Monday, January 24, 2022

Gamestop, Yolo, and Breadcrumbs

Alexander Vega’s checking account was dwindling. The 29-year-old father of two children was fired by the biopharmaceutical company in February 2020. By June, his balance had dropped to just $77. He decided that his only option was to adopt the YOLO philosophy, and deposit $50 in a brokerage account. “Then I started accumulating like $100 here and there,” Vega said. When he was investing in a mix of ETFs and individual stocks, his market returns reached 85%. Encouraged, he kept making small deposits whenever he could.

Vega was one of several retail investors who started their investing careers in 2020. According to a recent survey by Charles Schwab, 15% of retail investors in the United States began trading in 2020. Individual investors opened more than 10 million new brokerage accounts in 2020. According to JMP Securities, and Credit Suisse estimates retail traders could account for a third of all US stock market trading in 2021.

Part of what motivated these new investors was sheer boredom. Vega agrees: “People have more time at home, people get bored, and they see the money these stock market guys are making. So what do people do? They start for Google, And then go down the rabbit hole from there.” The incident caused market turmoil where meme stocks became hot commodities. Some participants made fortunes in the historic 2020 market rally, including amateur traders from Reddit’s r/wallstreetbets.

The subreddit made headlines in January 2021 by coordinating a historic short squeeze from gaming retailer GameStop (GME). The stock, which was less than $20 per share, rose to over $400 by the end of the month. That trading enthusiasm didn’t subside until the end of the year, and it looks like it may be here to stay in 2022, even as many enthusiastic retail traders soften their YOLO style for a more cautious approach. (Somewhat unreasonably, GameStop proved to be the best-performing stock of 2021.)

Vega is one of them. After deciding to look for a new job and eventually join the Marine Corps, he began reading personal finance and investing books, starting with Personal Finance for Dummies. From there he joined the David F. Svensson’s Unconventional Success. The first trading strategy Vega learned from the books was “buying dips,” which refers to buying assets after a fall in investment value.

“When I first started reading about this, I didn’t know anything about stocks or investing,” Vega said. “But I realized that, you know, the principle of buying something at an affordable price was a good one.”

Boston College finance professor Ronnie Sadka explained that buying a dip is essentially a one-time strategy. “It is not an easy thing to do; It is very difficult to time the market, but that does not mean that people are not trying,” said Sadka.

Even though buying dips is incredibly risky, the strategy attracts traders who look forward to a wildly disastrous day in markets like November 26, 2021, which was the worst day for US stocks of that calendar year: the S&P 500. , Dow Jones Industrial Average and Nasdaq remained in the red. It was also Black Friday. As shoppers tried to grab discounts on giant TVs, crowds of retail merchandise engaged in dipping amid a sell-off by the then-unnamed coronavirus variant we now know as Omicron. Although the trading day was shortened due to the holiday the day before, traders still managed to buy more than $2 billion worth of stock, according to Wandatrack – the largest number of days of net retail purchases of US stocks on record. was one of them. This wasn’t the first time retailers took the plunge. On July 19, as the Dow broke 725.8 points in response to concerns about the delta version, retail traders also held onto shares.

It is not a strategy without its risks. Retailers even popularized a meme about it—”when you buy dip and it keeps sinking”—which is apparently quite a sad occasion for LeBron James to make. Weeping, Vicki Bogan, an associate professor of applied economics and policy at Cornell University, explained, “Unless you have the time and energy, sufficient financial knowledge, and are able to absorb a lot of risk, there are market timing strategies to employ. Its difficult.”

That hasn’t deterred the retail crowd, many of whom believe the GameStop will surpass its current highest price it achieved during the January 2021 extravaganza. Caleb John is one of them. John first purchased a share of GME stock on January 25, 2021, when the stock had already gained upward momentum at $77 per share by the end of the trading day. Three days later, it peaked at $453 per share, the highest level ever for meme stock, thanks to a short squeeze. Despite the record price, John decided to hold. After studying the company’s structure and its outlook, he eliminated everything in his portfolio except GameStop and zeroed in on GME during the fall of February.

