Why Did Reddit Trigger a GameStop Stock Surge?

[BWV]

Dollar cost averaging is a losing strategy - the avg returns are lower

 

[kyphysics]

Lower than what?

 

[BWV]

Buying all at once and remaining fully invested

 

[Vanadium 50]

It's sad that there are people who don't understand what they are talking about trying to lecture us rather than ask questions. They might think they are looking smart, but they actually end up sounding like some mix of Cliff Clavin and Oswald Bates.

 

[Vanadium 50]

Dollar cost averaging is a losing strategy

Yes, and no.

If you mean "I am going to sit on a big hunk of cash that I want to invest, but won't do it right away", I agree. You're overbalanced in cash, and there is little reason to wait to fix this balance.

But if you mean that dollar cost averaging means investing (I don't think you do, but this thread is filled with people who misinterpret what they read) with every paycheck, I think that's a winning strategy.

There are also strategies that are related - e.g. bond ladders.

 

[kyphysics]

Oh...okay. Yeah, we had this debate before on this forum (was it in this thread?)...altho, that was SPECIFICALLY the lump sum vs. DCA debate.

That assumes you have a huge lump sum of money. I argued the evidence is shaky that the lump sum method is best, since it was valuation-blind from the studies done. If you factor in valuation at the time of your lump sum investment, it's clear that every time you buy into the market with very extreme valuations, you get a very bad return.

That's why Warren Buffett said he'd never lump sum into the market, but rather DCA.

Again, that assumes one does have a huge sum. Most people probably invest a little of their savings from income every month or two and de facto DCA.

 

[kyphysics]

Forgot to add...how does Wilshire 5000 vs. S&P 500 vs. Nasdaq do over say 4-5 decades (which I assume is most people's life-time investing time horizon)?

Again, I've heard people say Nasdaq would have done better, but haven't checked for evidence.

eta: Of course, past performance is no guarantee of future results too.

 

[fluidistic]

Well I must say that this thread made me rethink my near future plan. I have what I consider a medium sized lump sum doing nothing, and I am/was waiting for Tether and Celsius to bite the dust to invest it quickly into cryptos when that happens, like a tiger in the woods waiting for the rat to come close enough. But maybe I will invest it into stocks, an ETF possibly based on the CAC40 or another European market stocks related. Not that I prefer it to the US or international options, it's just that, after 5 years of holding, the tax would be 17.5% instead of 30%. My goal for now is to buy a place to live, but I'm already in the mid 30's.

 

[Vanadium 50]

My goal for now is

Most important words.

You don't say what your timescale is, so let's assume 5 years. It can't eb too much longer, and it can't be too much shorter. I don't have plots for the Euro indices, but here's the US Dow's 5-year returns:

So, it's had one extended negative run (the great depression) and about 4 times when it touched zero, but it looks like the median 8%. I expect the CAC, FTSE, etc. to be roughly similar: you will probably but not certainly do better than a savings account, and the worst performance of the century means you lose (or keep) half of your money.

In contrast, a risk-free (as much as anything can be) investment, a 5-year US treasury, is at 2.8%. That's almost 15% over 5 years.

It's up to you how much risk you are willing to take. My opinion would be that the best case reduces the 5 years to 4 or less, and the worst case increases it to 6 or more. That would be an important factor. Another is that the real estate market is also influenced by the economy - if stocks are going up like crazy, chances are the real estate market is as well. Of course, there is no reason you need to have everything in one basket - if the stock market is riskier than you would like, you can put some money in stocks and some in safe investments. You can dial in the best investment.

Finally, as you mentioned, there are tax implications. If I take on more risk, I want to reap the rewards, not send them off to the government.

As a PS, I have used US examples, but I would think really hard before investing in dollar-denominated, or for that matter, non-Euro denominated assets. That introduces exchange rate risk, since ultimately you will be spending the money in Euros.

 

[fluidistic]

Most important words.

You don't say what your timescale is, so let's assume 5 years. It can't eb too much longer, and it can't be too much shorter. I don't have plots for the Euro indices, but here's the US Dow's 5-year returns:

View attachment 303790

So, it's had one extended negative run (the great depression) and about 4 times when it touched zero, but it looks like the median 8%. I expect the CAC, FTSE, etc. to be roughly similar: you will probably but not certainly do better than a savings account, and the worst performance of the century means you lose (or keep) half of your money.

I appreciate your tips and comments. I don't understand why it shouldn't be a more than 5 years plan, though.

In contrast, a risk-free (as much as anything can be) investment, a 5-year US treasury, is at 2.8%. That's almost 15% over 5 years.

