial and psychological well-being are at stake.
Those who never take bold risks run the risk of leading “quiet lives of desperation,” as Thoreau put it, having never truly tried for something.
Those who take risks they can’t actually afford, on the other hand, can put their own future, and the well-being of their family, in danger.
The better path, in our view, is to learn the art of the selective big bet, while coupling the rare “bet the farm” move with the science of smart risk management.
Some risks are worth taking, but only to the extent they can be safely done. One way to handle this is to think clearly about what’s at stake and to always have capital in reserve.
Don’t Go All or Nothing When You Can Take Some Off the Table
Another lesson from the GameStop spectacle is the value in avoiding “all or nothing” type situations, except when they are necessary.
By that meaning, a trader who was long GME, and had substantial gains at some point, could likely have cashed out a portion of their position large enough to take back their initial capital and show a profit; the capital still in play could then have participated in further upside.
There are certain types of financial wager — like buying a house, or selling a private company — where “all or nothing” is mandatory, in the sense that taking partial profits or splitting the difference isn’t really an option.
But when trading liquid assets like stocks, futures, forex, or cryptocurrencies, it is almost always possible, at some point in a significant winning trade, to reduce risk while still maintaining a useful exposure profile.
Being willing to scale in or out — not buying all at once, and not selling all at once either — will mean forgoing the glory of picking the exact moment when it was ideal to buy or sell. But the reward for trading discipline overall can be a more emotionally fulfilling experience, with fewer painful instances of “I wish I had sold” or, sometimes even more painfully, “I wish I’d stayed in.”