- Hey, welcome back.
It's Nolan Matthias and today we're gonna talk
about the whole craziness surrounding GameStop, AMC
and the Wallstreetbets forum.
And I'm gonna tell it in three parts, first of all
what led us to all of this?
Second of all, why you shouldn't necessarily play the wisdom
of the crowds when it comes to investing.
And three, I'm gonna tell you how I did take advantage
of the wisdom of the crowds, or at least the lack of wisdom
of the crowds in order to make a pretty significant return
on at least a couple of the stocks
that were going crazy this week.
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Okay, so let's talk about what happened
and this is gonna be very much an informal video.
And I got to start with, first of all
I am not an investing expert so don't take anything
that I'm about to say as advice or anything else.
This is just purely my understanding
of what happened and how I took advantage
of what was happening in order to make a little bit
of money over the last couple of days.
So let's start by talking about GameStop
'cause this is what started the whole thing.
And what happened was back in 2019
a few investors recognized that GameStop was sitting
on a pretty significant amount of cash and not a lot
of foresight into where they were going in the future.
The company was sitting kind of on the ledge.
Nobody really knew what was going to happen with gaming.
A lot of people thought that the old,
buying and selling disks in a physical game store
was gonna go the way of Virgin Records or the way of HMV
or all the old record stores and CD stores that existed
and they're pretty much gonna run out of business.
And then there was this other group of investors
who said, well hold on a second, PlayStation, X-Box,
they're still releasing consoles that take physical disks.
There's probably a market for this
and there's probably a market because people still want
to be able to buy and sell the games that they've purchased
so that they aren't stuck to one or two games
or purchasing a game indefinitely
and having to be stuck with it
and not having the ability to trade to other products.
So there was this controversy
around the future of the company
and as a result, some investors started
to realize the significant amount of cash
that they were sitting on, made them
a pretty good value investment.
And the most notable of these was a guy named Michael Burry
and Michael Burry, Dr. Michael Burry,
was the guy who was featured in the Big Short.
He was the medical doctor who ran a hedge fund
called Scion Capital and he recognized
that the sub-prime mortgage bubble was about to collapse
and he was the one who bet against the housing market.
And he recognized that in 2020 or maybe it was late 2019,
I'm just looking at my notes here
that this company GameStop was a company
that was a very good value investment
and it was just simply being mismanaged.
And then a few months passed, nothing really happened.
There was a little bit of a bump up because Michael Burry,
the famous Michael Burry was investing in GameStop
but really not a lot happened.
And then on a little forum on Reddit called Wallstreetbets,
somebody pointed out that 84% of the stocks
in GameStop were being held short.
And what that means is that investors,
major institutional investors were betting against GameStop
and that 84% of the stocks had been borrowed.
So what I mean by that is, and you have to understand
how short-selling works is, when somebody shorts a stock,
basically what they're doing is they're taking a stock
and borrowing it from somebody else
and they're selling it on the open market.
And then when they sell it,
what they are doing is hoping that the value goes down
so that they can buy it back for cheaper.
And the difference between what they sold it for
and what they bought it back for, is their profits.
Now, what happened in this scenario
is pretty much the majority of investors
were people who were short-selling the GME stock.
Now here's the thing about shorting stocks
is unlike purchasing a stock and hoping that it goes up
in value, where you have a limited amount of downside
so let's say you buy a stock for $10 and it goes to zero,
your potential downside is $10.
Well, when you're shorting a stock,
the potential downside is infinite
because let's say you buy a stock for $10
and it goes up to a hundred dollars in value.
Well, now you've lost $90 per share on that stock.
And this is what happened in the case
of these short sellers who were short-selling GameStop,
because what had happened is they had sold stocks
for five, 10, $15, and then the price started to go up
and as the price started to go up
they had to cover their losses.
So let me give you another example on this
just to make it really simple.
So let's say you're in a position
where you are selling a share short at a dollar,
and the value of the stock goes up to $10.
Now you have to buy it back at $10.
So you've lost $9.
Now let's say it continues to go up to a hundred dollars.