It's up to you how much risk you are willing to take. My opinion would be that the best case reduces the 5 years to 4 or less, and the worst case increases it to 6 or more. That would be an important factor. Another is that the real estate market is also influenced by the economy - if stocks are going up like crazy, chances are the real estate market is as well. Of course, there is no reason you need to have everything in one basket - if the stock market is riskier than you would like, you can put some money in stocks and some in safe investments. You can dial in the best investment.

I'm willing to take serious risks, after all I'm already partly involved into several cryptocurrencies.
Not sure what "safe investments" you have in mind. I do have a bank account with around 2% yearly interest, even though it's limited and I cannot fill it above a low threshold. Then it's other accounts with lower yearly interest, but higher threshold. I don't have anything else in mind when it comes to a safe investment.

Finally, as you mentioned, there are tax implications. If I take on more risk, I want to reap the rewards, not send them off to the government.

As a PS, I have used US examples, but I would think really hard before investing in dollar-denominated, or for that matter, non-Euro denominated assets. That introduces exchange rate risk, since ultimately you will be spending the money in Euros.

If I open a PEA (it's a sort of plan for savings in stocks), I have to wait 5 years without any selling for the tax to pass from 30% to 17.5%. I could open the PEA today, even though I do not buy a single stock right now, I think, and the time would tick. That would be the beginning of my plan for now. Then I would have to decide whether to invest the lump sum all at once, or DCA. The thing is, since it's not that much either, and since they charge, I think around 6 euros per transactions, a DCA might not be the best option, even if I'm not that lucky with the timing of the lump sum investment.

Regarding EUR/USD, even though the EUR is very low, I would bet it still has room to go below the USD in the near future.

 

[russ_watters]

Back to Gamestop:

GameStop has fired its Chief Financial Officer, Mike Recupero, and is making staff cuts across departments as part of an effort to turn around the videogame retailer, the company announced Thursday.

Recupero, who joined the company about a year ago...

https://www.cnbc.com/2022/07/07/gamestop-cfo-is-leaving-the-company-retailer-announces-layoffs.html
Developing story.

 

[Astronuc]

I don't know how Reddit was involved in Tuesday's runup of BBBY, but someone made a killing. Timing is everything

• A college student made a $110 million profit on Bed Bath & Beyond stock this week.
• Jake Freeman's fund revealed a 6.2% stake in the retailer in late July, then sold it on Tuesday.
• Bed Bath & Beyond, the latest meme stock to skyrocket, has more than tripled in value this month.

https://www.msn.com/en-us/money/oth...ng-25-million-into-the-meme-stock/ar-AA10NZoZ

Bed Bath & Beyond stock more than tripled in price from under $6 to over $20 during that period, as retail traders piled in hoping it would skyrocket in value like GameStop, AMC, and other meme stocks. Freeman spent about $25 million on his stake, or less than $5.50 a share, and sold it for north of $130 million on Tuesday, the Financial Times reported.

"I certainly did not expect such a vicious rally upwards," Freeman told the newspaper. "I thought this was going to be a six-months-plus play," he continued, adding that he was "really shocked that it went up so fast."

Similar story on Yahoo
https://finance.yahoo.com/news/20-old-usc-student-netted-122608953.html

 

[Office_Shredder]

Timing and having friends and family willing to give you 27 million dollars to buy a meme stock.

 

[Astronuc]

(Bloomberg) -- The other guy - billionaire Ryan Cohen - pocketed a $68.1 million profit from the sale of his stake in Bed Bath & Beyond Inc., scoring a 56% gain on an investment he held for roughly seven months.

https://finance.yahoo.com/news/bed-bath-beyond-stake-sale-213259911.html

The worst part for the Reddit crowd: It was Cohen’s very involvement in the stock that fueled their enthusiasm. The price at one point this week more than quadrupled from a recent low in July, with at least some pointing to a disclosure that showed the GameStop Corp. chairman still was holding onto his stake, which at that point exceeded 10% of the firm. It included call options that would only be in-the-money if the stock continued to soar.

Meanwhile -

the Union, New Jersey-based company hired law firm Kirkland & Ellis to help it address an unmanageable debt load, according to a person with knowledge of the decision. The firm, known for restructuring and bankruptcy, will advise the retailer on options for raising new money, refinancing existing debt, or both.

