3 Things I Learnt About Gamestop Wall Street Bets VS Hedge Fund Short Sellers

3 Things I learnt from the Gamestop Saga

It is 29 Jan 2021. Gamestop (GME) share price is $325. It has gone up a long way since early January when price is around $17. The battle is still on. Several brokerage companies like Robinhood has started to restrict trading on GME. So much for a company that believes that everyone should have access to the financial markets. With this, I believe there might be more interest going towards Bitcoin.
If you unsure what happen, do check out the first article How Gamestop is better “investment” than Tesla, where we explain the hype on GME.
Disclaimer: I do not have any position in GME/Bitcoin. Indeed, I have “missed” out on the huge runs of those companies but time will tell. Here at Wealthdojo, we seek to understand what has happened fundamentally. Even in the insane movement in the stock market, we aim manage our wealth in a logical and systematic way.
3 Things I Learnt About Gamestop Share Price

3 Things I Learnt About Gamestop Share Price

 

The Update

Things were not pretty over the last few days.

  1. Hedge Funds had to closed their short positions taking in huge losses. Melvin Capital (the guys that have shorted GME) have not announced how much losses they suffered but Citadel and Point72 have infused close to $3 billion into Melvin Capital to shore up its finances. They have also deny going into bankruptcy but supposing have been bailed out.
  2. Several brokerage companies started to restrict trading. On 28 Jan, they only allowed people to sell their shares of selected companies. On 29 Jan, they allowed people to buy only one share of selected companies. This came as an outrage as if you restrict people to only sell. There is only one direction the company can go.
  3. Robinhood started to draw up to $600 million from their line of credit. They have also raised more than $1 billion from existing  investors. It is to pay customers who are owed money from trades and also fulfil regulations. They probably did not manage risk properly by allowing those shorter to short too much.

From this episode that is still ongoing, I hope to share 3 important lessons that we can learn as retail investors.

 

Leverage

Time and again, this word comes out to haunt the financial market. If you can remember the 2008 financial crisis, lines of credit is so easily available that even a prostitute can take a dozens of mortgage loan (Unverified information from Netflix: The Big Short).

When you leverage, you are using money that you don’t have to purchase a stock.

Leverage example:

You have $100,000. You want to invest in ABC shares (assume it is $1) because you believe the share price will double for whatever reason in the next few days. You leverage by borrowing another $100,000 to invest paying an interest (we are going to ignore interest in the calculations). You buy 200,000 shares using your $200,000.

When ABC shares doubles (now $2), you would have $400,000. You pay back $100,000 and your portfolio is now $300,000.

If you didn’t leverage and borrow, your portfolio only grows to $200,000.

Your money grows “faster” when you leverage.

However, if ABC shares drops to 0. Your original $100,000 is now 0. However, you now owe $100,000.

If you didn’t leverage and borrow, your portfolio just suffers the maximum lost of $100,000 but you do not owe people’s money.

The above is a 1:1 leverage. It is possible for you to have a 50:1 leverage in the financial market. Imagine how scary it is if the trade don’t go according to plan. That’s 50x of $100,000.

 

Investing with margin or leverage is the fastest way to lose all your money. We won’t deny the fact that it is also the fastest way to make more money. Ideally, you should only invest with the money you already have. I believe we will see how this spans out in the days ahead especially if there are big hedge funds using leverage in their GME positions.

Prisoners Dilemma

I never thought I would see this happening after my university days. Readers of Wealthdojo will probably know I’m a behavioral economics fan. Seeing prisoners dilemma play out in real life is somewhat very fulfilling.

Let’s set the context first. When the brokerage stopped people from buying. All you could do was to sell the stocks. Hence, it became a situation of sell or don’t sell among the retail investors.
3 Things I Learnt About Gamestop Prisoners Dilemma

3 Things I Learnt About Gamestop Prisoners Dilemma

I have created a payout table to facilitate the discussion on the prisoners dilemma.
3 Things I Learnt About Gamestop Prisoners Dilemma Part 1

3 Things I Learnt About Gamestop Prisoners Dilemma Part 1

Shareholder #2 best response is to sell. This is because if Shareholder #1 were to sell, Shareholder #2 is better off selling than not selling (2 > 1). If you sell but other investors don’t sell, you win but other investors lose. If Shareholder #1 were to not sell, Shareholder #2 is better off selling than not selling (5 > 4).