“I have no doubt that this is going to shatter the current high,” John said via Reddit chat. “If it was a really bad choice why devote a year and millions of potentially billions of dollars on advertising, how bad is this stock?” With all this money tied up in stocks, he now has very little expendable income, but he doesn’t plan to sell until his portfolio reaches the seven-figure mark. On December 6, he posted a photo of Bread Crumbs and Stubb’s BBQ Sauce to the subreddit r/superstock. “Holding on since January and I think I’ve hit my rock bottom—currently my third night of survival on literal breadcrumbs #ilovethisstock,” he captioned the photo. “Stubs though – solid,” replied Reddit user ComputerShare.

Almost a full year after the rally, the GME is still more valuable than it was before the squeeze. Sadka at Boston College said the stock still gets the most attention on social media based on its research, but it’s less likely to see another small squeeze that drives up its price drastically. GME short interest fell from 140% to 10% in January 2021, meaning fewer traders borrowed shares, sold them on the open market, and later expected to profit by paying back with shares at a lower price.

In the second half of 2020, the monthly total volume of retail trade stood at approximately $337 billion. Since April 2021, however, monthly total retail volume has declined significantly and stood at around $256 billion, data from Wandtrack showed.

But some COVID-inspired retailers remained in the market and learned more about the fundamentals of stock trading. Vincent Bruzze, a full-time retailer known on Reddit by his Isaac Asimov-inspired username, Hari Seldon, created the subreddit r/RealDayTrading in June 2021. This is a community for day traders who quickly buy and sell stocks based on price patterns. After a year and a half, the subreddit has grown to 11,000 members. Bruzze described his followers as people who had minimal experience and lost some money in the stock market, but did not give up. These traders seem to have left the YOLO mentality behind. They tune into their daily live chats to learn about technical analysis, read the books they recommend, and make small targets to make consistent profits. Vega is one of them. He discovered day trading after holding a few stocks and ETFs for almost a year.

Day trading is not for everyone. Bogan at Cornell makes a distinction between investing and trading: trading means buying and selling every day – which is what Bruges does – whereas investing means buying and holding for a long period of time. He added that day trading is “probably not optimal for most households” while investing can be “a very powerful tool for wealth creation”. As Warren Buffett famously said, “For most people, the best thing to do is own an S&P 500 index fund.” Index funds and ETFs are less risky and can give stable returns over a long period of time.

“Ninety-nine percent of traders fail because it is really hard,” Bruzze told Morning Brew. (The figures cited by Bruzze are commonly replicated by retail traders but are not supported by research.) A study by the US Securities and Exchange Commission in 2021 found that 70% of traders on average lost money every quarter and lost money every quarter. 100% lose. 12 months. “So many people have come to me with their stories, they lost everything, they lost their house, they lost their marriage, because they didn’t know anything better than this,” he said. “The first time I did it, it was wiped out.”

Vega continues its investment journey on Reddit. Shortly after the Thanksgiving dip, he announced a goal to make a profit of $1,000 by the end of December 2021. He achieved the target on 27 December. Vega said, “$1,003.34 to be exact.” With $60,000 in debt from student loans, he decided to become a long-term investor and take sustainable steps toward achieving financial independence.

While Bogan feels that more time is needed to predict whether the lockdown will turn retail traders into lifelong investors, Sadka disagrees. “There’s going to be a general elevated interest in trading because it’s available and easy,” he said. Strategists at Wandatrack also noted the continued interest of retail traders in “the entire spectrum of the stock market”, with Wandatrack telling Morning Brew via email, “they can’t resist investing in more speculative and volatile stocks.”

Although retailers are heading into the new year with a little less and a little more knowledge of the YOLO vibe, many of them still believe in meme stocks and ready-to-eat breadcrumbs on the way to the moon. Hyperactive retail trading trend is likely to stay here.

Nation World News Deskhttps://nationworldnews.com
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