A few people I know seem to have started to show an interest in investing lately. I’ve been shown several fairly hilarious videos on investing from my wife’s TikTok feed, which seems a bit like the modern day equivalent of hearing stock tips from the shoeshine boy ie probably not a good sign. In the meantime my news feed is filled with talk of ‘rampant speculation’ by retail investors in various bizarre stocks or cryptocurrencies. Interesting times.
A lot of the recent retail interest seems to have been drummed up by the recent GameStop debacle. I did find following this story quite fascinating – what initially looked like a standard pump-and-dump, bubble festival turned out to have a few interesting smaller stages with crowds of tripped-out derivatives-nerds and meme-artists bopping away. I was far too high to really understand everything I saw but it did feel like a learning experience. This party has already been widely written about so I don’t want to get into all the ins and outs, just draw out a couple of of the wider points I feel like I’ve taken away.
One thing I found interesting was that this situation really brought to light how illiquidity can amplify the strategic aspect to investing, making it become a game played against others, rather than a bet on the fundamentals. The bubble was started by the fairly astute observation that there was excessive short interest in GameStop, presenting an opportunity for it to be ‘squeezed’. Even if the stock was fundamentally valueless, sufficient demand could exploit the lack of liquidity to drive up the price on paper, forcing shorters to capitulate and buy back at stupid prices the shares they had borrowed. This highlights an inherent issue with shorting if you are a small investor – if you don’t have the liquidity to hold onto your position no matter what happens to the price ‘on paper’, then in principle you could be opportunistically taken out by better-funded aggressors. This is probably only really a risk when the stock itself is illiquid and the short interest is high, but the fact that some retail punters on Reddit managed to savage large hedge funds in this way, despite not having the fundamentals onside, is rather fascinating (or perhaps alarming).
It was also clear that derivatives played a key role in enabling and amplifying this situation. I’ve never really understood much about derivatives or had much interest in them. But it did pique my interest that this game being played out in a small failing retailer was apparently of sufficient significance to have an impact on the wider market. More widely I’ve seen several reports that demand for options has really exploded this year and have been wondering about the significance of this for the wider market and any systemic risks we may be facing (ugly shades of the Financial Crisis spring to mind). Anyway, I started off by innocently trying to find out what a ‘gamma squeeze’ was and ended up stumbling into a rabbit hole of Greek letters, advanced statistics and silly memes. I can’t say I feel much the wiser about this as yet but have set myself a personal project to try to understand this better.
The other interesting thing about the GameStop situation was that its instigators had been so successful in drumming up collective support through Reddit. It seems social media platforms can be used to target financial bubbles as well as digital advertising. Even Elon Musk is tweeting about Dogecoin and making billions off Bitcoin. I’ve seen some pretty laughable articles on ‘meme investing’ that suggest it isn’t something to take seriously. But I am starting to find this combination of memes, derivatives and illiquidity a little troubling. It does seem like a recipe for market instability.
The timing of the GameStop saga obscured news from the last Fed meeting that was happening around the same time. The general messaging was that given the economy needs continued support and only ‘transient’ inflation is expected, there is not going to be an easing up on expansionary monetary policy any time soon. This obviously seems bullish for growth stocks in the short term. The inflationary scenario I’ve been starting to anticipate still looks some way off.
I’ve a couple of trades to update on for February. For my regular monthly trade I sold out of IG Group. Sentiment turned sour on IG Group despite its last results being good because it simultaneously announced a large and rather dubious-looking acquisition of US brokerage Tastytrade. Most investors seemed to see this pretty negatively, concerned that IG might be paying too much for a flaky business near the top of the cycle. While I am encouraged by IG’s growth ambitions, I can’t say I found this acquisition particularly compelling and given its size think it might fall into the typically value-destroying ‘large transformative’ category of acquisition. That said I still think IG looks pretty cheap even accounting for this and wouldn’t be adverse to buying back again depending on what happens.
This month I also decided to make an additional ‘breakout’ trade in Adyen, selling Tracsis to fund it. Short term market conditions seem favourable, I have a lot of confidence in Adyen’s long term prospects and it’s clearly on a roll at the moment. So while the valuation looks pretty high I think it seems like a good candidate for a trade. I’ll be rocking a stop loss with this one as I explained in my last post.