4 investing dangers exposed by Gamestop

Meme stocks are the mutant offspring of social media and FOMO, born from a drunken threesome with a Reddit troll and nursed on the teat of the hype machine. Consider yourself warned.

Welcome to the no-nonsense newsletter that delivers practical insights and proven tactics to build real wealth and live life on your terms — all in 5 minutes.

If you were forwarded this email, join over 200k wealth-focused wolves right here, for free.

👇 Today’s Briefing

  • Story: Why Gamestop Was a Total “Clusterf**k” 🤑

  • Insight: Stocks - Vote by Day, Weigh by Decade 📈

  • Action: How to Monitor Short Interest 🕵️‍♂️

THE STORY

“Roar.”

Why Gamestop Was a Total “Clusterf**k” 🚨

[Story Snapshot 📸] In January 2021, a nerd shook up the world and took down Wall Street’s top titans with nothing but an ice cold Coors and a rainbow kitten t-shirt.

The WallStreetBettors refused to be passive bystanders in their own financial lives. They recognized the system may be rigged, but they were not going to let that stop them.

Most of you know the story, but here’s the highlights:

  1. They're going up against Wall Street giants with deep pockets

  2. Their pick, GameStop, is a brick-and-mortar on life support

Leading the charge is Roaring Kitty, the ballsiest pussy on the block. He's got a nose for undervalued stocks like Charlie Sheen's got a nose for cocaine.

Roaring Kitty's words spread like catnip among the WallStreetBets crowd. They start buying up GameStop shares, driving the price higher and higher.

By late January, GameStop hits an all-time high of $483, a far cry from the $5 a share that Wall Street thought it was worth.

But then, in an instant, the chaperone turns on the lights and seven minutes in heaven is busted…

  • Robinhood, the supposed champion of the little guy, claims they're at risk of breaking capital requirements due to all the GameStop buying.

  •  TD Ameritrade, says it's all about risk management and maintaining an orderly market.

The WallStreetBettors cry foul, claiming the game is rigged and the powers that be are out to crush their populist revolt. By the end of the trading day, GameStop plunges to $112, wiping out billions in gains.

The founder of WallStreetBets, Jaime Rogozinski, calls the whole thing "a total clusterf**k" and admits that almost everyone on the site lost money.

Here’s 4 crucial lessons you can learn from the aftermath:

  1. The risks of investing on margin: WallStreetBettors bought shares on margin, amplifying their losses when the price inevitably crashed.

  2. The potential for market manipulation: The saga raised questions about the role of social media in market manipulation.

  3. The power of short squeezes: The saga brought attention to the mechanics of short squeezes creating opportunities for investors.

  4. The limitations of "meme stock" investing: GameStop showed the dangers of investing based on social media buzz, over fundamentals.

As for GameStop, it's still chugging along at around $16 a share, trying to pivot to a new business model, but for a brief, shining moment, it was the center of the financial universe.

Key takeaway: WallStreetBets' GameStop saga in a nutshell: short-term wins, long-term lessons.

INSIGHT

Stocks: Vote by Day, Weigh by Decade 📈

"In the short run, the market is a voting machine but in the long run, it is a weighing machine."

Benjamin Graham was Warren Buffett before Warren Buffett. This quote is a metaphorical way of describing how the stock market behaves differently in the short term compared to the long term.

In the short run (voting machine):

  • The stock market is driven by emotions, popularity, and hype.

  • Investors "vote" for stocks based on sentiment, trends, and news.

  • Share prices can fluctuate wildly based on these short-term factors.

In the long run (weighing machine):

  • The market eventually "weighs" a company based on its fundamentals.

  • Factors like earnings, growth, and cash flow ultimately determine price.

  • Companies with real value tend to appreciate over time.

While the market may be irrational and mispriced in the short term, it tends to correctly "weigh" a company's worth over the long haul.

This principle encourages investors to think like owners, focusing on the underlying business rather than trying to profit from fleeting market sentiment.

TAKE ACTION

How to Monitor Short Interest 🕵️‍♂️

Here's how to keep an eye out for potential short squeezes or market manipulation:

  1. List stocks to watch (current holdings and/or potential investments).

  2. Dig up the "Short Interest Ratio" or "Days to Cover." You can find this info on financial websites like Yahoo Finance or Finviz.

    • For Yahoo Finance: search for the stock, then click "Statistics" and scroll to "Share Statistics." Look for "Short % of Shares Outstanding" and "Short Ratio."

    • For Finviz: search for the ticker and check out the "Short Float" and "Short Ratio" under "Fundamentals."

  3. Give the ratio a quick once-over:

    • Above 5? That's considered high.

    • Compare it to the stock's history and its industry pals.

  4. Put it on your calendar (check the ratio at least once a month, or more if the stock's acting squirrely).

When you make short interest ratio check-ins a regular thing, you're basically giving yourself a secret decoder ring for the stock market's shenanigans.

But, it's just one piece of the puzzle. Don't forget to consider the company's fundamentals, market trends, and your overall investment game plan.

Memes of the Week 🤣 

Bite-Sized Reads 📚

[Read] Read all of Warren Buffett’s shareholder letters from 1977 all the way up to 2023.

[Read] Forbes: “Benjamin Graham liked to look at the historical company performance over an extended period of time.”

[Quotes] Mike Tian: “We believe it’s better to short a deteriorating business at a fair price than a good business at a rich price.”

Improve this Newsletter in <2 Seconds👇

Publisher: Jordan Belfort

Editors in Chief: Brock Swinson and Davis Richardson

DISCLAIMER: None of this is financial advice. This newsletter is strictly for educational purposes and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research. 


Example blog post
Example blog post
Example blog post