THE BIG SQUEEZE
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THE BIG SQUEEZE
The Magnificent Rise of the Retail Investor.
Hi Everyone 👋,
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I would be lying if I said I wasn’t grinning ear-to-ear watching millions of retail investors ‘short squeeze’ a Wall Street hedge fund to the tune of $5 billion dollars.
I’ve seen enough over my 15-year finance career to know the system needs a bit of a shake-up.
“Every once in a while, (Wall Street) does something so stupid it takes your breath away.”
The GameStop fiasco that transpired is the epic tale of that shake-up — a Michael Lewis Hollywood movie dying to be made.
With a plot that thickened when a timeless ‘stock market’ truth failed us all:
"Bulls make money, bears make money, pigs get slaughtered"
The fact that millions of investors on a Reddit group could out-smart, out-maneuver & out-capitalize a $12B fund was too much for Wall Street to handle. . .so they slaughtered them.
On Wednesday, after a meteoric 10x rise in less than 10 days, retail investors were restricted from buying certain stocks and options across trading platforms at the banks, Interactive Brokers, WeBull in China and, most shockingly, at the retail favourite ‘commission-free’ trading app Robinhood.
So much for ‘democratizing investing.’
The platform whose unofficial tag-line ‘steal from the rich and give to the poor’ came under attack and is now being sued by its very own customers.
“The problem with a mission driven business is at some point that mission may conflict with making money.”
Given this ‘material change’ Robinhood likely delayed its IPO – perhaps indefinitely.
The Retail Renaissance
It would be easy to brush off this week’s events as a ‘moment in time’ like CNBC tried to.
But, I disagree.
The retail investing market has changed.
“Prior to 2020, retail activity (single stocks and options) stayed flat for 20 years. (Now) households, active mutual funds, and passive mutual funds and ETFs represent 63% of the market (~$36 Trillion). Hedge Funds own 3% of the $57 Trillion US equity market - so "Retail" is 12x more important than hedge funds.” — Zero Hedge
Do I believe the current pace of retail activity will remain?
No.
Because as the world re-opens and people divert their attention and money to revenge travel and outings – retail activity will die down.
BUT, over the long run, I fundamentally believe there’s a new important investor at the table and Wall Street will have to adjust.
“Don’t hate the Player. Nor the Game.”
NOW, let’s dive into the dawn of a new era ‘The Rise of the Retail Investor’ in <5mins:
DEFINING MOMENT 👉 Crowd-Sourced Gamma Squeeze
COMMUNITIES 👉 Collaborative & Decentralized
PLATFORMS 👉 Fun & Frictionless
LEADERS 👉 Warriors with CFAs, Influencers, Celebrities & Social Billionaires
PRODUCTS 👉 Pre-IPO access, esoteric asset classes previously only for the rich
1. DEFINING MOMENT
This story is easily told through: A Dog. Two Wolves and a Pack of Lions.
The Dog is GameStop ($GME). An NYSE publicly-listed video game retailer with an underwhelming track record.
Two Wolves are hedge fund Melvin Capital & short-seller Citron Research. They believed $GME’s “brick & mortar” stores were a liability in an increasingly digital world and that they could profit by shorting the stock.
But, they made one BIG MISTAKE. . .they didn’t realize a salivating pack of digital investors were on their tail!
The Pack of Lions are +7.6 million (up 4MM in the last week alone) retail investors on a Reddit group called r/Wallstreetbets. Plus influencers like Elon Musk, Chamath Papitallya, the Winklevoss Twins and even politicians like AOC — who ‘piled-on’ the trade and/or Tweeted about it.
In nutshell this is what happened:
The math was simple. $GME had a HUGE short interest of 140%. Retail investors saw this and believed they could make a profit by taking the other side of the bet.
“All the math you need in the stock market you get in the fourth grade.” — Peter Lynch
They were further encouraged by activist investor Ryan Cohen buying +$76MM of stock looking to turn $GME around like he had done with Chewy.com sold to PetSmart for $3.5B.
Retail started buying stock and an unprecedented amount of “out-of-the-money” call options, driving the stock price way up! (Sidenote – they also ordered dozens of pizzas to some of the short sellers’ homes, LMFAO.)
