GameStopped!!

Now that things have mostly settled down with the mob, the market appears to have refocused on other things.  As was expected, many of those who invested in GameStop, AMC Entertainment, and Bed Bath & Beyond lost a lot of money this week.  While it may have seemed “fun” at the time, the gamification of investing has a dark underbelly, especially when it is likely that manipulation was involved.  While I’m not going to argue that investing in fundamentals is as relevant as it once was, say back in the days of Benjamin Graham who wrote the seminal book on security analysis in 1934.  Clearly, the advent of retail investing and later the Internet has changed not just how we invest, but in what we invest.  Having said that, investing is not a game and should not be looked upon as such.

Let me finish what I started last week regarding the events surrounding GameStop. When I left you, trading had been either halted or severely limited depending on which custodian was in question. The largest offender was Robinhood, which some have taken to calling the Sheriff of Nottingham. However, was it collusion between the hedge funds and the custodians that precipitated the trading halts? The answer is, it depends. One thing is certain and that is Melvin Capital took it in the shorts (pun intended)! They lost 53% in January, amounting to billions of dollars in losses and requiring a bailout from other hedge funds.

Now on to the rest of the story. Robinhood is claiming that the National Securities Clearing Corporation, the company that acts as middleman in clearing trades, raised its margin requirement due to the increased volume and volatility of the meme stocks. As evidence of this, Robinhood did in fact raise $3.4 billion in capital last week to cover this requirement. That is irrefutable. However, the part of the story that isn’t well understood is that Robinhood uses a hedge fund, by the name of Citadel, that acts as a market maker for its trades. For every trade, Robinhood gets a small fee from the hedge fund, which allows it to offer “free” trading. What we don’t know, and what might be hard to prove, is if Citadel put undue pressure on Robinhood to slow or halt trading for its own benefit. I’m going to leave the tale here since it appears the SEC will be investigating all the actors in this story. However, something that has gone unsaid, is that it is not outside the realm of possibility that another hedge fund (or several) were behind the mob on Reddit, posing as the little guy. When all is said and done, we might just discover that this was less a case of David vs Goliath but instead a case of Goliath vs Goliath. Time will tell.

Onto company news this week, we learned that Apple is in fact working on a car. It signed an agreement with Hyundai to build an Apple car at its manufacturing facility in West Point, Georgia. According to the press release, Apple will be responsible for both the hardware and the software, with the intention of beginning production of a self-driving car in 2024. Perhaps to help fund this venture, Apple raised $14 billion in a bond sale this week. If you’re wondering why a company with a $192 billion in cash needs to raise money, it is because most of that money is overseas, and it would rather not pay tax on it. In other news, Jeff Bezos, the CEO of Amazon, announced he is stepping down. At fifty-seven years old, I imagine he’d rather spend his days enjoying his $194 billion as the richest man in the world, according to Forbes. Just as amazing, the company posted a record $100 billion in sales in the fourth quarter. Regardless what you think of Mr. Bezos, his company has crept into every aspect of our lives.

In closing, I’d like to reiterate that the gamification of the stock market, while unsettling, may be a trend here to stay.  Younger generations, which are now coming into their own, see the world quite differently than you and me.  They grew up with smartphones and tablets, social media, and online gaming.  It seems only natural that as they enter adulthood they take some of these lessons from childhood with them.  As companies like Schwab with its retail investing in the late 1980’s, the takeoff of mutual funds in the 1990’s, and later Vanguard with low cost ETFs in the 2000’s changed the landscape, I believe we’re on the precipice of another revolution.  Mobile apps, “free” trading, and trading in fractional shares have democratized investing in a way that has never been seen before.  While the knowledge and expertise may not match the computing power, younger generations are driving innovation and change in ways that will likely become harder to ignore.  While investing is a long-term proposition, it is nonetheless our job to understand these trends and find the opportunities where they exist.  Now you know.

Bruce J. Mason, MBA