The mob has consequences
Hedge funds are bad.
People are good?
Of course not, there are some good and bad hedge funds, and some good and bad people. Hedge funds get a reputation for taking risky and sometimes morally questionable trades. A hedge fund, is just a fund that has more freedom of where to invest their capital than other funds.
In the case of GameStop, hedge funds together shorted over 100% of the float of the company (i.e. almost every share available on the market was shorted). When shorting, you borrow the stock, betting that it goes down, with the promise of repaying the stock later. If the stock goes down, the fund makes a profit, and if it goes up, they take a loss.
Shorting a company’s shares is completely ethical — you bet on the efficient market responding to the negative fundamentals and profit from it. Shorting over 100% of a company’s shares is not only greedy and unethical, but terrible risk management.
Reddit users on the popular subreddit WallStreetBets have been paying attention to GameStop for a few months, however, in the past few weeks it’s been ramped up to overdrive; no longer are they just “paying attention” to it, they are encouraging buying it on leverage to new participants.
In the recent weeks, virtually every post on the subreddit has become a post for “buy GME, and don’t sell.”
They take advantage that there are outstanding short positions on the market and try to force those shorts’ hands to buy their stock at levels that are completely unjustified for the stock.
This is an organized theft. They take advantage of poorly positioned shorting hedge funds, and take money from their accounts en masse; this is not investing, it’s a coordinated financial attack. They knew that if they pushed the price above a certain price, the fund would be forced to give them money.
The sole purpose of the GameStop buying frenzy is to steal the money from the hedge funds.
Why is it justifiable? Because all hedge funds are inherently evil and should be punished, right? (Does this remind you of a certain country in 1930s Europe?)
This is a sign of rising collectivism among the population.
Those who are individualists see the pump-and-dump going on with Reddit as a terrible consequence of mass greed-fuelled gambling, with unintended casualties in other market participants. It’s nothing more than a purposeful attempt to make the market less efficient for personal profit —a reprehensible pump-and-dump group.
Those who are collectivists in this situation, view the pump-and-dumps as just “the people getting back at the hedge funds who are shorting.” They assume that the hedge funds are inherently the oppressor and they are the victim. There needs to be no evidence towards this, as the narrative is strong enough where anyone questioning it is instantly turned away from the group. The people participating in this are doing a moral good, and the end justifies the means.
What is the end though? That is the real question we need to be asking ourselves. What is the end?
Make naked shorting illegal? Sure. But this doesn’t end there…what’s next?
The goalposts will continuously move, because retail — being retail — still won’t make money. Retail vs. institutions are the equivalent of a high school basketball player competing with LeBron James.
Retail is millions of phone traders with no expertise and a desire to make quick money. We all know how this ends.
The next day for the aforementioned stocks. If you hold spot, you lost a majority of your money. If you had any leverage, you lost 99% of your money.
With this current (and extrapolated to the future) mentality of “it’s somebody else’s fault that I can’t make money” and the fact that there are now so many amateurs demanding that they ALL trade profitably, we have a phenomenon of mob rule.
This phenomenon will lead to demand for legislation (if not violence) against people who are successful for no reason other than being successful. Retail demands access to the same financial instruments as professional investors despite having no knowledge or training on using such financial instruments.
The SEC will crack down on retail-targeted pump and dump groups, then it will get out of hand — the incentives for the promoters of the groups are huge, so they’ll restart over and over because there’s always a fresh batch of greed. Then, once the mob gets large enough, the matter will be politicized, and you can expect AOC and the like to argue it as to why “capitalism is broken” or something of the sort.
What a surprise… two hours after posting the article:
Congratulations. You have become exactly that which you hate.
You hate socialists for saying “eat the rich” yet you support a pump and dump group that does extremely unethical activities solely because it “hurts the rich.” You hate BLM for considering cops an oppressor class and black people an oppressed class, yet consider yourself oppressed and Melvin Capital an oppressor.
Mobs have consequences and you will see them sooner rather than later.