Cohen co-founded Chewy about a decade ago and then sold it for $3.35 billion to rival PetSmart and a British private equity firm in 2017.

https://finance.yahoo.com/news/exclusive-meme-stock-hero-ryan-185217269.html

https://finance.yahoo.com/news/ryan-cohens-60-million-bed-090518332.html

Losses mount this morning about 10:10 am

Symbol	Last Price	Change	% Change
BBBY Bed Bath & Beyond Inc.	11.09	-7.46	-40.22%
GME GameStop Corp.	35.47	-2.46	-6.49%

 

[bhobba]

Interestingly now I am trading options with real money and refining my strategy; professional traders often gravitate to what is known as delta-neutral strategies that make money regardless of market direction. That is possible from something known as theta decay. My strategy has a trade of that type as part of it without going into details (it's called the ten delta iron condor by its originator).

Thanks
Bill

 

[BWV]

Interestingly now I am trading options with real money and refining my strategy; professional traders often gravitate to what is known as delta-neutral strategies that make money regardless of market direction. That is possible from something known as theta decay. My strategy has a trade of that type as part of it without going into details (it's called the ten delta iron condor by its originator).

Thanks
Bill

To make money on a delta neutral position you have to be short gamma (vol), which is what an iron condor does. Thr proverbial picking up dimes in front of a steam roller.

 

[BWV]

One small correction - there is one(trivial) delta and gamma neutral position and one gamma neutral position with positive expected values:
If you look at two basic relationships from put/call parity
Stock = cash - put +call
Cash = stock + put - call
but these positions just replicate long stock or long cash, so you don’t need options to get this exposure

 

[Vanadium 50]

Hmmmm...

There are three ways to make money in the market:

1. Profit from the underlying asset, often in the form of dividends
2. Out-trading your counterparty
3. Commissions from brokering transactions.

That's it.

Unfortunately, "I got to system" works only slightly better in the stock market than the casino.

I'm not an expert in iron condors or triple dipsy doodles, but if one is going to try and make money through #2, one needs to understand what side of the bet you're betting on. In this case, it sounds like you are betting that volatility - more correctly, price variations, will go down with time.

This is usually a good guess, but it is not always true. So that's what you are betting.

In line with "picking up dimes in front of a steamroller", you might well be in a situation where 90% of the time you get a dime, and 10% of the time you lose a dollar. But your expected gain is zero (slightly negative if there are commissions) or you won't find a counterparty. (In reality, supply and demand will adjust the options prices accordingly).

 

[BWV]

Hmmmm...

There are three ways to make money in the market:

1. Profit from the underlying asset, often in the form of dividends
2. Out-trading your counterparty
3. Commissions from brokering transactions.

4. selling insurance (which is what short option positions do)

The bulk of the finance lit indicates there is a modest risk premium (meaning a return above the discounted expectation)
https://www.aqr.com/Insights/Research/White-Papers/Understanding-the-Volatility-Risk-Premium

 

[bhobba]

4. selling insurance (which is what short option positions do)

Exactly. It's not 'triple dipsy doodles' it's based on an observed fact. 83% of the time, the premiums paid for options are more than they are worth. This gives a statistical edge in selling options. It's exactly why Warren Buffett uses them all the time to get shares at the price he wants. He knows the insurance business well and understands its benefits. There are very profitable systems (not 'picking up dimes in front of a steam roller.') that make use of this and are neutral eg the Rhino system (based on $25k capital):
https://www.smbtraining.com/blog/wp-content/uploads/2018/07/SMB-Rhino-Backtest.pdf

When looking at returns like this, one can be inclined to go WOW and think it is a way to make a fortune from the market. It is good all right - but must be compared to simply buy and hold. The issue has to do with TAX, which of course, depends on one's individual situation. Even as a retiree here in Aus I have to pay taxes. Not only that, but any income I get affects the small amount of money I get from the government because I am a self-funded retiree. It is often not worth it without going into the details, but that is another story. Using buying, and holding it never is a problem - it just sits there growing. After that is taken into account, the returns are not as spectacular as they may seem. Such option strategies are really for those that would like to do it for a living instead of the 9 to 5 grind. Its big advantage is managing options trades only takes a couple of minutes daily. With some strategies, just a couple of minutes a month eg the Super Bull. Note - it is not market neutral. Secondly, you MUST not use more than 1/10 of your capital as it is VERY volatile, and you can lose all your money.


The returns of the above strategy are not steller using the correct account size - but if you want income, it is an easy way to go. Plus, you only use a small amount of your capital - the rest can be put into long-term and medium-term investments.

Even professional options traders that rely on it for their income do not trade with all their capital. They use something like $100k-$200k. They invest the vast bulk in long-term investments, and any money left over goes straight into those investments. The only exception would be those trading for a prop trading firm or something similar.

