Markets can remain Irrational longer than you can remain solvent – John Keynes
Its never a good idea to take position against the big hedge fund managers. As they have enough liquidity to remain in their positions for long to eventually make you realize that your trading capital is almost blown up. But some retail traders who discuss their trades on this reddit group had some other plans this month.
The backstory starts with a company named GameStop(GME) which sells video games. But, wait! This is 2021 and who the hell buys video games from stores? Its like carrying around a share certificate when you have the facility of Demat.
GME’s fundamentals were below average and thus billion dollar hedge funds like Melvin Capital Management shorted the stock. The hedge fund had $55M worth short positions in this stock. This was a huge short position and it is impossible for individual retail traders to become profitable by going long on this stock.
But things got interesting when some Reddit users saw the short positions of these hedge funds on this stock and decided to buy the stock creating a short squeeze against the hedge funds. The group of reddit traders never bothered to sell their stock and did not allow the stock to fall in spite of the worrying conditions of GME as a Business.
GME was trading at $43 on 21st Jan’2021 and the stock skyrocketed to $145 in just 3 trading days. This is like “3 din me paisa triple“. To add more fuel to this rocket (Elon does like Rockets), Elon Musk tweeted this.
This is the second case this month when Elon tweeted something and immediately it got priced in. As I write this, GME is trading at $226 whilst making a high of $348 intraday. In this process, Melvin Capital lost around $2B in a matter of 2 weeks. And thus a set of reddit retail traders were able to defeat experienced hedge fund managers in their own game.
What I Learnt?
- The stock price can never tell the true fundamental picture of the company.
- Whether you win or lose, the first thing that any trader should consider is proper risk management that is knowing how much you can lose beforehand and if you can take that loss or not.
- Even the experienced fund managers might lose big if risk is not managed properly.
- Never trade with emotions and ego.
- Elon Musk has a magical power to affect stock prices with his tweets.
Lets end this article with a meme!