 This should be fun, and you'll probably you know one of the one of the things you'll find is you know that I'll be one of the few people out there in the universe Who's actually that are gonna defend the short squeezes the hedge funds the the guy is shorting these stocks and And analyzing it so large you can from that perspective Okay, so what's going on a Couple of things first Well, yeah first there is There is a star called a GameStop GameStop is a company brick and mortar company it has stores Where they sell games, you know if you might have been in one you might see them at strip malls That I think they're all over the country Like most brick and mortar companies. They're not doing well. This stock was was pretty cheap They You know COVID has not been a help they being really struggling. So that's item number one Item number two over the last few years We have seen the development of Retail stock buying platforms Robin Hood comes to mind that make it super cheap to buy and sell stocks to trade in the marketplace super cheap and and really easy You know interfaces user interfaces that are simple to use ed easy to use and these have become the favorites of You know 20 25 year olds 30 year olds 40 year olds to trade add to that the fact that a lot of people have been at home and and at a work and maybe have some stimulus cash in the bank account and Not very busy and Day trading seems like a cool thing to do, you know buying selling stocks So that's item number two item number three reddit Which is a very popular? What is it chat social media type platform where people chat and discuss different issues? Well reddit has a number of platform number of groups that engage in in discussions about Trading and Often, you know, there's a discussion and people get excited and they all go into a stock together and And the stock price goes up because they're all trading into the stock all at once And then maybe they get out and and over time. I think that many people on the reddit platform have come to the conclusion that they're You know kind of geniuses and they're they're really smart at this and they're really good at this as day traders tend to Convince themselves and they have a communication platform with thousands maybe tens of thousands of other people who are Other people who are You know like them day traders and on reddit and are ready to pounce and ready to move quickly and can move large Amounts of money for pretty small amounts of money, but large numbers of people pretty quickly and therefore impact stock prices Really really quickly. So you add those components the ability to trade quickly cheaply the chat groups where people follow each other that people get people each other excited Very very quickly. So madness of crowds kind of impacts where everything is wild up and people move in groups in You know mobs into the stock market driving prices up and then a lot of stocks that nobody's paid attention to a long time Like GameStop that are pretty cheap and That are that are pushed down and maybe there's a corporate event I think in GameStop there was a replacement of CEO and the stock stacks moving up because some people think a little bit more optimistic about the stock and Then that is makes it noticed by the reddit community and the reddit community Starts buying and the buying drives the stock price up So then the buyer say whoa look how much money I made on this Maybe we should buy some more and they buy more and then they buy more and then they buy more and it goes up And up and up and they get more people excited. Hey, you're missing out If you don't invest now you missed out on a great deal and then they use options options are Options is where you buy an instrument that you make money if the underlying asset the stock in this case goes up a lot You make even more than what the stock grows But if it goes down if it stays the same you lose everything you you'll the value of what you bought goes to zero so and buying options Can drive stock prices up by the fact that in many cases in some cases The person who sold you the option Buys the stock in order to protect himself just in case the stock goes through the roof, but him buying it Drives the price up So what has happened to game stock game stock over the last? I Mean today today's Wednesday. Yeah today game stock shares went up a hundred and fifty-seven percent And what did it take for game stop shares to go up a hundred and fifty-seven percent is For a lawn mosque before the open open market open today. He tweeted game stonk stonk is used as investment banter on You know on reddit and He just put the name it And it went out a hundred fifty-seven percent no other news available In addition You know before today Game stock was out how much was it? Let me see if I can get the exact number. Yeah 3700 percent over the last six months most of that happening over the last couple of weeks 3700 percent The stock is worth. I don't know the company is now worth 30 billion dollars for a brick and mortar brick and mortar Game store complete nonsensical completely makes no sense complete ridiculous now Part of what drives the stock up is let's go through. I don't know how many of you know what short-selling is But so as game stock went up it got to a point where some investors for example Hedge funds so sophisticated investors investors that are in the markets that have a lot of money in the markets that Analyze markets pretty carefully as the stock went up These hedge funds came in and said, you know the stock doesn't make sense that it's this expensive We're going to short the stock