3 Things I Learnt About Gamestop Prisoners Dilemma Part 2

3 Things I Learnt About Gamestop Prisoners Dilemma Part 2

Similarly, Shareholder #1 best response is to sell. This is because if Shareholder #2 were to sell, Shareholder #1 is better off selling than not selling (2 > 1). If Shareholder #2 were to not sell, Shareholder #1 is better off selling than not selling (5 > 4).

3 Things I Learnt About Gamestop Prisoners Dilemma Nash Equilibrium

3 Things I Learnt About Gamestop Prisoners Dilemma Nash Equilibrium

The Nash Equilibrium for this game is for both of them to sell getting a payoff of (2,2). Logically, both shareholders will sell.
Although (4,4) is the most ideal for them, it requires all the GME investors to coordinate and don’t back out on the deal. It will certainly play on the motivation on the GME investors to stick on with don’t sell.

Motivation

3 Things I Learnt About Gamestop Wall Street Bets VS Hedge Fund Short Sellers

3 Things I Learnt About Gamestop Wall Street Bets VS Hedge Fund Short Sellers

I have learnt that in investing, different people will have different motivation. I find it bizarre for people to randomly ask someone on their opinion and whether to invest in the stock market at this moment of time.

If you ask a trader, he will say yes because the S&P is upward trending.

If you ask a value investor, he will say no because valuations are crazily rich.

If you ask a growth investor, he will say yes because there is still growth.

If you ask Warren Buffett, he will just buy back his own shares.

If you ask Elon Musk, he will tweet Gamestonks!

If you ask me, I will sit at the sidelines and continue to collect excellent companies and a sensible price.

For the people at Wall Street Bets, they are there to send a message.

 

If you decide to follow any of them, make sure they have the same motivation as you. Otherwise, you might find yourself in an awkward position.

 

Final Thoughts By Wealthdojo

When you thought 2020 was an epic year, 2021 came as another surprise. This episode definitely hasn’t closed yet. Who knows this might be a trigger for another financial crisis. If it comes, the question is “are you ready?”.

 

For those of you who want to kick start your Wealth Management journey in 2021, why not consider joining my telegram channel?

Join my Telegram Channel for a tip a day! In Wealthdojo, we dedicate a small amount of time daily for learning new things. Continuous learning is one of the greatest secrets of success.

For those of you who want to turbocharge your journey, contact me at chengkokoh@gmail.com. I would like to hear from you what your experiences are currently and from there, we develop a plan specially catered just for your journey.

We wish you all the best! Stay Safe and Take Care!

Chengkok, Sensei of Wealthdojo.

 

Short Squeeze

How Gamestop is better “investment” than Tesla

It is official. Gamestop (GME) is now giving a “better returns” than Tesla (TSLA). GME returns stand at 3300% vs TSLA 691% over the past one year. It is even better than bitcoin which is giving a 257% returns over the past one year. Just how did it happen? Is it too late to invest in bitcoin, Tesla or even Gamestop?

Here at Wealthdojo, we seek to understand what has happened fundamentally. For example, the impact of raising $5 billion from Tesla offering. We then see if it makes sense to invest in it or just speculate. Even in the insane movement in the stock market, we aim manage our wealth in a logical and systematic way.

Disclaimer: I do not have any position in Bitcoin, TSLA or GME. Indeed, I have “missed” out on the huge runs of those companies but time will tell.

Tesla VS Gamestop

Tesla VS Gamestop

 

How did this happen?

It happened for TSLA. It is happening for GME. This movement in the stock market can be summarised into 2 words.

Short Squeeze

What is a Short Squeeze?