Added Later:
Why do I do it? I don't need the money. Nor do I trade enough to make meaningful profits. In my case, I simply find it interesting and fun. And yes, I am making money - not much - but about $100 a month in the small amount I trade with options. I get more from the dividends of the much greater amount I have invested in two ETF's here in Aus, VDHG and YMAX. I have tried individual shares as I did in the old days, but to be honest, the hassle was not worth it for me at this stage. I found selecting and buying individual shares too much of a pain even though I used a stock selecting service. Besides, the marketing junk you got from the stock service annoyed the bejesus out of me.

Thanks
Bill

 

[Vanadium 50]

4. selling insurance (which is what short option positions do)

I would lump that - and arbitrage - into "out trading". My #1 is making money on the underlying asset, #2 is making money on the trade, and #3 is making money on the mechanics of the trade.

#2 is a zero-sum game. Before engaging in that, it behooves one to understand what they are betting on, what their counterparty is betting on, and it wouldn't hurt you to know a little bit about who the counterparty is.

If you have an "unbeatable system", and your counterparty is the big Wall Street banks and brokers, it might be worth rethinking this plan. The big banks didn't get that way by having a net outflow of money.

It's also important to look at the statistics in detail. If I have a trade that earns me money 99% of the time, what happens in the other 1%" In a zero-sum game, I lose 100x (ok, 99x) as much as the average trade. If that number is smaller than 99x, what's in it for the counterparty?

One last word on "selling insurance" - if your plan involves selling insurance to Allstate, you might rethink it as well.

 

[Office_Shredder]

I think selling insurance and doing arbitrage are very different. One requires you to be the best at executing a series of transactions, and understanding the costs of the trades well. The other just requires having a higher risk tolerance than the average market participant for large downcrashes.

 

[BWV]

The real problem with selling insurance to the financial markets is that the risk cannot be diversified - it’s like running a hurricane insurance book but with every property in Miami

But if the risk could be diversified then a return premium would not exist

Every time volatility spikes in the financial markets, you see headlines of short vol strategies blowing up.

https://amp.insurancejournal.com/news/international/2022/03/14/657966.htm

 

[kyphysics]

Sorry if I'm changing the topic, but for a slightly different flavor, what do people think of ridesharing/delivery stocks?

These are legitimate companies (Uber/Lyft, etc.), but they are money losing and have lots of competition and not a clear path to profitability that would justify their valuations.

They are in some ways "meme"-ish stocks in that people recognize these names in every day life and maybe a retail investor who wants to just invest and not look at 10Ks and 10Qs, etc. may buy into them.

Not as bad as GameStop, which is literally in a dying/dead industry, but also by no means a logical growth stock either. . .

What is the future for ridesharing and delivery stocks? I'm surprised Amazon isn't delivering food from restaurants by now.

 

[BWV]

Sorry if I'm changing the topic, but for a slightly different flavor, what do people think of ridesharing/delivery stocks?

These are legitimate companies (Uber/Lyft, etc.), but they are money losing and have lots of competition and not a clear path to profitability that would justify their valuations.

They are in some ways "meme"-ish stocks in that people recognize these names in every day life and maybe a retail investor who wants to just invest and not look at 10Ks and 10Qs, etc. may buy into them.

Not as bad as GameStop, which is literally in a dying/dead industry, but also by no means a logical growth stock either. . .

What is the future for ridesharing and delivery stocks? I'm surprised Amazon isn't delivering food from restaurants by now.

50 cent dollar business model? Crappy unit economics and regulatory arbitrage

 

[kyphysics]

50 cent dollar business model? Crappy unit economics and regulatory arbitrage

Can you elaborate on what you mean by "regulatory arbitrage" above?

FWIW, I've actually seen some analysts say that the future of companies like an Uber might not be in ridesharing/delivery at all. They theorize that the company just wants to get a huge customer base and then somehow use their data (like Meta, Google, etc. does). . .Some have said the same about Tesla, except Tesla is a legitimate company with their cars, batteries, and A.I./self-driving products/services. But, some people do say Tesla could turn into a data company too with their brand (super loyal followers willing to give up their data vs. Meta/Facebook users who often hate the company).

If not, I don't know how Uber becomes a decent profitable company. . .it's not economical.

eta: Between Gamestop and Uber stock - both of which suck - I might choose Uber, though, if forced to buy one on fundamentals only.

 

[Vanadium 50]

what do people think of ridesharing/delivery stocks?

Let's take Lyft's management at their word - they can make $60M profit annually. They have 355 million shares outstanding, for earnings per share of 17 cents.

McDonald's Corporation has an Earning-Per-Share of $8 on a price of $250. So one valuation of Lyft is (17/800)*250 = $5.30.