now. What does the short mean a short mean the star selling a stock you don't own So how do you sell a stock you don't know? Well, what you what you do typically is you borrow the stock from somebody who owns it You borrow the stock. Let's say the stock is selling at $50 a share and you think it's gonna go down so you borrow the stock at $50 and You sell it so you get $50 in your bank account Now the stock goes down. Let's say it goes down to 25 So at 25 right you now You know you now buy the stock at 25 and You return the stock to the person you borrowed it from right because you still owe the stock How much money have you made? You made $25 You made 50% on your so-called investment, right? Remember you borrow the stock you sell it Then you buy the stock when it goes down and you return the stock to the person who you borrowed it from and you made money if the stock goes down What happens if the stock goes up? Well, let's say again. You borrowed the stock stock selling at 50. Let's say the stock goes up to 100 Let's say the stock goes up to 100 and the guy says I want my stock back oh Then you have to buy the stock for $100 and give it to him and you lose 50 Let's say the stock goes to 200 or the stock goes to 300 or the stock goes to 3000 3000 now You got $50 in your pocket and you owe the guy a stock that is worth $3,000 now imagine you did it with more than one stock so part of what happens that Causes the frenzy on the upside is Called the short squeeze at some point the guy who Let's say I'm the guy. I borrowed the stock. I'm sitting there The stock keeps going up and up and up and I think oh my god It's my ability to lose money here is infinite. It can keep going up and I'm just losing money the more it goes up So what I do is I buy I Cover my shorts and that's called a short squeeze when the stock market is stock has gone up so high that I can't afford To wait I have to buy the stock and return the stock to the guy about it from and get out of there a Short seller has unlimited Downside risk he can lose in theory not in reality, but in theory an infinite amount of money How much can he make? The best he can do is double his money. So it's very asymmetrical risk You can double your money if the stock goes to zero but You can lose an infinite amount an infinite amount So the short squeeze is when those shorts get out Now when a stock goes up three thousand seven hundred percent and it's not just one stock You know to stock up blackberry you remember blackberry the phone the email thing it's it's a Awful company. I mean it used to be great, but it's can't compete. It can't be with Apple can't compete with Samsung It's been skyrocketing. So a bunch of these stocks of skyrocketing. There are Companies out there that hedge funds out there that specialize in shorting these stocks Right in shorting these stocks now. It's shorting a good thing on bad thing Or shorting is if so, okay, we'll get to shorting bad thing good thing in a minute, right? Because that's a whole other discussion about stock prices So as the price is going up the shorts are getting squeezed they have to get out They lost a huge amount of money and at least in one case Melvin capital Melvin capital was almost wiped out almost wiped out a lot of these hedge funds use leverage and It's it can it's very very very dicey for them So in the case of Melvin, which was almost wiped out, but you see the underlying trade is a good trade Melvin is right to short these stocks in the long run Melvin will make money and the people running Melvin are smart guys Who in the long run make them market more efficient? I'll get to that in a minute and what they do is absolutely? true and right and correct and Yet they're being driven out of business now You know that these guys are basically good guys and they know how to make money and their business is good and the decisions are good How do you know this? Well, you know it by the fact You know that by the fact that Melvin capital is being bailed out not by the government God forbid And if the government were bailing them out, I'd say who knows if Melvin is good or not from a business perspective No, Melvin has just been bailed out bailed out bail out is the wrong term They've just got a two and a half billion dollar investment. I think Jonathan is here Jonathan also runs a hedge fund wouldn't you like a two and a half billion dollar investment from Citadel and 0.72 two of The best hedge funds in hedge fund history Citadel and point 72 who manage I think hundreds of billions of dollars and who just gave 2.5 billion dollars to Melvin why? To make money They didn't give it out of charity. They didn't give it as a bail out. They gave it as an investment They figured Melvin was down Somebody says it's 2.75. Maybe I wrote it down wrong Melvin is down We can make an investment on pretty good terms and believe me They got good terms on this. Otherwise, they wouldn't have done it we're gonna make a fortune when Melvin comes back and That's how you know Melvin. No idiots the short sellers of GameStop are no idiots at all. So Okay, so we've got start going through the roof We've got hedge funds who short the stock Getting squeezed now. I'm gonna tell you a personal story Because this happened to me This happened to me I mean, I think the guys that read it think they invented this that this is the first time it's happened There's nothing wrong with overshorting um, I mean they didn't over short they they You know, they they shorted stock. They didn't have but In normal times, there's nothing wrong with that and it's not pump and dump The pump and