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This Month’s Newsletter

Lions, Tigers and Bears, Oh My!                                                                Join our Monthly Newsletter                February 2021                                                                                             

Junius V. Beaver, III

co-CIO, Principal

This month I thought I would take something from the “Wizard of Oz” because what we witnessed last month is about as bizarre as something we would see in the movies!  I contemplated the title Reddit, Robinhood and GameStop, Oh My!, but stopped short only because of how random something of this nature really is in the real world.  The probability of something like this occurring is similar to me being in another plane crash (5 years old) and surviving – it’s highly unlikely but it happened. 

The characters in this movie/reality were Reddit, Robinhood and GameStop.  Reddit is online social news aggregation, web content rating and a discussion website.  Robinhood is an online site that provides investors the ability to buy stocks for free. And finally, GameStop.  GameStop is an American video game, consumer electronics and gaming merchandise retailer. 

In the movie, Dorothy, the lion, scarecrow and the tin man were all trying to get to Oz for various reasons in order to better themselves, or in Dorothy’s case get home.  In this story, investors with an average balance of ~$5,000 decided they would take on the hedge fund industry through a message board Reddit, use Robinhood as their brokerage firm and buy GameStop stock that was trading at ~$6/share on September 11, 2020.  Investors discussed on message boards that GameStop was a heavily shorted stock, and with limited knowledge of its fundamentals, if they all joined together they could kill the shorts and destroy the big bad hedge funds.  As the herd mentality came into play and all the small retail investors started buying the stock, it certainly went up!  This seems to have played out recently but that is for another day…  So, what really happened in the end?

Reddit provided a platform for the actions, Robinhood was the conduit and GameStop stock was the lamb.  There is no question that what took place in GameStop stock hurt the hedge funds.  There is no question individuals who invested in those hedge funds lost billions (Melvin Capital and others).  There is no question that some individual investors made a lot of money.  There is no question that some investors lost everything.  So why did the party end?  Is the playing field fair now?

To answer that question, we must take a deeper dive.  As investors plowed more and more money into GameStop, something drastically changed.  The value of Robinhood went up and the value of the hedge funds went down.  Here is where things are quite different. For both parties to stay solvent due to reserve requirements, they have to maintain a minimum amount of money on their balance sheet at all times.  Robinhood (private company) fell below those levels and had to go to the public markets and ask for ~$3 billion.  This took several days and in the interim they had to restrict how much stock their investors could buy.  The flip side is Melvin Capital.  They made a few phone calls because their founder already had relationships and within the required time raised ~$3 billion himself.  No changes required for Melvin Capital. 

Let’s now circle back now to the Wizard of Oz.  In the Wizard of Oz, Dorothy and her friends ultimately make it to Oz and get the opportunity to meet the great wizard who is nothing more than a man behind a curtain.  The movie is a classic and a true testament in self belief.  The movie is also fiction.  In the case of Reddit, Robinhood and GameStop this is not what occurred.  Trading in stocks is a zero sum game, and for every buyer there is a seller.  I’m certain there are people who bought low and sold high.  I’m also certain there are people who bought high and sold low.  I’m certain some hedge funds lost billions.  I’m also certain some made billions as GameStop cratered from ~$500 back to $50.  What ultimately started out as a way to show the hedge funds who was boss will have little to no impact on their 3 trillion dollar business. 

Over long periods of time, the market is quite efficient.  This is an illustration of when it’s not over brief periods of time!  This isn’t the movies and we didn’t get the story book ending.  GameStop is still what it was – the Blockbuster of the video gaming industry.  Staying diversified is just as important as staying invested.  Trading stocks in this fashion is a losing game.  Focusing on goals rather than the shiny star.  Risk and reward go hand in hand. 

At Lanier, we invest in the traditional asset classes, such as stocks and bonds but believe additional diversity including hedge funds, real estate and commodities (when appropriate) can reduce risk and potentially increase returns over time.

Junius V. (Trip) Beaver III, is a co-founder of Lanier Asset Management and serves as its Co-Chief Investment Officer. Trip has been a financial advisor delivering high-value investment solutions to affluent individuals since 1994. In addition to his work at Lanier, Trip donates his time and investment expertise to charitable organizations such as the Library Foundation and the Metro United Way.

January 2021: 2020 - A Year of Shocking Events

December 2020: Just What Problem Are We Trying To Solve?

November 2020: Federal Tax Revenues and the Debt Bomb (Continued)

October 2020: The Forever Growing Debt Bomb

September 2020: Are We Out of the Woods?

August 2020: COVID-19's Potential Impact to Deficits

July 2020: Random Musings in Our Random New World

June 2020: Does Anything About This Feel Normal To You?

May 2020: Can the Rebound Last?

April 2020: The Big Bear of Q1 2020

March 2020:  Where's the Bottom?

March 2020: A Perspective on Crises

March 2020: Is there Any Good News Out There?

February 2020: Is Diversification Dead?

January 2020: The Roaring (or Boring?) 20's Are Here!

December 2019: Providing 'Alpha,' The Holy Grail of Investing

November 2019: The Search for Yield: Chapter 2

October 2019: Given the Current Rate Environment, How Has the Search for Yield Changed?

September 2019: What is the State of your State?

August 2019: Volatility is back, but is it the end of the world?

July 2019: Is This the Year 2000 All Over Again?

June 2019: Concerns of an Economic Slowdown?

May 2019: Benefits of Hedge Fund Investing

April 2019: Yet Another Burden On The US Economy

March 2019: Capitalism vs. Socialism: The Debate is Alive and Well

February 2019: What Are the Most Important Factors for Investing in a 401k Plan?

January 2019: A Look Back and a Look Ahead

December 2018: The Inverted Yield Curve - In Layman's Terms

November 2018: A False Sense of Security

October 2018: Reflections From Over Four Decades

September 2018: A Decade of Assisted Recovery

August 2018: The Entitlements Train Wreck - Possible Solutions?

July 2018: Is Wage Growth In This Country Improving Over Time?

June 2018: The Impact of Corporate Tax Reform

May 2018: Kentucky Derby Talks - Bulls vs. Bears

April 2018: How Much Longer Can Interest Rates Stay So Low?

March 2018: Policies For Economic Growth

February 2018: Volatility

January 2018: So What's In Store For 2018?

December 2017: Tax Cuts and Jobs Act: Good or Bad for Me? It Depends.

November 2017: Whack-A-Mole - D.C. Style

October 2017: Should You Consider a Robo-Advisor?

September 2017: Alternative Investments - What and Why?

August 2017: The QT Quandary

July 2017: Quality of Life Influencers (Cont'd)

June 2017: Quality of Life Influencers

May 2017: Repatriation Myths and Realities

April 2017: Time to Invest in International Equities?  Let's Take a Look...

March 2017: Valuation - A History Lesson

February 2017: The Prince of Darkness

January 2017: Mountains of Debt - Does it Matter Anymore?

December 2016: Trumponomics: Reagonomics' Twin?

November 2016: Found Money

October 2016: Marrying Theory and Practice

September 2016: Do You Have a Sharpe Portfolio?

August 2016: Be Careful of High Dividend Stock Strategies

July 2016: "Die Younger" is Not a Strategy

June 2016: Blame Tina

May 2016: Would You Rather:  Tax Cut or Tax Increase?

April 2016: Father Time Demands Your Attention

March 2016: What Has the Last Year Taught Us?

February 2016: Winners and Losers of the Oil Battle

January 2016: Diversification Improves Returns and Lowers Risk