With Reddit, Gamestop, Koss, Citadel, and Robinhood all involved—how do you sort it out? What does it mean for your investing?
Bridget Sullivan Mermel CFP® CPA and John Scherer CFP® talk about what they recommend that investors do.
TRANSCRIPT
Gamestop, Robinhood, and Your Money
John: It's in the news. Everybody's talking about the short squeeze and what's going on in the market. What do you do about that stuff? Find out today on this episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. So John, this Gamestop story caught my attention, because I feel like it has heroes and villains like a lot of great fairy tales.
John: That's a great analogy, and it's interesting. I don't know the exact numbers, but you read the in the newspapers, you know, Gamestop up 80 percent, up 100 percent. There's a couple of local companies we were talking about, Koss headphones out of Milwaukee. They're up 400 percent in the last two weeks. The Citadel, known by you—
Bridget: Right now, they're down, they're bad, yeah.
John: So what do you say when somebody asks you, "What do I do about this?" or brings that issue up, the short squeeze, and what's going on? What's your reaction to that? What kind of advice do you give?
Bridget: Well, first, I try to explain my perception of what's happening. So, Gamestop is a company that I think some people have fond feelings for because they're of the age where they used to go to Gamestop with their kids and buy the latest games. Right. So this is Gamestop. And so now they're getting older, and Gamestop -- they're worried that it's gonna go in the way of Toys R Us, and it did seem to be heading toward bankruptcy, but then there was good news too, so it's kind of a mixed bag.
But some alert people on a particular Reddit forum saw that some big hedge funds, "bad guys," or, you know, "villains," were shorting the Gamestop shares, which means they were betting on them to go down, okay? And it got to the point there were so many bets that they had bet more than could possibly be covered, so the people on the forum said, "We are going to drive up the price and make sure this bet does not pay for these hedge funds."
Okay. And then other people got linked in, like Citadel, which is one of our Chicago companies. Again, probably, I think people have a negative attitude about them because they don't really know what they do, and they're intermediaries in this whole thing. And then Robinhood got involved because they stopped trading on both Gamestop and some of these other tickers like Koss headphones. And I'm not positive that Robinhood stopped Koss. I'm just trying to give the broad outline of what seemed to happen.
John: Sure.
Bridget: So Robinhood was in a difficult position because their whole marketing proposition seems to be, "We're giving the little investor the tools of the big investors," i.e., like hedge funds. And so them stopping trading seemed to be in conflict with -- they were acting more like the big guy instead of the Robinhood!
So they were acting more establishment than Robinhood, and so people were upset about that, too. So, there's a lot to dissect, and enough local angles, like -- a lot of people don't realize this, but Chicago and Madison are actually pretty close together, but there's different local stories. So there's a lot a lot to say about it, and market manipulation stories seem to come out every 10 years or so. And it's kind of interesting, especially because people want to kind of see behind the scenes, and they also think that something nebulous is going on behind the scenes.
John: Well, it's interesting, as I hear you talk -- I loved your analogy of the fairy tale, what goes on, kind of the story, and the idea that it comes up periodically, right? This particular thing is new, but the idea is not new of what's going on. And so that's interesting to me as I think about that question of "What do you do?" It's not, "Oh, this is brand new." It's another version of the same fairy tale, as you say. And then, the other side is you've got the "bad guys," depending on who's viewing it. You know, the hedge funds are the bad guys, the big corporations that are doing this. Or, on the other side, you see some news, and it's "Well, these people that are from the Reddit boards, they're the 'bad guys' that are doing things."
And it's sort of tells me to take things with a grain of salt, like who's wearing the white hats and who's wearing the black hats. It depends on your point of view, and there's probably something in the middle that makes sense as the real story. But then, from a practical standpoint, can you talk about, like, okay, so we've got these moving parts, but then what do you do? Should I be in, you know? You see some of these folks, and they invested at $50 a share, and now it's at $400 a share, and,
Bridget: They made some money! Yeah.
John: And, it's like, "Oh, I missed out on that!" What do I do? How do I get in? How do I take advantage? What do I do about this? How do you talk about that stuff, or how do you think about it yourself, even?
Bridget: Well, if you can resist, sit out. If you can't resist, and you're like, "This seems like too much fun! This is my kind of fun. I really want to get involved in this!" Then, 10 percent of your portfolio, max, play around with this stuff. But this is worse than going to Vegas, as far as I'm concerned, because you've got to respect the brain power and the lobbying power, and everything, of these hedge funds and private equity and private capital. You have to respect these people, because they have a lot, and so...
John: Plus, there's no free drinks on Robinhood. At least you get a drink or a meal, or something, in Las Vegas, right?
Bridget: Yeah. And so, we were talking about in Vegas, the odds are 55 of the house to 45 percent to you. In the general stock market, it's 75 percent to you...
John: Yeah, 25 the other direction.
Bridget: Yeah, 25 percent the other direction. This is a previous episode, both in the stock predictions and the lottery episode. But this is probably worse. I don't have the exact numbers, but the probability is probably worse. So I was thinking about this this morning when I was feeding my fish, and I was thinking about how the fish -- and I'm gonna share my fish tank. You can see in my fish tank I've got a diver, and I've got a treasure chest on the bottom, but when I feed the fish, they're just going after the food at the top. They're just at the very, very top. They're just looking at the top. This news is like the very top. And we want to be thinking about the planning. Any kind of person, any time I've heard about somebody actually getting treasure, it's taken a lot of planning and a lot of thinking through. It's not a one-off "Oh I'm paying attention to Gamestop. Now I'm gonna make my fortune."
John: Yeah That's interesting, because that's how I think of it, too. And I love that image of the pellets falling on the water for the fish, and it makes that noise, and they come up and get it. So much of the news, in our world anyway, is the white noise, and taking that long run. And it's not to say that people don't make money, right? Some people have made money on these things when the noise comes, whether it's what's going on now with the Gamestop issues, or others.
But the reliable way, as I think about it, the people that have won the game, it's probably ten to one that they did the basics, they did the saving and did it all. And then, yeah, there's ten percent of the people that listened to the noise and took advantage, but that's not the reliable way to get ahead, and it's not part of the long-term plan. And having a plan and sticking to it is so important, and I love that image -- in your fish tank, the diver, right?
Planning is the dive, and going to get the gold, that's the reliable way to get there, not that you can't get it other places. And as I think about wrapping up, how to think about this -- my takeaways from this are that it is really white noise. It doesn't impact you. You don't have to participate, and if it's fun, yeah, take some of that gambling money, 5 or 10 percent of your portfolio, do some things, but the serious money is where your diver is. That's the thing that doesn't listen to that noise. So that would be my my takeaways for our viewers here. What about you? Is there anything else that you have as far as takeaways or how to think about this?
Bridget: That really summarizes it for me, too. I'd just like to mention to people that if you subscribe to our channel, that helps other people find us, so you'd be doing us a favor, and you'd be helping other people find us. And also, John and I are both members of ACP, or the Alliance of Comprehensive Planners. We are a not-for-profit group that helps individuals all over the country with financial planning and it's a lot of the thinking that we're talking about here. So with that, I'll wrap up. Thanks, John!
John: That's great! Thanks, Bridget.
At Sullivan Mermel, Inc. we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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