dump is is what the Reddit guys are doing. So here's my story, right? This happened a long time ago 1999 happened in April 1999 in April 1999 This is in the midst of the dot-com bubble and I know some of you weren't born Um back in 99. So so this is ancient history for you But there was a a dot-com bubble an incident bubble and you know, there was a week in in April of 1999 where any bank I invest in banks boring brick and mortar banks like like game stop right boring stuff And there was a week in um in april of 1999 Where every bank that announced that maybe one day it would have a website Maybe one day it would do into their banking The stock doubled the tripled for a day Maybe two And then went back to normal, right? So everybody rushed in stock went through the roof and then went back down Yeah, by the way, this happened during, um During black lives matter Black-owned businesses The traded in a stock market like black-owned banks Went way up And then came back down to the fundamentals to what? But they went way up because everybody was excited about Investing in black-owned businesses drove the stock up Divorced them fundamentals. They came back down to their normal level. Anyway, these banks All doubled and tripled within a day two days Not 3,700 percent Just 200 300 percent And I During that period had a short On a bank called net bank. You can you can look it up. Now, I don't remember the exact numbers But this is approximately this is part of Managing somebody else's money and I had a short on net bank Why did I have a short on net bank because it was already At the time I put the short on the most expensive bank in the united states And that made no sense. It couldn't make a lot of money. It didn't make a lot of money. It had a pretty simple and Business model with no upside no world upside. So, uh, I think I shorted it at $40 a share, let's say In a matter of two days The stock went from 40 dollars a share to 160 dollars a share Now I just to give you a sense of how much money you can lose in a short Um, I had a $200,000 investment in it. So maybe I should have it less than 40 and At the peak When it got up, I was down a million dollars So in a sense of 200,000 of dollar investment, I would have lost the 200,000 Plus another 800,000. So I was down a million dollars on this stock My investor called me up and said, what are you doing? Um, I said, don't worry The stock's gonna go down There's no question. It'll go down. It's not worth 40. Never mind 160. It's just not worth it And he said look, it's not how you do this Get out So the next day luckily it went out a little bit. I got out We still booked a huge loss hundreds of you know, close to a million bucks Within two years two years the stock went to four Within four years the stock went to zero. It basically went bankrupt. So Even though I was right It was I was in the same position as melvin I couldn't bear the losses And I had to get out and I booked a massive loss, right? That's what's going on with Game stop now what will game stop be within a year two three four Very little Very little Stock can't stay that high You can buy and buy and buy but at some point At some point it's obvious That the stock price Is completely divorced From the fundamentals KL says You're on book. I told you so as if I would say I told you so. Yes, but That's not the point the point is as an investor You can't do that. You can't there's only so many losses you can absorb There's a certain level of losses you can't absorb as a fiduciary Managing other people's money. You can't keep absorbing the losses and in the dot-com era days Stock prices could go up and up and up and up just like right now. You don't know where it ends You don't know how much you don't know when your investor's gonna want his money back You just can't do it And when you withdraw your money when you withdraw the short You're buying stock which helps the bubble and the bubble can keep going At some point All bubbles boost At some point The price comes down Now some people are going to make a lot of money on the way up here The smart ones are going to get out in time A lot of people are not going to be smart. A lot of people are going to be the people who say oh I missed out. Let me get in now And at some point The stock will tumble Stocks prices are not random Stock prices are based On the potential of a company to produce cash flows A stock price is the present value of future cash flows In other words of Future profits in a sense, but it's not accounting profits. It's economic profits So the present value The value today Of all the stream of cash that this company is going to generate in the next 20 years And indeed in an interest rate environment where interest rates are very close to zero Cash that a company generates in 20 years is very valuable today If you believe there's going to be no inflation if you believe interest rates are not going up So stocks should be higher given lower interest rates But they can't be this higher Not for a company that can't produce the cash flows. Where is game stock? Going to produce cash flows 3700 percent Greater than what it was what they were supposedly producing just two months ago three months ago four months ago It doesn't matter if interest rates are zero. It's still true that a company is The company's value is the present value of future cash flows the future cash flows might be priced at zero But even at zero interest rate This risk You have to have some discount rate If there's no risk why is there no risk the company could go bankrupt the company could have less cash flows than