Angry kids give the big guys a beating. Is that a good thing?

My friend Christelle Colman sent me a link to a Vox.com article early this morning – it was about how Reddit users (mainly young people) are beating hedge funds at an old age game of making money through trading.

Since I have a keen interest as CMO of the Purple Group (which owns investment plaform EasyEquities with 30% partner Sanlam and trading platform GT247.com) I had been following this interesting development the past few days.

I remain firm that investing should not be confused with trading (the latter being far more short term, higher risk in its outlook) nor with gambling (where a few may win big, but ultimately everyone will lose except the casino). If you want to get rich quick, win a lottery (unlikely), gamble (not clever to my mind), trade (risky but can be fun and very rewarding) or commit a crime (stupid, not encouraged and not a viable option).

Investing is for those of us who want to, consistently, improve our money habits and our financial status. And the best way – biased as I am – is EasyEquities. But, if you are going to trade, is doing what these Redditors did, wrong? Or are the hedge fund biggies (and baddies?) finally getting what they deserve?

Most of my mates at Purple agree – this is likely to end in lots of people losing lots of money. For more context and info, I chatted to Shane Curran – one of the founders of Investure – a world-first, SA inovation whcih offers prtection to EasyEquities investor. Here is what Shane wrote:

“AMC (+600%), Gamestop (+800%), what just happened???

You may have seen strange comments and articles referencing AMC and Gamestop in the last couple of days. Here’s why.

Gamestop is up almost 800% in five days, going from a $3 billion company to a $25 billion company! AMC is up almost 600% in the same period, now a $6 billion company from a $1 billion company five days ago. These kind of “returns” are what has been sparking the storm of news around the two companies. MADNESS or JUSTIFIED? What is driving this?

Basically, the two share prices are being driven by a lot of very angry people. I kid you not.

These two stocks were both heavily shorted by Wall Street “Professionals”. Retail investors who post open comments on their trading ideas on Reddit’s board “WallStreetBets” decided to fight against these professionals, who had large short positions in the stocks. Basically, the professionals put their money on the stock going down (they lose if it goes up) while the “amateurs” are putting their money on the stock price going up. Collectively the amateurs, with the Reddit board as the source of the “collaboration”, decided to drive the price up, causing anyone with short positions to experience MASSIVE losses in their position, with the hope of forcing them to close their short positions. In fact, it also forces the pros to add to the carnage. The explosion in share price forces the hedge funds to cover their losses by buying stock, thereby adding to the upward momentum. INSANE.

So far, the amateurs are winning, as can be seen in the crazy increases in share price. Reading through the Reddit board shows some very angry people, who believe they are essentially modern-day Robin Hoods – taking money from the rich (who use Wall Street professionals) and giving it to the poor (themselves and their community of like-minded individuals). Basically a revolt against the pros.

Check out some angry posts (the only two posts I read – excuse their language) here and here.

NBC reported that S3 Partners, a financial data company, found that short sellers had lost $23.6 billion on Gamestop this month.

How does this end?

Well, I can’t imagine short sellers holding their positions through this kind of a rise, so probably mission accomplished. But also, with two highly over valued companies, possibly more over valued than Tesla even.

Already some retail brokers like TD Ameritrade have stopped investors buying more stock in these shares. It would be a nightmare if they also stopped them selling the stock when the movement dies, as big losses are probably coming.

Overall, a crazy story to watch unfold. A lot of heavily shorted companies’ share prices are rising significantly just in the hope that the Reddit community will target those short positions next. It’s amazing what democratising access to financial markets can do, as well as the damage. With free leverage available to retail investors, and community chat boards where literally millions of people can come together, the retail traders collectively can access enough financial firepower to take on Wall Street for the sake of it, not based on a company’s fundamentals – scary.”

Interesting take from Shane – and a reminder, for me, again of why I am proud to work with a trading team led by Nilan Morar and a risk team led by Mark Wilkes – people who take seriously their responsibility to help investors and traders stand the best chance of making money. Not losing it.