Well, now you've lost $99.
And all of a sudden the trade where you thought you
were only investing a dollar, ends up being a trade
where you are losing almost a hundred
and then multiply this by a significant number of shares
and that's what happened here.
So using GameStop as an example,
people had had short sold the stock for $10
and then they got to the point where they potentially
had to buy it back for three or $350.
So let's just use that as an example.
They short sold it at $10 and had to buy it back at 300.
So they lost $290 per share.
Now let's say they had made a $10,000 short sale at $10.
Well, now when they have to go back and buy back the stocks
to cover their losses, the $10,000 bet they thought they
had made, ended up being a $290,000 loss.
And that's on an initial trade of just $10,000.
So this is what was happening to the hedge funds
that had sold short the stocks and as a result
of them having to cover their losses
and buy back shares to cover their losses,
it compounded the effect, increasing the price of the stock
and it just kept going up and up and up and up
til at one point it was at $450, which is insane.
So what had happened in technical terms is a group
of Redditers on Wallstreetbets,
about 2 million of them as of a week ago,
as of right now, there's almost three to 4 million of them,
they had basically put the short squeeze
on institutional investors.
So it's a David and Goliath story where a whole bunch
of David's got together to beat the heck out of Goliath.
And as a result, they made a significant amount of money.
In fact one trader is said to have earned
almost $47 million.
Now, I don't know if he locked in the profits or not
but he made a pretty significant amount of money just
by buying the stock and going with the wisdom of the crowd
and basically putting the screws to the man in this case.
So that leads us to part number two of the story
which is investing on the wisdom of crowds
which is at the best of times, not the best idea,
because basically what people tend to do
is they tend to ride the mania.
This is what happened during the Dotcom bubble,
where everybody invested in tech stocks
and then the majority of people lost a ton
of money because they got in too late.
And this is what happened in the housing market in 2007,
when everybody bought houses because housing prices
could only go up and then they were proven wrong,
right Michael Burry?
And then on top of that, this is what's happening right now
with GameStop and with AMC,
because as of today, as of when I'm filming this,
the values of both of those stocks have absolutely plummeted
because what happened was on Tuesday night,
the media came out and said,
there's a meteoric rise in GameStop and AMC.
And a whole bunch of people flooded into the market
on Wednesday morning.
Now, if you got into the market on Wednesday morning
and you got out on Wednesday afternoon,
you probably did pretty well.
But if you held into Thursday morning
you got your butt kicked.
And that's because inevitably, any sort of investing trends
that go through the roof for no reason
other than just mania, well,
they always tend to come crashing down
and that's what happened on Thursday.
So let me tell you the third part of this story.
'Cause the third part of the story,
even though I don't suggest investing
on the wisdom of crowds, is that every once in a while,
about two to three times a year,
there becomes this opportunity to make an investment
in these sorts of trades and these sorts of investments
that have no reason to go up, but are.
So here's how I played these stocks.
On Tuesday afternoon it became very clear
that these stocks were going to make a huge run
because they were getting a ton of media attention.
So what I did is on Wednesday morning
I went in and I bought shares of both AMC and GME.
And I bought them with the expectation
that I needed to limit my downside
and the way you limit your downside
or the way I limited my downside
is I put a stop loss on them.
So in other words, if the value of the stock
went more than 20% below what I paid for them
then my brokerage would automatically sell them.
And the reason I do that is to mitigate my potential losses.
You have to remember as well,
anytime you're making this sort of investment
you have to be a hundred percent willing to
lose the money that you're investing
because the reality here was I wasn't investing,
I was speculating.
To me, this is the same as going to Las Vegas
and putting my money on the blackjack or the craps table.
And here's what my plan was.
My plan was to limit the downside.
If I lost 20% of the value that I put into these,
and again, it was a very small portion
of my portfolio value that I put into these,
well, then I would just eat the losses and move on.
But I figured there was the potential for me
to run up in a single day,
a pretty significant amount of returns.
