I am no investor. Just a curious reader and occasional thinker. But the quirks of the market have always piqued my interest.
The market is a great allocator of what people want and can produce. When demand meets supply, the settlement process is the price. The producers get a fair margin of what is sold and the consumers get what they want. That’s simple enough. And that is the reason for its existence, the market that is.
The power of the market is that it sends out reliable and timely signals to get people to produce goods and materials because they are wanted. Real goods pass from the hand that desires it to the hand that makes it. The motivation is usually the price, the common currency, the medium of exchange, and yes, the market eventually decides on that. Everybody is happy, contented, and life goes on.
But, like religion, the market can be distorted; at times, with disastrous consequences - the 2008 recession.
In other word, it can be used for good or for bad. It can be a place to efficiently allocate scarce resources for a fair profit, and a place to blindly reap millions at the expense of millions. This accounts for why the apex of the pyramid for the ultra rich is getting sharper and sharper, or narrower and narrower, splitting wide open the rich and poor income gap.
Investors may think they can control the beast that is the market, and some of them inevitably profit immeasurably from it when the speculation goes their way. But the beast at times comes alive on its own and devour even the most savvy investors, when greed boils over, beyond what good sense can rein in.
History has shown that speculation has to be curbed or regulated. and regulators have to stay vigilant and tough against personal enticement.
But, speculation profits the rich immensely with nothing to show except for a burgeoning bank account and an attitude of superiority and indifference.
Mind you, nothing changes hands with speculation. No producers contribute to society because nothing is produced. No workers earn a more decent wage because there is no rise in productivity. And no consumers benefit because there is nothing of necessity demanded for by them.
Stripped bare, speculation is about gaming the market, using its own rules to enrich yourself. The rule is how you beat the market over short and/or long runs. For many, it is making money work for you by capitalising on price differences.
And there is really nothing wrong with it (yes, you heard me the first time), until you risk other people’s money (and/or your family savings or savings for your kids’ education) and then lose everything because you can’t help yourself or you think for that second that you are different, you are invincible.
Speculation is thus nothing more than gambling at the Casino with the hope of striking it big on credit. And instead of spinning the roulette wheel, you stake it all on online trading platforms.
Sometimes greed is secondary to such mindless or extreme speculation. There is usually more to that when one puts leveraged funds at the whims and fancies of the mercurial market. There are pride, competitive ego, godlike superiority, market fame to preserve, and the desperation to be proven right to contend with. Those are complex emotions that often turn the investors (whether a lone wolf or an institution) into an obsessive-compulsive wreck, living from one glittering mirage to another.
And such extreme speculation adds nothing to the society. It is blind to climate change, to the widening income inequality gap, to the plight of the retirement savings of millions, to regulations which they are wont to circumvent, to the soul of the society and their own. I guess you only live once right? And who dies with the biggest toys wins?
This brings me to the GameStop rallies. It is an international hit because it has that David-vs-Goliath feel, or for modern context, that OccupyWallStreet movement.
I repeat here that I am no investor and I have limited knowledge on terminologies like short selling, margin trading, or hedging risks. All I know is that history repeats itself and greed is but one of the engines that drives that mindless repetition of historical blunders.
You will have to read the whole GameStop saga, about how little david thwarts the big boys of investments, to understand the intricacies involved. But, in layman language, it is about a group of institutional investors betting on the demise of a business (yes, GameStop). And that demise is earmarked by the fall in its share price.
Mind you, nowadays, you can bet on anything, even the failure of businesses. Not much of an American dream right? And that has been done before with relish in the 2008 crash where billions have been made on that alone to the insane enrichment of just a handful.
So, at the risk of oversimplifying it, the equation is that you buy short (by borrowing the shares) in the hope that the price will fall, and then you buy it at a much lower price. That difference is the insane profit to be reaped.
And for investors who want to hedge against the fall in prices, they bet on that too. They do that by buying insurance against the downward pricing. And when that happens, that is, a business collapses, its time for popping champagne as the happy hedger (or investor) skips over to collect on its insurance policy.
So, everything hedges on a business failure. The funeral of GameStop is the wild celebration of these speculators. The morality of such investment is highly questionable, but the morality of market is to beat it and make lots of money from it right?
Yet, one 34-year-old Keith Gill, the David in our saga, threw his stone at the temple of Goliath. He went long, that is, putting in money (S$70k) in the hope that GameStop will prosper, that is, its price will surge. And surge it did (from US$4 a year ago to US$325) as he rallied small time investors, by the sheer strength of numbers, to invest together to push up the price.
This rise caused the big boys to endure a serious financial beatings losing up to S$26.2 billion over the weekend. That’s a lot of other people’s money.
Here is what is written about the ArabSpring-like GameStop rallies on Wall Street.
“Inspired by (Keith Gill) and a small crew of individual investors who gathered around him, hordes of young online traders took GameStop’s stock on a wild ride, putting themselves against sophisticated hedge funds and upending Wall Street’s norm in the process.”
“Their actions - pushing up GameStop’s price by buying so-called option contracts that offer a cheap way to bet on a stock’s direction - have shocked established investors because Mr Gill and his online comrades are the antithesis of the Wall Street Titans who have long ruled the stock market.”
Ok, that is the long and short of this episode (pun unintended). And the lesson is that of the celebration of small investors seriously disrupting the profit-reaping norm of the empire investors of Wall Street.
The victory is one of morality in the market where saving a business is more important than earning a quick profit from its demise. Hopefully, it will cause the rich investors to think "long" and hard about the path they have been taking, that is, taking huge risks that is liable to destabilise the market just so that they can profit insanely, But then, as I have been writing...history always repeats itself, especially when the high risk pays off so damn well.
So, alas, fingers crossed right?
