Never bet against the little guy
Highlights of the $GME short squeeze, musings on economic bubbles, and more content based on 'The Office'. This is Issue #008 of Forward.
‘Hedge fund manager’ doesn’t seem such an aspirational title anymore, does it?
If there was ever a time to start thinking if we’re all just puppets in a simulation generated ‘for the lulz’ — as some Gen Z stock traders on r/wallstreetbets would say — it is now.
A Reddit community of amateur stock traders, flush with capital from stimulus checks issued as part of pandemic relief, nearly took down a hedge fund run by a promising young manager by pumping up the stock of a small video game store, using a broking platform that has been accused of trying to ‘gamify’ stock marketing investing. Oh, and the world’s richest man supported the movement with a few well timed messages to his millions of followers on a social media platform that, just recently, effectively gagged the former President of the US on its network.
Is this the real life? Is this just fantasy?
The $GME capsule
You’ve probably been inundated with commentary and opinion pieces on the events that transpired in the past week. At NEO, we believe in separating signals from noise, so here is our curated collection of some of the best reads to understand the madness and come to informed conclusions.
Start with this excellent summary of the whole event (with explanations of the relevant stock market terminology involved).
If you’d prefer the tl;dr version however, we’ll throw it over to Chamath Palihapitiya, who sums up what happened in this succinct Twitter thread.
In a nutshell, the events of the past week are the result of many things — the power trip that Wall Street has been on, the democratisation of access to capital markets thanks to technology, free flow of information, the increasing frustration and irreverence of a new generation that cares little for the status quo, and of course, sketchy regulation.
What of the gatekeepers?
Speaking of regulation, where does one draw the line? Should the Securities and Exchange Commission go after Robinhood for encouraging the ‘gamification’ of the markets that Reddit forums like r/wallstreetbets seem to revel in?
In many ways, it seems an argument of Libertarianism vs Paternalism — you can put seatbelts in a car, but the owner can choose not to wear it.
But the markets and economy are more than about the car and owner. It is about what happens when a few irresponsible people with oversized cars start driving on crowded streets. Considering the large scale economic impact of organised market manipulation, and massive overvaluation of popular stocks like Apple, Amazon, and most recently Tesla, should the Federal Reserve be taking notice to avoid the buildup of a bubble much larger than the dotcom bust of the late 90s?
And what of Indian markets? Despite bleak economic news pouring in, the Nifty and Sensex have been making fresh all time highs, with the latter crossing the 50,000 mark recently. While this is a clear indicator that Indian markets are not insulated from the frenzy happening elsewhere in the world, India’s generally conservative policies might actually be the saving grace in avoiding a GameStop like situation in the country, argues Nithin Kamath.
When will the bubble pop?
If you’ve been following Forward over the past few months, you’ve probably come to the painful realisation that we’re currently in a bubble. Poor monetary policies and misallocation of capital in grossly overvalued assets are becoming a snowballing cycle where company valuations have gone through the roof (*cough* Tesla *cough*) and even knowledgeable institutional investors have no choice but to chase high fliers to ‘outperform’ the market.
There will likely be an inevitable pop. It’s impossible to say when and what will trigger it. So what can the average investor do to ride out this wildly adventurous phase without having their net worth wiped out? Jeremy Grantham has some pointers.
A visual representation of tech companies taking over the stock market
In 1980, seven of the 10 biggest stocks in the S&P 500 were energy corporations. Just one was a technology firm (IBM). The energy sector made up nearly 30% of the S&P 500 in the early 1980s. It’s now down to roughly 2.5% of the index.
Technology has taken energy’s place at the top of the heap as the largest sector, with a 24% weight. And that weighting is likely understated. For instance, the six biggest companies in the S&P 500 are all what most people would consider tech stocks or at least tech-adjacent companies—Apple, Microsoft, Amazon, Google, Tesla, and Facebook.
Collectively, these six stocks are worth around $8 trillion.
🔗 How Technology Ate the Stock Market
What do we do about Bitcoin?
Say what you will about it, but you can’t ignore Bitcoin. We’ve discussed it at length in previous issues of Forward, and with good reason, considering this is what Elon Musk’s Twitter bio looks like as we write this:
It’s still anyone’s guess what part Bitcoin will play in the future of money (and the world), but for now the best thing savvy investors can do is pay attention to worldwide signals, and listen to what some of the world’s best minds have to say about it before coming to their own conclusions.
Here are Ray Dalio’s thoughts on the cryptocurrency, including an in-depth research report on Bitcoin’s viability as a stable store of wealth as compared to gold.
Professional tennis is an entirely different game from the amateur variety: pros win points; amateurs lose points.
This means that if you’re playing against an amateur, your best option is to focus on not making any mistakes. In amateur tennis, matches aren’t won—they’re lost.
Stuff we loved this week
China is a global superpower today, but 40 years ago, it was just a large blip on the map. How did an impoverished and backward Communist country become an engine of global capitalism? What actually happened 40 years ago to set China on the road to prosperity? This ENDEVR documentary (56 min) has a few answers.
Will we transition to become members of a virtual digital universe where everyone has agency, social presence, and access to a shared virtual economy — a metaverse? And will crypto be the underestimated fabric that binds it all together?
Recommended read: The Intel Trinity
A shared biography of Robert Noyce, Gordon Moore, and Andy Grove — three men who took a big chance, and ended up building one of the most successful and important companies of the computer age.
Food for thought
In the second issue of Forward, we shared Venkatesh Rao’s excellent piece decoding Organization Hierarchy in the backdrop of the hit comedy The Office. Here’s a spiritual successor to that piece by Alex Danco. 👇
🔗 The Michael Scott Theory of Social Class
The higher you ascend the ladder of the Educated Gentry class, the more you become Michael Scott.
People spend a lot of time wondering if and when they’ll have the means to retire. The real question might be, do they want to?
Reading Forward can be an exercise in understanding the true nature of money, and perhaps experiencing despair as a result. But our true goal is to make sense of what is true. And when things get complicated, sometimes the best thing to do is to reflect upon simple truths. We’ll leave you with these personal finance philosophies by Morgan Housel.
That’s it from us this week. If you loved reading Forward, please share it with others who might enjoy it and help us spread good financial knowledge. In case you aren’t subscribed to us yet, just drop your mail below and we’ll handle the rest.
Until next time,
Your friends at NEO
Excellent post! Single article summarising all the main events happening recently.