you expect I mean, I have heard this story of The laws of finance are gone Growth companies are all the matters stocks can only go up if they grow I've heard that story before And whenever I've heard it whenever people start Telling me that story. That's when I know it's time to sell god. That's when I know it's time to sell Because that is bs Companies has to produce cash flow Cash flow has to be discounted Now it's true amazon apple google you think there's no risk in amazon apple google's stock price Not stock price cash future cash flows. You think they should be discounted at zero As if there was certainty That is ridiculous Now interest rates are low so your inflation premium is very low But at some point At some point Any one of those companies could fail Not fail in the sense of go bankrupt fail in the sense of produce earnings that are disappointing So I don't know exactly what the stock price of amazon Of google and apple should be I suspect lower than what it is today, but I I I don't know I don't know haven't run the numbers I can guarantee that the stock price of game stop and blackberry Are not where they should be Of course text is exponential But from of what levels? Is it always exponential? Is there no ending it? I mean if tech is exponential and you run the numbers google apple and Google apple and was the amazon will basically own the entire world if that were true None of that is true. Yeah You can you can imagine you know That You know invest stock prices can only go up And you will suffer the consequences And you will suffer the consequences. I mean I heard exactly the same thing In 1999 now it is true That if you and by the way in march of 2000 uh technology stocks went down and over the next few months The nasdaq went down over 50 percent over 50 percent It took almost the I think it took a decade or more than a decade to get back To get back to where they were Our tech stocks right now in that position where they could drop 50 percent Certainly tesla is Certainly many other stocks by the way many of those tech stocks in 1999 went to zero Some of them went down 80 percent so Stocks have to reflect the fundamentals Stocks have to reflect The underlying companies long-term profitability Stocks have to represent the whiskiness associated With that long-term profitability I don't know what is better than tech stocks. It depends on It depends on What? It depends on the on uh on the valuation Yeah, the hyper growth profits, but if it's all priced If that's already in the price then It could still go down a lot You could easily over price tech stocks You don't know what the return of investment is going to be in the future on a stock Even if you know what the return of investment is going to be in the future in the company So every time Markets have detached fundamentals From stock prices We call that bubbles They end badly people lose a lot of money a lot of money and uh I suspect somebody some people are making money right now Somebody's gonna lose a lot of money on game stock blackberry and these other stocks that the reddit people are driving up Fundamentals are not dead fundamentals will come back Fundaments might be dead for a month. They might be dead for a year. They might be dead for two years three years But they will come back and they will come back with a vengeance And when they do Some of you Will be holding the bag We'll be holding the bag and I again, I'm not giving stock advice I'm not telling you what stocks I don't know if amazon google and apple are overpriced or not When I say fundamentals, do you mean reality in a sense? Yes, but but a particular aspect of reality the reality of The reality of the profitability of the company the reality of the ability to make money I I love The reality of the ability to make money That's a reflection of the stock price And when people start making arguments that apple goes up because you love your iphone It's time to sell apple I'm not saying it'll go down tomorrow but This is exactly the kind of Thinking detached from reality thinking detached from Economic fundamentals thinking detached from financial fundamentals That It's when people say that like, you know, tesla is really really expensive and and John guldt of all people tells me have you ever been in a tesla? By the way, the two are unrelated completely unrelated You can produce the best product in the world and your stock price could be higher than what it should be Everybody could love your product And your stock price could be higher than what should be and I heard exactly the same thing about pets.com In 1999 where's pets.com right now? It's zero And it went to zero very quickly And a bunch of other things that were before the time now. I'm a huge fan of technology I'm a huge fan of technology stocks and long term I think technology is going to be great and when these stocks go down in the next Call it correction. I'll probably be buying Would I buy tech stocks right now? I don't think so. Now, I'll be doing some research To try to put a number on these but right now No, I would not buy tech stocks certainly not tesla and You know, I'm sure there There are tech stocks that might be undervalued that it might be good deals I don't buy arc investing or any kind of investing, you know investing principles Like economic principles, they don't change with the mood It is true that technology Has some exponential growth and technology grows that are faster and more dramatic good technology technology The wins and then which is very hard to determine who's going to be the winner that technology does have unique