Why you should be cynical of the market as an investor
Since I started investing last year, I have always tried to remove any emotion when I am deciding what to buy and sell. That has generally been quite easy to be honest, probably because the market has been pretty good. However, the events this week have definitely made that extremely difficult to do. I am of course, referring to the entire fiasco around GameStop (GME) and the incredible rise in its stock price.
For the very few people who have no clue about what’s going on with GME, here is an extremely brief summary. Basically, a group of reddit users from a group called WallStreetBets, realized that the GME stock was manipulated and excessively shorted. The short interest was over 140%. In simple terms, it means that some groups sold a huge amount of GME stock, which did not really exist in the first place. Normally, such manipulators would get away with it, because they would cover their position after they made their money. However this group of redditors realized that if GME saw a little upward momentum, this could result in an upward spiral in its price. This is because the hedge funds in this case would be desperate to cover their positions and be trying to buy back the stock (which didn’t exist). There are a lot of detailed YouTube videos and articles explaining what actually happened, but lets move on.
So what happened yesterday? The price continued to climb as the demand for GME went through the roof, because the hedge funds had manipulated the price so much, that now they were desperately seeking the GME stocks to cover. However, the group at WallStreetBets were a different breed. These guys did not sell as they realized the potential upside of the phenomenon.
The price multiplied by over 50 times in the last 3 months and these hedge funds were really in deep trouble. So yesterday the major banned retail investors from buying anymore GME stocks. Here is a screenshot from Robinhood, one of the more popular brokers.
Basically, by banning any buying action, Robinhood and other brokers have prevented GME from rising any further. In fact it caused the price to crash drastically. If this is not an evidence of market manipulation then I am not sure what is. All the news outlets are interviewing these so called “brokers” about their actions last night, but no one is asking a very basic question – If I can only sell my stocks, who is buying them? I will let you guys figure this one out….
Anyways, so this made me really angry last night, and I don’t even own any GME shares. But it made me think, what if they suddenly stopped me from selling my Apple shares, just because the billionaires did not make money due to their blatant fraud? Is the market really fair after all? Clearly not.
Without digressing from investing too much, and getting into the entire socio-political implications of such blatant fraud, I would just like to talk about what can we do as a retail investor, now that we realize the game has different rules for different classes.
And the answer is quite simple actually. The reason why these corporations and billionaires can get away with such blatant manipulation is because most of us don’t know the rules in the first place. We live under the impression that the rules are fair and if we play smart, we can amass wealth too. But that rule comes with a caveat, that the ones in control cannot lose money. Retail investors cannot just sit around and invest without understanding the markets work. So my advice to anyone reading this is, either be willing to learn and research about what you are investing in, or stay out. Don’t let your ignorance fill up the pockets of these crooks. Always question anything the media, especially the financial channels tell you. Challenge every claim they make. Be a cynical investor.
Disclaimer: This post should not be interpreted as investment advice as I am not a professional financial consultant. The objective of this blog is to share my experiences with others and receive feedback. I will provide links to my information sources to the best of my abilities, but the reader is responsible for their own due diligence