A few weeks ago, one of my clients called extremely excited and said, ‘I found you on Google Earth.’ That sounded to me like she found me doing a Google Search. Then I thought about how she said, Google Earth, and I realized she was talking about the Google Maps car getting a picture of me! This reminded me of how little we control our own data. (See more later in the article.)
Over the last week, a stock called GameStop price went up over 1000%. Crazy. It then proceeded to fall by 50%. As a financial advisor I have no idea where it will end. Being in wealth management, I am happy to report none of the portfolios we control directly own this stock. Why did this stock go up and then down so rapidly? It really comes down to individual investors attempting to bust ‘trades’ of big hedge funds. There is a common practice among hedge funds to short stocks. If you are a hedge fund and you short a stock and the stock price starts to rise, to cover the short, you need to buy the stock.
Background: GameStop’s stock had been falling for over 5 years. Some hedge funds bet that this decline would continue.
In such bets, called “short sales,” hedge funds borrow a share and sell it. The hedge fund is obliged to buy back the borrowed share later. The bet pays off if the price drops in the interim period, meaning the hedge fund can pocket the difference.
In the newer age of ‘transparency’, users of the Reddit threads found a way to profit at the hedge fund expense. The Reddit thread readers joined together and over the last week bought GameStop stock. This buying caused the price of GameStop stock to increase.
This in turn forced hedge funds to cut their losses and buy back shares in GameStop and then sold the stock one last time. This yo-yo pricing of GameStop is an example of both transparency and a way for individuals to take advantage of someone else’s greed.
As our world becomes more transparent, more individuals will look for ways to outsmart big data. One fear is that big data will find ways to reduce transparency and ‘protect’ individuals. The biggest loser of this type of trading is that the stock price of a company may no longer actually represent the legitimate value of the company.
Plan Today. Protect Tomorrow.
Copyright 2021 by Peter Blatt. All rights reserved.
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