A short squeeze happens when there is a (1) sharp rise in the price of an asset. For traders who previously short the asset, they are (2) forced to close out their positions. As they are forced to now (3) buy the asset at that current price, this tends to send the prices even higher.

In simpler words, a strong buying pressure “squeezes” the short sellers out of the market.

 

Example of a Short Squeeze

For example, stock ABC price has been falling over the last 2 years. Let’s assume that it is now $10. Short sellers (people who sell the stock without having them) sell the stock ABC at $10 hoping to profit from the decrease in prices. (In a hypothetical example, if price becomes $1, they just buy it back at $1 and profit the $9 difference).

However, something happened. This could be a favorable earnings or simply a tweet. The price (1) rapidly increase. Let’s assume prices is now at $20. They are now under pressure if they are on margin (2) to buy back the stock at $20 or risk having the price going up further. At this moment of time they would already be losing $10. They scramble to close/buy the stock (3) at $20 sending the price even further. This keeps escalating until all the short sellers are pretty much out.

 

Case Study of Short Squeeze

In July 2020, the dollar value of all shorted Tesla shares is close to hitting $20 billion. No US stock in history has ever been that shorted. On 23 Oct 2020, TSLA reported a profitable quarter. When the (1) share price increase, the short sellers were forced (2) to buy Tesla shares. This in turn send the price even further (3).

Another example is Volkswagen in 2008.

 

How to identify a potential Short Squeeze?

There are many indicators to identify a potential short squeeze and I will try to explain it in a quantitative and qualitative way.

Quantitative: Short Interest

Short Interest is number of shares that have been sold short but have not yet been covered or closed out. Short interest, which can be expressed as a number or percentage, is an indicator of market sentiment. The larger the percentage, the more shares that are being shorted.

Quantitative: Hated Company / Movement Driven

The 3 above are just an example of strong emotions in retail investors. The more someone “hate” the company, the more he is committed to short them. This can be seen from Tesla cult-like investors who either love them or hate them.

After that, it is just waiting for the right moment for it to pop.

 

Can you profit from a Short Squeeze?

You definitely can. This screenshot has been making it’s way on the internet and this isn’t the final profit that he has. The current price of GME is $209 (27 Jan 2021) and the last price in this screenshot is $65. He has amplify his returns using options so god knows his returns now.

However, I would advice otherwise from chasing this return. This is purely speculative and nothing short of a gamble.

GME Short Squeeze Profits

GME Short Squeeze Profits

 

Final Thoughts By Wealthdojo

Short Squeeze

Short Squeeze

The market is an representation of the collective human behaviour. I personally think that it is an amazing run for GME. However, I rather sit on the sidelines along with Warren Buffett to watch this play out. Congratulations for those who profited.

 

For those of you who want to kick start your Wealth Management journey in 2021, why not consider joining my telegram channel?

Join my Telegram Channel for a tip a day! In Wealthdojo, we dedicate a small amount of time daily for learning new things. Continuous learning is one of the greatest secrets of success.

For those of you who want to turbocharge your journey, contact me at chengkokoh@gmail.com. I would like to hear from you what your experiences are currently and from there, we develop a plan specially catered just for your journey.

We wish you all the best! Stay Safe and Take Care!

Chengkok, Sensei of Wealthdojo.

 

 

Is it too late to invest in Bitcoin?

Is it too late to invest in Bitcoin?

Happy Birthday!! On 12 Jan 2009, Nakamoto sent 10 bitcoin to Hal Finney. This became the first “transaction” in bitcoin history. 12 years later, prices of Bitcoin exploded to reach USD$40K (on 9 Jan 2021). What a journey! Such exponential increase in prices tend to spike interest among the retail investors on their wealth management journey. If you reading this, welcome to the club.

In this article, I will write about my understanding of bitcoin, where we are at the moment and also answer an important question in your mind.

Is it too late to invest in bitcoin?

Is it too late to invest in Bitcoin?

Is it too late to invest in Bitcoin? Source: Logo vector created by starline

Disclaimer: I don’t claim to be an expert in Bitcoin. All views represent my own. I would love to engage in a healthy discussion of bitcoin in the comments section below.

