Many of you have asked me about GameStop and the implications for Invstr.
Below are my personal views. Statements that appear to be factual should only be taken as my opinions.
Firstly, what is happening in the marketplace validates everything we have done. And it is showing in our results as I will discuss later.
At a simple level, Gamestock is about the fundamentals and technicals of a single stock. Retail investors, who know GameStop, decided that the arrival of Ryan Cohen on the board would help to transform the fortunes of the company. Some hedge funds disagreed. They ended up with opposing positions. We don’t yet know who will be right or wrong on the fundamentals of the company. We do know that they can change quickly. The technical picture of the stock is clearer. The hedge fund shorts amounted to 140% of the free float of the outstanding shares!
Now, I have been on the other side of that trade. I once involuntarily controlled more than 100% of a $500mm 7 year non-callable bond for the Republic of Italy. I could have bought in the short sellers at a massively inflated price. Or I could have sat on the position until maturity collecting $70mm a year with an infinite return on capital. In the end I devised an honourable solution that worked for everyone – the country, my employer and the short sellers. But that is a different story. What is relevant is that there was theoretically no way out for the short sellers. The price could have gone up 100%, 1,000% or 10,000%. The same is true in GameStop.
At a higher level, this is a story of retail vs professional investors. It is not a new story. It has happened before in Tesla and Beyond Meat. The reality is that in a new world in which everyone has access to information and in which every pattern of behaviour is changing, retail investors who make consumer trends have far greater sagacity about stocks and markets than professional investors. We see it daily on Invstr. The returns that our members make is astonishing. And its not just in Fantasy Finance where we have anyway eliminated most of the arbitrages. Even in our real money $100,000 Challenge, our December winner made over 3% and our January winner made 20% with no margin and no options trading. That compares to the 4.4% that the hedge fund index returned in all of 2020. Retail is learning and is becoming at least as sophisticated as the top hedge fund managers. Some hedge funds look pretty foolish. How much dumber can you possibly be to be short a stock with a 140% short ratio? Where were the risk management controls?
At an even broader level, what is happening is neither about a single stock nor about comparative performance. It is about our vital capital markets. The economy needs ‘Wall St’. Without it we don’t have capital formation, growth, employment and social cohesion. Sadly, the capital markets have let us all down. Investing is a basic human right. When we invest we define our future health, wealth and relationships. For decades the financial industry has perpetrated the myth that they alone were competent to manage other peoples’ money. And what did they do with it? They under-performed the market year-in year-out while skimming their fees off the top. Then when the industry was unmasked in 2007-2009 what happened? It was bailed out and given access to enormous amounts of liquidity with which to continue as before. The system appears to be rigged in favour of a select few. The inequity of the situation has angered the younger generation who have a far more profound sense of right and wrong than those before them. So for them, GameStop and other stocks is about the whole system not a single stock.
How have certain people within the finance industry reacted? In a word, appallingly. The hedge fund at the centre of the storm was bailed out, partly by money from a convicted insider trader. Robinhood and many other clearing houses suspended purchases by retail investors in GameStop and up to 50 other affected stocks. Institutional short sellers by contrast were allowed to continue to trade in these stocks. When 100,000 outraged Robinhood users gave Robinhood a 1 star rating in the Play store, Google responded by deleting all of those ratings (Google Ventures is an investor in Robinhood). There has even been talk of suppressing the perfectly legal social media sites that facilitated the free exchange of information between retail investors.
The impression that all of this behaviour creates is that the markets are for the preserve of a financial elite, that doesn’t like anyone else beating them at their own game and which will collude to protect their own interests. This will only inflame public opinion even more. The information revolution and the real democratisation of finance is now happening at an accelerating pace. People not institutions have information and power. How politicians, regulators, exchanges, clearing firms, VCs, banks, hedge funds, technology and media companies respond will define whether they are perceived as collaborators in a flawed and outdated system or whether they are perceived as forces for good, equality and real democracy.
The biggest loser has been Robinhood. This seeming wolf in sheep’s clothing has been unmasked. People now believe that their business model from the outset was to aggregate as much retail order flow in stocks and options and sell it to their hedge fund patrons – to take from the poor and give to the rich. Their marketing appears to have been one big con trick. Their CEO appears to have lied publicly while claiming on the one hand that he did not have a liquidity crisis while raising $1bn in fresh capital and hundreds of millions of dollars of loans on the other. Their recent $65 million SEC fine appears to have done little to change their behaviour.
What does this mean for Invstr? Our whole rationale is being validated. People want access to information, to streaming real-time data, to financial education and a place where they can learn from each other socially. Invstr has all this and more. Invstr was built for them and them alone. We exist to empower retail investors not to exploit them. We don’t allow harmful option and margin trading. As that realisation spreads, our numbers are spiking. Our downloads and registrations are up 5 fold. 91% of those are word of mouth user referrals – pure virality. Engagement levels are through the roof – number of sessions, time spent in app, daily visits to the app, transactions, monetisation all soaring.
Invstr’s time is now.
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.