Sponsored - Despite the euphoria over the recent short squeeze in stocks like Gamestop and AMC, sadly this is nothing new. The difference this time however is the fuel created by social media, broadcasting these moves like never before. I can vividly remember in the late ’90s, while attending UK, logging onto a Yahoo message board before heading out, learning what the hot stock of the day was, adding shares through my E*trade account and then heading off to class. I had no idea what they did and quite frankly, didn’t care. All I knew is that by the time I got home from the Chem-Phys building I would be up enough money for my weekend festivities. It was a lot of fun, but not once did I think it was somehow ‘normal’ or I all of a sudden became a market ‘genius.’
Make no mistake, while the ‘retail crowd’ of Reddit is getting a lot of attention, it seems as if their sophistication level is quite a bit higher than adding some dot-com stock in the late ’90s. Let’s break it down a bit.
First off, whoever began the movement to ‘take down the suits’ had to know just what ‘open short interest’ was and where to find it. Then they had to know that by buying the stock en masse they might create enough momentum to spark a short squeeze, whereby those ‘short’ the stock would have to cover at potentially devastatingly higher prices.
You see, unlike owning a stock long, when someone desires to bet against a stock they first borrow the stock and sell it short. In theory this is simple, unless of course the stock starts to rise considerably. In that case the losses can mount quickly and in order to stop the bleeding those with short positions must buy to cover, creating even further demand for the stock. Short squeezes are nothing new and over the years there have been some epic tales of short squeeze battles, but the fact that this time it was initiated by retail traders on a Reddit forum takes the cake.
There is no question this adds one more layer to the speculative fervor of an already hot marketplace; however, it remains a unique niche and not a rampant movement among all investors everywhere. While it sure looks and feels as if we’re overdue for a decent pullback, I’m just not so sure this marks the end-all top that so many folks are looking for.
So what’s an investor to do? Well, that’s the difference right there. Investing and speculating are two different actions altogether and as an investor I believe this should change nothing with regard to your long-term strategy and financial plan. Markets will go up and markets will go down but over time capital appreciation through compound interest, with solid index exposure is, in my opinion, the best way to garner returns and achieve financial goals.
This activity is fun to watch but I’m not so sure I’d be joining in, nor would I take the action to signal any broader theme that may be occurring. Rather than make any dramatic portfolio adjustments, I would encourage folks to simply ensure they’re allocated appropriately to achieve longer-term goals and while you’re remaining disciplined in your boring, stodgy approach, grab a bucket of popcorn and enjoy the show!
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