 

Context Of Bitcoin: Currency Of Trust

Bitcoin was born slightly after the full swing of the banking crisis. What started as a subprime mortgage crisis eventually created a domino effect that crippled the ENTIRE world financial system. You can imagine the distrust in the financial industry at that time.

The original Satoshi Nakamoto white paper states: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Financial institutions now have new and stricter regulations to comply. At the same, another school of thought arose. Skip the financial institution altogether. It is what it meant by disruption. Imagine a world where you can make financial transactions without going to a bank. This loosely translates to a more efficient and cheaper financial services.

 

This is where Bitcoin was born.

Bitcoin is positioned to be the “currency of the future”. This boils down to back to the fundamental of money which is trust. The US Dollar has been positioned to be the global currency because it is widely accepted and “trusted” (consider why you won’t want to hold Zimbabwe’s currency). 61% of all foreign bank reserves are denominated in U.S. dollars, and nearly 40% of the world’s debt is in dollars. On the dollar bill, you will see this world called legal tender which means that it is acknowledged by the laws as a mechanism to settle a private or public debt or in order to meet a fiscal responsibility which includes paying taxes, abiding by contracts, and finally damages or fines.

Bitcoin is making waves as it becoming more “widely accepted” (I will discuss more about this later). It is also “trustable” as it is backed by blockchain technology. To put loosely, blockchain technology is used to share valuable data in a secure, tamperproof way. That’s because blockchains store data using sophisticated math and innovative software rules that are extremely difficult for attackers to manipulate. At this moment of writing, Bitcoin is not legal tender yet but is deal with as property or goods.

For a deeper understanding of cryptocurrency, blockchain technology and bitcoin, here is a good article by PwC.

 

Can it ever be used as money?

In the economic literature, something can only be used as money when it has these 3 functions. A medium of exchange, a measure of value and a store in value. Perhaps the heavily debated issue is if Bitcoin if it has a store in value.

Is there a store in value?

Bitcoin Price Volatility

Bitcoin Price Volatility

Consider this graph on the volatility of bitcoin over the past year and also past 10 years. The prices of bitcoin was never in any sense stable (which is what makes it exciting). Prices volatility have been north of 20%. A store in value is defined as something that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. Whether you are a bull or bear for bitcoin, I think we can agree that there is no predictability for the value of the coin in the near future.

Is it being used as a medium of exchange?

While Bitcoin transactions has been increasing over the years as it slowly become more “widely accepted”, we are unsure how much of it is being translated into real goods and services. According to newbtc, only 33% of bitcoin transactions are being used to purchases goods.

Bitcoin Transaction Trend

Bitcoin Transaction Trend

That being said, I believe that there will be more transactions in future. My question is IF my Bitcoin is appreciating at such an insane level, why would you ever use it to buy something? Taking a note back into May 22, 2010, now known as Bitcoin Pizza Day, Laszlo Hanyecz agreed to pay 10,000 Bitcoins (USD$400,000,000 or USD$400million today) for two Papa John’s pizzas for USD$25. Who in the right mind would want to use Bitcoin to buy anything? Imagine something that you bought at $25 then would now be USD$400million. There would be an extreme incentive to keep money or HODL (someone that keeps cryptocurrency rather than selling them).

Will more people start to use Bitcoin?

It is written that there is an “increasing adoption” of Bitcoin. I have my doubts as shown by this Bloomberg article. About 2% of the anonymous ownership accounts that can be tracked on the cryptocurrency’s blockchain control 95% of the digital asset. Due to the finite nature of Bitcoin, an increasing adoption have to mean that the number 2% should start to go up. I believe there are some whales that are currently holding the bulk of Bitcoin for it to be used meaningfully as money.

Personally, I believe the original intent of it being used as money is now being shaken.

 

Bitcoin As An Investment Speculation

While I believe the original intent of Bitcoin have not been carried out, you cannot not deny that the people have been making money on it. Whether Bitcoin should be invested depends on who you are asking or who you are.

Futuristic Individual – Yes. We will be using cryptocurrency in future.

