If you followed the WallStreetBets share squeeze (more info here, here, here), you’ve probably struggled with about 6,000 paragraphs starting with something like, “If I gave you one banana …” That’s because you probably learned more about short films and options and margin calls in a few days than through hundreds of films. and TV stock broker content. You may have a renewed intimate practical knowledge and disgust from online brokers. Now that you know how stocks are going up, it is time to learn how they are going down.
Despite the story of a two-party war between WallStreetBets and hedge funds – which has now turned into mania on CNBC, where a parade of venture capitalists suddenly wants to side with “ the little guy ” – many other people are holding the now expensive shares that WallStreetBets sent to Pluto. to send. These include teachers whose pensions are tied up in public funds, individual wealthy people who are got richer, and the ailing physical businesses themselves.
Who is most likely to suffer? What happens to the economy, if anything? What happens at the end of a “Short press? “We have asked the authorities in the field for advice.
Will GameStop and the dozen or so other stocks that have been blown up by private investors ever go down?
Aswath damodaran
Professor of Finance at New York University’s Stern School of Business
It’s not inevitable, but it’s likely. Nothing has fundamentally changed with these companies, and if the only thing that keeps them afloat is the Redditors trade, the stock will lose its oxygen as they move on to other targets.
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Donald Langevoort
Thomas Aquinas Reynolds Professor of Law at Georgetown University Law Center
We are much too early to provide answers. Nothing is inevitable, but if the past is any indication, the relevant stock prices will return to meaning. What feeds a bubble like this (assuming it is a bubble) is the overconfidence of investors that previous indications that they can move markets indefinitely, which can last for some time (self-fulfilling prophecy) but has a natural end point. Obviously, those who got in and out at the right time will be celebrating their brilliance, but unless they are disciplined enough to stop before the checkout, there will be losses.
Terrance Odean
Rudd Family Foundation Professor of Finance, Haas School of Business, University of California at Berkeley
I have not analyzed the fundamental value of GameStop. However, from what I read, I expect recent prices to far outstrip fundamentals.
What it likely means is that prices will drop significantly, but not necessarily all the way to pre-January prices. However, there is no hard and fast rule as to how fast the drop comes. A stock can remain overpriced relative to fundamentals for a long time. Owners will likely be disappointed with future profits as a result, but that could take time. GameStop is unusual due to the great attention of investors on both sides.
Is there a chance that market makers will end up taking a large portion of the losses?
Terrance Odean
Market makers are at risk when they take large temporary positions in extremely volatile stocks. So yes, they can take losses. However, the institutional investors with the greatest risk are those with large unhedged short positions.
What happened if, for example, large hedge funds knowingly blown a bubble?
Sloan Distinguished Professor of Management and an associate professor of economics, finance and accounting from MIT Sloan School of Management
We saw this with the internet bubble in the late 1990s. As we know from transcripts and interviews, a number of funds have acknowledged that a bubble existed at the time. But what many realized is that it may be easier to ride the bubble and make a profit, and exit before the bubble bursts, rather than trying to exert corrective market influence by cutting prices back to fundamental values .
People who decided to try to hunt, and bought at the end of the bubble in the 2000s, eventually lost. One of the under-sold groups to lose as a result of the bubble is hedge funds that have tried to exert market leverage by bringing prices back to fundamentals. An example is people like the Jaguar Fund, otherwise known as Tiger Fund, who tried to exert some sort of corrective force moving away from the internet bubble and taking bets against the valuations. They ended up losing and eventually had to close before the bubble burst.
Other funds like Quantum Fund, under George Soros, seemed to be taking a position more in line with the bubble. I need to be clear I don’t know their intentions, but they survived.
So there was a bit of a difference in terms of which funds did well than funds that didn’t. It seems to be based on those who knew how to ride the bubble over time versus those who tried to exert market influence.
Is there a scenario where the majority, or even half, of the retail investors who bought GameStop or these other stocks end up turning a profit?
Aswath damodaran
No.
What are the knock-on effects of the GameStop short squeeze on the overall market?
Aswath damodaran
Hedge funds were already in trouble and got into this crisis in terms of performance. Money is flowing from active vehicles to passive vehicles and this will only speed up the process. I think Melvin Capital was already losing money on positions prior to the GME run.
Short squeezes in a stock can force funds with large short positions in that stock to sell other, often profitable, positions to raise money to cover margin calls. If many hedge funds have correlated positions and are getting simultaneous margin calls, it can lead to a situation where these funds are all selling the same positions to raise money, causing the prices in these positions to drop, leading to more margin deposits (if using the positions). Individual hedge funds with heavy leverage bets can get hurt.
Could this hurt retirees, such as teachers?
Donald Langevoort
[Pension money] is a topic of interest – funds need to invest cautiously, on a portfolio basis, but we know that some public funds are under pressure to place bets that are inconsistent with that legal mandate. That said, a diversified portfolio is unlikely to suffer much from such events, and learning from painful experiences can be a useful correction.
What happens to the companies themselves?
Arun Chopra
“Twitter professor” and founder of the financial market research firm Fusion Capital
If you look at AMC: AMC has taken off, but they are in big debt and need money. And so they issued stock when the stock ran out, and it’s down again [at the time of interview]. And so not all short squeezes are equal. This will not put the industry out of business.
At the grassroots level, we see short squeezes occurring in markets all the time. We have a strategy that takes all of this into account, and there are three to four really good opportunities every year that will work. That happened completely in Tesla. So that is ongoing. It’s gotten a little bit worse now because we’ve never seen so much options trading in history.
The real risk is that the short squeeze stocks will force these fund managers to start selling their quality stocks. And when that happens, you get Google and Facebook and the ones that come down, and everything the Fed tries to do to keep things going will come under pressure. And for me, that matter falls back to the Fed, because why are they letting this get out of hand? And then you could even extrapolate that further back to why this social situation is going on for the class struggle.
Closing thoughts
Arun Chopra
I think what will happen, the volatility will remain, and message boards like WallStreetBets will remain. Prior to all of this, they conducted research. GameStop was there for a year, and I’m kicking myself for writing it off as a dog.
You can see these fantastic ghosts especially on WallStreetBets [the kind of thinking] of people who are younger. If you see things a certain way, and you don’t stick to dogmas and textbooks – this is what makes those signs. There is no question about the capabilities of those younger people.
I think this story about the common man stems from everything that’s going on. We never felt that there was a housing crash in the early years for much of the generation now being asked to pay two hundred thousand to go to college, which doesn’t even guarantee anything. I bet if the system was fairer, half of that group would be busy with other things.
So when I read posts about getting through the housing crisis on WallStreetBets, I immediately think absolutely. And I’m shocked when I watch CNBC, and they say, oh, I love David and Goliath too! But I’m like, no, you don’t. You just show up, are you kidding?
I just think realism is important, and to understand that this is not going to solve the problem. I’m sure more people have lost money on AMC [when it crashed on Thursday] who didn’t even chase GameStop and thought AMC would be next. I think the bigger problem we have is that these really systemic issues – like Congress dealing with student loans – need to be addressed.