What happened next is akin to a ‘Black Swan’ event, not accounted for in anyone’s ‘risk models.’ Two simultaneous SQUEEZES:
Short Squeeze: related to offside short positions
Gamma Squeeze: related to offside option positions
Without going into CFA mode here, trust me this led to a perfect parabolic ‘buying storm’ sending the stock from $40 to +$480. Closing at $325 on Friday.
This is what happened next:
A) Hedge Fund Gets Bailout:
B) Reddit Groups Gets Mysteriously Taking Offline (now back online):
C) Trading on $GME and other stocks and options halted (for retail only, they could sell but not buy):
D) NASDAQ CEO says this publicly:
E) Hedge Funds & Short Sellers Cover Their Shorts (unconfirmed if actually true):
As we go to print, the story is still developing. We’re all ‘following the money’ and putting the pieces of the puzzle together:
“It was a smart trade. Retail saw it and Wall Street missed it.” — Chamath Palihapitiya
The reason “retail saw it” is because they are now incredibly powerful in numbers, tools & community. They are armed with much of the same information as professional investors. They meet daily, share and challenge one another and generate ‘crowd-sourced’ insights.
So, where is this all happening?
2. COMMUNITIES
“Hedge fund ‘Idea Dinner’ with 7.6 million guests”
For decades, Wall Street has been hosting fancy ‘ideas dinners’ behind closed doors where they discuss investment strategies.
Retail investors simply created their own version: Reddit forums, Discord Groups, Twitter & TikTok, where they openly discuss and showcase investment strategies.
It would be easy to dismiss them ALL as unsophisticated. But it’s simply NOT true.
The level of research I’ve seen on some of these forums goes way beyond regurgitating press releases. It involves CFA level financial analysis that rivals equity analysts at Goldman Sachs. Take for example one of the WallStreeBets Reddit group members “DeepF—ingValue” (pictured above in a WSJ article) — he has CFA and worked at a financial services firm.
My fund manager friends tell me their firms ‘scrape the group for trading ideas.’
I have also personally seen investment banks email research from WallStreetBets Reddit group research to get their own institutional clients to trade the ideas.
“Finance has become culturally relevant in a way it has never been before and these stocks are going viral on social media.“ – CEO of Robinhood
Financial Twitter or ‘FinTwit’ is extremely powerful as you can search what anyone is saying at any given time on a stock by simply entering the ticker with “$” in front.
StockTwits is another community born out of FinTwit’s popularity that now has over +2MM users.
The new thing seems to be TikTok with +2B people on it and a way more powerful algorithm.
Where someone like me who just started an account (+2k followers) posted a video (about the BIG SQUEEZE) and got +35k views in less than 12 hrs.
I have also come across other TikTok finance accounts with +1MM followers like @fourtoeight.
Finance groups are also proliferating on the wildly NEW popular audio-only app Clubhouse. Launched during the pandemic, it now boast +2MM users and a $1B valuation. It’s also proving to be a HOT spot to crowdfund millions of dollars.
Now, let’s talk about the NEW frictionless, social & highly addicting ‘on-ramps’ to investing in the stock market.
3. PLATFORMS
Before this week, Robinhood was the favourite trading app amongst retail investors.
They had +13MM customers and were trending high in the app store until their rating tanked and Google manipulated it back to #1.
But I digress.
The app has everything you want as a beginner investor: it’s slick, easy to use, you get free stock for referring friends and confetti when you make a trade.
It’s also a place where you feel comfortable (at least you did until last week) using complex and risky products like options.
And wow do their clients trade a lot of them!
But the story is larger than RH — or its equivalent WeBull in China — which has grown 10x in the last year BTW.
It’s about the rise of the “Do-It-Yourself” (DIY) investor, who is using more sophisticated platforms and has more money in their account.
Corporate executives, small business owners and even ex-Wallstreet bankers have billions in DIY accounts. They don’t want to talk advisors.
This trend is also accelerating because banks don’t want their advisors actually advising clients on investments. Instead, they want them ‘asset gathering’ and to stick their clients in funds.
But, clients are catching on.
They don’t want to pay high fees for ‘passive investing’. They either want to pick stocks themselves as we’ve discussed or allocate to low-cost ETFs (that don’t require an advisor) or invest in active ETF managers.
The recent rise of Ark Investments — leaders in active ETF investing — AUM confirms this.
