Investing with Diamond Hands

I started writing this article a while back and then last week was historic on Wall Street with the GameStop fiasco. Since the theme of my original article ties into the events that transpired last week, I thought I’d add my two cents as well.

I often come across people who call themselves experienced because they’ve been working in a certain field for 3 years. I find it odd. Even after 17 years of experience in finance, I don’t think I could say that I know everything about my field. Sure, I’m an expert at some things but I’m wary of saying I’m an expert at everything.

I’m all for people teaching one another, provided they actually know something themselves. I’ve seen a lot of “experts” give out advice that is not only shallow but also wrong. This is dangerous and even more true in today’s investing world.

Gut Investing

There’s a whole generation of kids who’ve got apps buying stocks and calling themselves an authority on stock picking. Some are making enormous sums of money, which is great. But, they don’t shut up about it. They think they’re doing people a service by telling them to invest in certain stocks. They don’t however, tell them that they can very well lose all their money if they don’t exit at the right time. Nor, do they tell them that they probably bought the stock at a very low price so anyone watching their videos may have missed the boat, so to speak.

What’s even more alarming is that it’s not just the kids who are doing this. I know a 60 year-old gentleman who decided to invest all his savings in stocks because he had some success with Zoom’s meteoric price increase. He blogged about it on a forum and as someone with some experience, I thought it was my duty to tell him to watch out and do his due diligence. He thanked me but said he would trust his instincts to lead him to riches. A few days later Zoom announced a stock issuance and the price came down significantly. I sure hope his gut told him to sell before he lost any money.

I watch these people. It’s a lot of fun but, I can’t help but wonder how many people may have gotten burned because of the frivolous advice being dispensed. The problem with the world is that salacious gossip always tends to be one-sided and people buy into that frenzy.

I’m not saying I’ve never lost money. All the experience in the world cannot account for unforeseen events. Sometimes, you can get caught off guard. But, on the whole, if you’ve done your homework and if you listen carefully, you can come out a winner. It’s not impossible to master, and some people can probably do it even in three years.

Where the $GME (GameStop) Ride Started

By now, everyone knows about Roaring Kitty or DeepF***Value. The guy who apparently started the $GME story. If you’ve read the Wall Street Journal article, you know that he’s a CFA Charterholder, worked for a financial institution and did his homework before he decided to invest in GameStop. He’s got an elaborate YouTube video explaining his thought process. When he made his bet, it wasn’t completely unfounded. He had his process and his reasons to invest; he just didn’t know it would pay off that well.

But, I had to do my homework. So I decided to watch more of his videos.

I have to say I’m impressed. Not only does he believe he’s a value investor (it’s part of his Reddit handle) but, also the way he explains his research process is pretty good. I honestly think he spends way more time than many of us reading the numbers. The WSJ has a beautiful picture of his notebook and of course, his Magic 8 Ball. Sure, he takes significant risks because he looks for steep discounts that may or may not pay off. But he’s upfront about it and he does put disclaimers in his videos. Now, that’s being responsible.

Except for the part where he decides to use his Uno cards and Magic 8 Ball. LOL. But to be fair he’s quite the nice guy and fun to watch.

But, let’s get serious for a moment. The guy did his research and formulated a solid thesis - he followed Michael Burry, he looked at insider filings, he looked at the balance sheet and he read, read, read. People who watched his videos seriously surely learned something.

They Needed a Cause

And then suddenly people lost sight of what they were doing. Suddenly, it all turned out to be about something other than investing. They needed a cause.

I can understand this. We’ve been in limbo since the pandemic started and we just don’t know what to do with ourselves. So when people find an avenue to let out their anger, anxiety or whatever else they’re feeling, they jump on it. As my favorite Professor Damodaran says, it’s a David vs Goliath story with all of us rooting for the little guy. This was their opportunity to stick it to the Man.

But what’s interesting is that it’s not just the individuals who got rich. If you look at the filings for GameStop, guess who bought shares? None other than Funds… Blackrock being one of them, Michael Burry’s Scion being the other, of course. I did the math and Burry is currently sitting on a value of over $550million at a share price of $325 for 1.7million shares, when they bought in at $10 per share.

End Game

As I write this, I’m seeing people trying to fuel the frenzy further by “holding the line”. Some have already lost money because they entered at the wrong levels. I don’t know if this is money that they can afford to lose. All I know is that experience tells me this will end badly for some people.

While I appreciate that a great many have made money out of this frenzy (myself included), all good things have to come to an end and people need to be ready for that. I went in with the idea that there could be some upside driven by market behavior and as soon as I hit my target price, I sold. If I’d have held on, today I’d have made a 300% return instead of a 100%, but I’m ok with that because I wouldn’t be okay with a 200% loss.

I don’t know what the end game is. The WSBs say they will hold it till it hits $1000 but, even Tesla hasn’t gotten that far. So who knows. Professor Damodaran makes a good case for a few ways this could all play out, on his YouTube channel and blog.

I just solemnly hope I’m wrong about people losing money and I hope that people can get out while the going is good and everyone is happy. I’m all for people investing and trading, particularly individuals. Stock markets work because of individuals so it’s only fair that individuals profit from it.

But, I still stand by my principles -

read, study, learn, and above all exercise some discipline.

Remember there’s always a story behind the numbers… and it pays to understand the story.

Disclaimer: I’m no longer long $GME