Value Investor – No. Because there is no value creation in Bitcoin (No revenue/cashflow/earnings).

Technical Analysis Trader – Buy at signal. Sell at signal.

Bullish Retail Investor – Hell Yeh. Huat ah!

Bearish Retail investor – Run for the hills! Let me tell you a story of the Tulip bubble.

Personally, I believe that there is room to speculate on this. With no foreseeable future usage (in my own humble/limited capacity), I feel that it is a strange asset class but an attractive tradable instrument.

 

Final Thoughts By Wealthdojo

There are still many things shroud in mystery. Who is Satoshi Nakamoto? Who are the 2% who is holding Bitcoin’s wealth? Are they the Russians, Chinese or terrorist? We will never know (at least for now).

With Bitcoin entering into the financial system, they have became part of the system they have set out to replace. The disruptor seemed to have become absorbed into the legacy system. The banks will live another day.

All views represent my own. I would love to engage in a healthy discussion of bitcoin in the comments section below.

 

For those of you who want to kick start your Wealth Management journey in 2021, why not consider joining my telegram channel?

Join my Telegram Channel for a tip a day! In Wealthdojo, we dedicate a small amount of time daily for learning new things. Continuous learning is one of the greatest secrets of success.

For those of you who want to turbocharge your journey, contact me at chengkokoh@gmail.com. I would like to hear from you what your experiences are currently and from there, we develop a plan specially catered just for your journey.

We wish you all the best! Stay Safe and Take Care!

Chengkok, Sensei of Wealthdojo.

 

Is Tesla in trouble Why is Tesla raising $5 billion now Impact

Tesla just raised $5 billion from stock offering. Are they really in need of cash?

On 1 Sept 2020, Tesla (TSLA) announced a $5 billion capital raise through equity distribution agreement. I thought it was a brilliant move as written in my previous article. (Is Tesla in trouble? Why is Tesla raising $5 billion now?). Just when the world just began to understand the news, they completed the deal on the 4th Sept 2020. Do they really need the money that urgently?

Tesla just raised $5 billion from stock offering Are they really in need of cash.

Tesla just raised $5 billion from stock offering. Are they really in need of cash?

 

I never expect to write this article that quickly. In any case, this presents my thoughts on why TSLA is doing this so quickly.

 

Non-inclusion into the S&P 500 Index

Previously, I speculated that the equity raise was to give more liquidity to prepare for the inclusion in the S&P 500 Index. However, that idea was snubbed out when TSLA were passed over for inclusion. Instead, Etsy, Catalent and Teradyne was included into the Index as part of the portfolio re-balancing.

The reason remains unknown. Personally, I feel that whoever is making this decision wants to make the S&P 500 Index less speculative in nature. TSLA has a relatively higher short ratio as compared to the other companies. An inclusion of TSLA might make the S&P 500 “correct” more often. (Donald Trump won’t want that to happen).

TSLA Short Ratio

TSLA Short Ratio

 

Buy Low. Sell High.

In any case, TSLA isn’t doing any buying. They are merely issuing out new shares. The best way to get more bang for its’ buck is to sell it at a higher price. We all know that TSLA YTD is around 325%. This is perhaps the best to time to “sell high” for whatever purpose they want to use the money for.

With regards to dilution, it is roughly around 1% dilution.

You can view their SEC Filing Form 8-K here.

 

Final Thoughts

This is not a buy/sell recommendation. Personally, I still think that Elon Musk is an expert in raising capital. I like his vision but have trouble understanding the valuation of TSLA. I have no positions in TSLA nor do I intend to start a position soon.

 

Join my Telegram Channel for a tip a day! In Wealthdojo, we dedicate a small amount of time daily for learning new things. Continuous learning is one of the greatest secrets of success.

For those of you who want to turbocharge your journey, contact me at chengkokoh@gmail.com. I would like to hear from you what your experiences are currently and from there, we develop a plan specially catered just for your journey.

We wish you all the best! Stay Safe and Take Care!

Chengkok, Sensei of Wealthdojo.