Cathie Wood the founder, now being called the female Warren Buffett, was told she was crazy for launching ‘active investing is dead’.
She plowed $5MM of her own money into it. She’s now worth +$250MM.
Even Goldman Sachs knows passive investing is dead. I am told their retail arm Marcus is launching ‘negative fee wealth management’. You heard right, they pay YOU to manage YOUR money.
4. LEADERS
There are BIG influencers and MICRO influencers. The big ones - with millions of followers - move markets with single Tweets about their favourite themes:
@APOMPLIANO 👉 BITCOIN
@CHAMATH 👉 SPACS
@RAYDALIO 👉 CASH IS TRASH
@STOOLPRESIDENTE 👉 ALL STONKS (He is the CEO of Barstool Sports who coined this term which went viral)
@ELONMUSK 👉 ANYTHING
Elon has moved markets in Signal, Etsy, Dogecoin and this week he changed his actual bio to #Bitcoin. Sending it up +15% within hours.
The micro influencers are thousands if not millions of small communities like Sara Well, a nurse by day who talks stocks by night in her discord group with dozens of investors.
BUT the absolute community FAVOURITE are the “MEME-AS-A-SERVICE” army: @WallStBets @Litquidity @leveredloyd @TrustFundTerry @parikpatelcfa @Wallstreetconfessions @Robinhood.memes @finance_god and many more!
They make learning and investing funny as hell and we all know for something to be REALLY funny, there needs to be an inch of truth in it!
They are so popular that even the CEO of Jefferies, the largest independent, global, investment bank (located in the US), is frequently featured and does LIVE events with them!
5. PRODUCTS
Investing in high-end art, wine, sneakers & pre-ipos is now possible for the retail community.
Please read ‘The World’s Largest Cocktail Party’ where I cover it all!
GRIT’S TAKE
I am very happy to see more people taking an interest in the stock market. It is a wonderful place to learn about the world, the economy, human behaviour and build wealth.
There’s really no other place where you can build a thesis and test it against the brightest minds in the world and make an outsized return.
This meme was meant to be tongue & cheek, as I do want to remind everyone that the 100-year average annual return on U.S equity indices is 7-9%.
Which is why day trading is NOT the secret to life-long wealth, contrary to what some believe.
The real secret to investing is:
“Time in the market. Not timing the market.”
Compounding really is the 8th wonder of the world like, Uncle Buffett says.
We’re all millionaires and we don’t know it yet. Instead of buying a $5 coffee every day invest it in the stock market compounded at 7.5% for 50 years — you’re a millionaire!
The other important thing to understand is corrections. They happen a lot and you must learn to stomach them. They are a necessary inconvenience of investing.
“Since 1950, there have been 38 stock market corrections on the S&P 500 of at least 10%. The flip side is, the market has recovered from every single one. But not every single stock has recovered.”
The sophistication of the retail investor is catching-up to the institutional investor.
Here at Grit Capital I want to be an ally to this new generation of investors. They don’t want ‘your father’s or mother’s broker’. I am giving them what they want (and what I want):
“Grit is for the gritty, diy'ers, deal junkies, who love to get unfilitered, unfluffed, straight to the goddam point insight into the markets, investments. No fluff, no bullshit, no suits.”
This week I received HUGE validation for the quality of my research. The largest investor in Roblox, who owns +$6B, read my newsletter and sent me this message:
You can read my ROBLOX newsletter or watch my YouTube video.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Join me TONIGHT at 830pm ET on Clubhouse w/the CEO of StockTwits (one of the largest retail investing communities in the world with +2MM users) — talking ‘WTF Happened this Week’
P.P. S ‘Harvard, Yale, Brown Endowments Have Been Buying Bitcoin for at Least a Year’. The largest endowments in the world don’t do YOLO trading. They obviously see something bigger here.
What else we Grittin’ On:
Squeeze On. Goldman Sachs says this is the biggest short squeeze in 25 years, with shorted stocks up 98%.
Bitcoin Ban. India might ban private cryptocurrencies like bitcoin and develop a national digital coin. Please understand a digital coin isn’t decentralized nor limited in supply - very different than bitcoin.
Robinhooders. ‘Excuse me sir, are you doing an IPO or are you going to jail?’
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