Gamestop – AMC – Blackberry – Nokia | How The Short Squeeze Affects Your Retirement

 

Troy Sharpe: What in the world is going on with stocks like AMC, GameStop, BlackBerry, Nokia, Bed Bath & Beyond, all of these companies are exploding in price.  I want to explain how they’re doing that and what that means for your retirement portfolio.

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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, and host of the Retirement Income Show. To understand what’s going on with companies like AMC,and Blackberry, and GameStop, and Nokia and the rapid increases in the stock price, we have to understand some basic elements about what’s going on. What is shorting a position? What is a short squeeze? What is the hedge fund, and what does the Hedge fund actually do?

I’m going to break this down so we understand it, and you can be more  informed when you’re reading about some of this stuff, and you see the activity, Most importantly, I’m going to bring it back to how it impacts your retirement in your portfolio.  Think of a Hedge fund is nothing more than a big group of people. They have a lot of analysts. They look at a lot of data. They have the best information out there, but they’re really just a group of people who invest. Companies like AMC, BlackBerry, Nokia, GameStop, the big group of people feels that these companies  have antiquated technology or antiquated business models.

They think these companies are going out of business. Just like you can buy a stock hoping it will go up, you can short a stock or sell it hoping it goes down. The big group of people, they simply want the stock to go down, they believe it’s going to go down because the businesses are bad businesses. Think back to Kodak, when the digital revolution took place and we started taking photos with our iPhones and Androids, Kodak never evolved, they still had their camera, you hit the button, the photo came out, you waved it and that was it.

The big group of people said this company’s not adapting. They’re going to be gone.  They’re going to go bankrupt. We’re going to bet or we’re going to invest in such a way that takes a profit if we’re right, and the company goes out of business. When we look  at companies like AMC, and GameStop, and Blackberry, and Nokia, very similar theme here, these are antiquated companies, at least as far as their technology or their business model is concern.

These big groups of professional investors, they say, “You know what, these companies are going to go out of business. We’re going to make money on the way down.” But this other group of people, and essentially, this is the people on Reddit and some other blogs, they say, “You know what we can do it. We can force these companies into what’s called a short squeeze.”

A short squeeze is what I’m going to show you in a minute, causes the price of a certain stock to accelerate if it goes up enough.  During a short squeeze, what happens is, let’s say the hedge funds, the big group of people, they have a million shares at $10 million, or $10. This is $10 million that they’ve invested. The problem is when you short a stock and you think it’s going to go down, you don’t actually own those shares, you sell them first. You have to borrow them from someone else, and then  you sell them. At some point, you have to buy them back so that person gets their shares back. If the stock goes up to 15, the trade has gone against you.

This means you thought from $10, it was going to go down, but if it goes up to 15, this means you will get what’s known as a margin call.  That means you must buy back the shares. You’re going to have to buy $5 million, the amount of money that you’ve lost  in that particular company. You’re wrong on the bed, it didn’t go down because people started buying it, the people on Reddit. The stock price went up. Now,  it just has to go up about a 50% gain for the short squeeze to take place because there are regulatory requirements that say if the stock goes up a certain much,  you the big group of people, you have to buy it back because you’ve borrowed it from someone else.

This is what happens. They have to sell, the  big group of people, the big hedge funds, they have to sell their long positions to generate the cash to buy back this stock.This is what happens with companies like Apple, and Microsoft, and Facebook. Over the past couple of weeks, we’ve seen those prices come down. It’s not that those businesses have changed  anything from a structural standpoint, profits, revenue, growth expectations, those are still strong companies, but because the hedge funds,  the big group of people had the margin call because the position went against them.

It went up to 15, they have to put a buy order in for the $5 million, and to generate that cash, they have to sell their other positions. This is how it impacts you and your retirement portfolio. If you own a bunch of these companies, which most of you do then you’ve seen your stocks go down in value, but it doesn’t mean that those companies are worth any less. It’s just a short-term temporary dip in value because the big group of people had to sell these positions to generate cash. Now, we’re not talking about this happening on a $5 million scale, we’re talking about this  happening on a billion-dollar scale, or $2 billion scale.

The numbers are much bigger than what my example is here, but in a nutshell, these companies, these big group of people, essentially thought the business models of these companies were antiquated. They said, “They’re going out of business. We’re going to make a profit when the stock goes down.”  This other group of people on Reddit, essentially a trading blog, or they’re reading the same thing, or they could be working together, which would be illegal.  They say, “You know what, we are going to force these companies to buy back their stock. We’re going to force a short squeeze.”

This is the short squeeze. If enough people buy the  stock, and it goes up to 15, they know that the Hedge fund, the big group of people will be forced to buy. Once the big group of people is forced to buy,  this creates a trigger action because that big order coming in for $5 million, guess what that does to demand, it increases demand which shoots the price up further. Now, it’s not up to 15, it’s up to 20, 22, 25. Now, it’s up to 25. Other people on the reading blog are getting in.

Other computer trading  programs, like algorithms that are momentum-based, they see a stock go from 10 to 25, they start buying, it’s automatic. Then it goes public, and everyone sees what’s going on,  and it just gets parabolic, and this is how a company like GameStop goes all the way up to $200, $300, $400 a share. Of course, what comes up must come down. The real value of GameStop is not $400, it’s artificially inflated because of all this forced buying, and then the greed and everything else that takes place that we’ve seen over the past couple of weeks.

Ultimately, these stocks are going back to being worth next to nothing. It’s just what do they do in the meantime. This is what  shorting is. This is what’s going on with these stocks. The is what a short squeeze is. It’s when this big group of people, typically hedge funds, they are forced to buy because the bet went gainst them. I’m using the word bet here instead of invest because let me be very clear. What’s happening over here is no different than going to Las Vegas and putting your money on the roulette table,  picking a single number.

This is not investing. Everyone getting into these stocks, the GameStop, the AMC, they’re not investing, they’re gambling. It’s a lottery ticket. Investing means  we want to buy and hold something for the long term because we like the business prospects. This does not impact you long term. You shouldn’t be dabbling in this type of market if you’re in  retirement or near retirement. Maybe you want to play around with a little bit of money here or there, but we want to focus on good companies in retirement that pay dividends, that have little debt, that have great cash flow, that have growth expectations, or are currently growing.

These are the companies we want to invest in, and that is investing. This is gambling. To be successful,  we want to avoid gambling, we want to focus on investing, we want to tune out the noise, so we’re not worried about the day to day price fluctuations, and we want to stay connected to our money through a  retirement plan because remember, investing is just one part of a retirement plan. There are taxes, you need to generate income, social security, medicare, estate planning, healthcare expenses, social inflation, all of these things tie in together with a comprehensive retirement plan.

Investment Management, that’s just one component, and I’d argue it’s not even the biggest, most important component  of a comprehensive retirement plan. That’s why you should work with somebody who understands how all these interrelated pieces work together. In a nutshell, this is what’s going on. Try the best you can to avoid it unless you feel like gambling. If you feel like gambling, prepare to lose because that’s what happens most of the time. Unfortunately, most of the people in this stock right nowthey’re going to lose money.

You have to get in if you’re going to do this before all the hyperactivity starts. If you’re in the beginning before all this begins, you can write it up,  but once you write it up, don’t get greedy, you have to sell at some point in order to protect those profits. You may miss out on a big game, you may be able to ride it all the way up, and that greed will keep you in and ride it all the way back down. Set some limits, understand your risk tolerance, your willingness to take risks, and if you want to dabble in this market, do it for a little bit of money,but do it before all the hyperactivity starts because you’re almost guaranteed to lose if you start to get in at that point.

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