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.