And that's exactly what happened,
by the end of the day on Wednesday, I was able to earn
on AMC a 29% return and on GameStop a 12.5% return.
Now I am by no means a day trader
because being a day trader inherently is a risky strategy.
And it makes you put money at risk
on a daily basis in order to earn returns.
But every once in a while,
there's this sort of scenario where there's some mania
in the markets where you can basically take advantage
of what's bound to be a run-up.
And then the key is to get out of the market as fast
as possible with a small return, compared to what
other people are making but a return none the less.
So I was quite happy if I made 10% on a day
on both of these stocks, obviously I did far better on AMC
and I did a little bit better on GME, but the key thing
for me was making sure I got out on Wednesday night
because what I was concerned about was I was concerned
about what the SEC might do on Wednesday night
or what these different investing platforms might do
on Wednesday night and sure enough, the SEC did nothing
but on Wednesday morning, different investment platforms
like Robin Hood stopped allowing people to buy these stocks.
And therefore the stock came plummeting down
and it shows that I was able to get out at the right time
because what I was trying to do was mitigate my risk.
And to me, holding it through the night was pretty risky
because you didn't know what different companies,
what different organizations
and what different regulators were going to do
while the market was closed.
Now, the other thing I watched
during the day on Wednesday was the volumes.
And what was clear was that on Wednesday morning
there was pretty significant volumes
but that the trend was on a downward trend.
And what that told me was that the shorts
were in a position where they
were either done covering their short positions
or they just no longer wanted to play the game.
So when the volume started to go down pretty significantly
that's when I started to make my move
to get out of the stocks and ultimately
what I ended up doing was making a 29% return on AMC.
I bought it at about 14,75 and sold it at $19
and on GameStop and I'll put the images here
showing exactly what I bought and sold them for,
but on GameStop, I think I purchased around 305
and sold at around 345.
Now I'm blurring out the amount that I invested
and the dollar value that I invested at
because I don't want what I invested and the gamble
that I made, to be something that is indicative
of what I think other people should do.
Because again, you need to make,
when you're making this sort of gamble
and that's what it was, it was a gamble.
It wasn't an investment, it was a gamble.
I gambled on the fact that I could ride a little bit
of momentum for a day and make a little bit of cash
and that's what I did.
And each individual needs to do that on their own.
They definitely shouldn't be looking at what I invest
or what other people invest and try to,
follow the crowd and do what other people are doing.
That's what's gotten a lot of people on Wallstreetbets
in trouble this week, is they tried to follow the wisdom
of the crowd and a lot of people emptied out
their life savings, invested in GameStop at 350 or $400
and have lost a pretty significant amount
of those investments.
And the moral of the story is this;
regardless of what you're doing,
if you don't understand what you're investing in
you shouldn't be investing in it.
The easiest thing, if you wanna be an investor
and you don't wanna dig deep into how to invest
and different strategies and so on and so forth,
is go and read a Tony Robbins book,
like Money, Master The Game, or Unbreakable or Unshakable,
whatever the name of that book is
and try to mimic a portfolio using ETF's
and just keep it safe, keep it simple.
And if investing and gambling and speculating
is something that you want to do
with a very small portion of your portfolio,
and what I'm talking about is maybe one or 2%
of your portfolio then fine,
but definitely don't be the person that goes out
and follows the dude on YouTube or follows the Redditers
on Wallstreetbets and gambles their entire life savings.
So that's it, that's my thoughts on this whole situation.
It was a once in a lifetime opportunity for a small group
of investors to basically make a pretty significant amount
of money by sticking it to the man
and sticking it to a bunch of short sellers.
I applaud them for doing it.
I don't necessarily applaud different organizations
who stopped allowing people to buy
and make their own investment decisions,
and therefore artificially deflated the already
artificially inflated stocks, but that's what you need
to be wary of when you make decisions like this,
is there are things that are outside of your control
that you can't manage and ultimately can end up
costing you a ton of money.
So, interesting story, interesting set of circumstances.
Don't be a gambler.
Don't be a speculator,
unless you're a hundred percent willing to lose the money.
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