Lyft actually trades at $16.65. So this only makes sense if one believes that it's earnings will approximately triple, and do it soon. Or if you believe you can turn around and sell it to someone who doesn't care about earnings.

This may not be crazy: Lyft had $4B of revenue, and think they can get 1.5% profit on that. What's to keep them from going to 2%? 3%? McDonald's had $23B in revenue and $6B in earnings. It is much easier to imagine Lyft going from 1.5% to 3% profit than imagining McDonalds going from, 25% to 50%.

This is not financial advice, and in many cases one's goals are better served by other investments than individual stocks. Much less individual stonks.

 

[Office_Shredder]

Can you elaborate on what you mean by "regulatory arbitrage" above?

Regulatory arbitrage is when you take an action whose only value is that it let's you get around a regulation. For example classifying someone as an independent contractor when they are an employee. Or deciding that your drivers aren't driving taxis so you don't need taxi licenses. It usually is intended to refer to something that is actually legal but maybe not intended, but can also be something that is illegal but you know won't be enforced against you.

Uber especially has been famous for ignoring rules in its search for growth like this.

 

[kyphysics]

Regulatory arbitrage is when you take an action whose only value is that it let's you get around a regulation. For example classifying someone as an independent contractor when they are an employee. Or deciding that your drivers aren't driving taxis so you don't need taxi licenses. It usually is intended to refer to something that is actually legal but maybe not intended, but can also be something that is illegal but you know won't be enforced against you.

Uber especially has been famous for ignoring rules in its search for growth like this.

True re: Uber

But, in fairness, don't many (if not, most) corporations do the same? Google (Don't Be Evil slogan) even has some independent contractors (who have complained).

Big law firms hire bottom-of-the-class law school grads for document review and pay them crap salaries and treat them poorly oftentimes, knowing they are desperate for work.

Amazon hasn't didn't pay taxes for years, by purposely being unprofitable...etc.

 

[kyphysics]

In fact, the moment you show a profit, Wall Street often kills your stock if you're a growth company.

They want you to lose money, but grow the top line. CEOs have specifically been told NOT to show a profit or else their stock will tank, as it means the end of a growth phase/era and transition into a "value" stock/stable slower growing company.

 

[russ_watters]

True re: Uber

But, in fairness, don't many (if not, most) corporations do the same?

No, not to anywhere near the same extent. Uber was set up from the start to have legal problems as a normal part of doing business. Most companies try to avoid crossing the line - they straddle or even cross it on purpose.

The view of ethics you have in the two examples is shaped by personal (political) beliefs about how society should work. There's nothing unethical much less illegal going on in what you describe. Uber is different.

[Edit] Be careful getting your information/beliefs from Reddit/twitter. It's an echo-chamber of like-minded soundbyte-based arguments. The positions often come with little connection to real life, but heavy on emotional triggers.

 

[kyphysics]

No, not to anywhere near the same extent. Uber was set up from the start to have legal problems as a normal part of doing business. Most companies try to avoid crossing the line - they straddle or even cross it on purpose.

The view of ethics you have in the two examples is shaped by personal (political) beliefs about how society should work. There's nothing unethical much less illegal going on in what you describe. Uber is different.

Because of classifying drivers as ICs?

A lot of businesses do that (not w/ drivers, but other workers), including Google. Or, is it because their drivers really are more like regular employees that it corsses the line? Was there an additional issue other than ICs?

 

[kyphysics]

re: ethics/legality My post didn't imply (at least, not intended to) that Amazon losing money on purpose or Google using ICs, etc. was unethical.

I was only pointing out that lots of companies do things that take advantage of how the world works.

 

[BWV]

Amazon hasn't didn't pay taxes for years, by purposely being unprofitable...etc.

This is wrong on two counts
A) GAAP earnings <> taxable income
B) Amazon showed little or no income for many years because it reinvested its cash flow from AWS into R&D, which under GAAP is expensed, rather than capitalized. A car company investing the same portion of their income into new factories would show GAAP earnings as those investments get capitalized on the balance sheet and only appear on the income statement through depreciation. As AWS grew and the earlier investments paid off, AMZN began to show GAAP earnings

 

[kyphysics]

This is wrong on two counts
A) GAAP earnings <> taxable income
B) Amazon showed little or no income for many years because it reinvested its cash flow from AWS into R&D, which under GAAP is expensed, rather than capitalized. A car company investing the same portion of their income into new factories would show GAAP earnings as those investments get capitalized on the balance sheet and only appear on the income statement through depreciation. As AWS grew and the earlier investments paid off, AMZN began to show GAAP earnings

I'm 100% aware of that.

eta; maybe the way I worded it opened myself up to this? ...If so, good correction.