growth opportunities But that and stock prices have to be correlated And and and right now they're not correlated I will look at arc invest because i'm interested in In people who invest in innovation and uh Oops, I don't know why that's doing that. It's called Recommends a company called arc invest I'll look at I'll look at it. But as I said Um, it'll be interesting to see what their research looks like. It'll be interesting to see what's uh, you know I'm all for exponential growth. That's great um All right, let me uh, so let me just I just want to say something about why this is troubling scary Other than you know, it's scary because I've been in the middle of it and lost money I mean, I give you the example net bank Net bank was the future and it was the future. I mean that future banking is the internet But was net bank the one that's going to take advantage of it No, and I could see it in 99 And everybody I'm sure all the arc investors of that time Were rushing into it and ultimately drove it up to I don't know 200 bucks a share And four years later it went bankrupt. That's what I'm talking about Stock price and the underlying technology grew exponentially the underlying technology of internet banking dominates the world today But it wasn't net bank that benefited from that and it certainly wasn't the shareholders of net bank that benefited from it Why is the phenomena of reddit rushing into stocks and driving them up so negative? Well, one is Having stock prices that actually reflect reality that reflect fundamentals That reflect the true nature the true nature the objective nature of the company the objective price value of the company Is crucial for the functioning of markets Markets are used Prices are used to allocate capital Prices are signals That As to where to allocate capital A start going up in normal circumstances Is a signal that that is a growing thriving interesting Opportunity to invest And allocators of capital whether it's banks whether it's investors with its All kinds of investors start looking at that area So I'll give you an example in the beginning of it all in the mobile industry Automobile stocks went way up and all the people who invested in buggies Remember buggies hoson buggies Looked around and said whoa, what's going on here? Oh, it's a competitor to buggies And they started selling buggies and putting money into automobiles and that was good It's a good signal And it's good To destroy if you will the capital that's in buggies or we allocate the capital in buggies to something productive because Buggies are dying industry So stock price is going up and down based on fundamentals based on what's actually going on in the world Is crucial to the functioning of markets Crucial to the fund to the allocation of capital and therefore crucial to capitalism or to even semi capitalist markets If capital starts being allocated Based on prices that are not connected to reality It is an economic disaster So let's say now in this case, I think markets know but let's say markets think oh my god game stop Whoa, that probably means that brick and mortar Stores have increased in value dramatically and that's the future And everybody rushes in to invest in brick and mortar stores as they collapse that would be a disaster for markets and to the extent that stock prices Are just giving confusing mint messages that people now don't know is this a reddit stock? Is this a meme stock or is this something else? It creates confusion in capital allocation And creates less efficient markets Less wealth creation Real wealth creation And long-term economic harm So this reddit stuff is not harmless It is harmful And to the extent that it extends to other stocks or the industries or the players It can really cause havoc And People are celebrating this so so here's a here's a One guy on twitter writes and he's got 4.8 thousand likes right? He writes they took our stimulus We took their hedge funds So this is and he's got a In the background he's got a building burning, you know like a riot where building is burning So we're burning down their house But whose house are they burning down? They're burning down the house of hedge funds Hedge funds who short stocks But hedge funds that short stocks are essential crucial To helping make prices efficient To helping make prices reflective Of real true value So that the allocation of capital in the economy Can happen effectively If you are going To destroy hedge funds You're destroying markets You're destroying the allocation of capital And you're destroying the economy in which we live you live So it's not neutral It's not a game Indeed, it's not a casino if it was a casino who cares A casino that house loses you win it doesn't really matter Here it is immensely important Prices are in A crucial indication Crucial indication of Where to invest capital They determine which industry is growing which industry shrink Which company is growing which company shrink which managers Have you know are successful in which managers are not And it's a long term. It's not short term And these nihilists Who are not only Playing edouillette And watching hedge funds burn They're enjoying this. They think it's a game. They think this is wonderful But it's the hedge funds that are shorting these stocks that are the heroes They're the ones holding on to reality They're the ones who have grasped reality holding on to reality And trying to live by reality Whereas in a sense These people are just Rejecting reality denying reality placing their wishes their whims above you This is Somebody writes here nihilism arriving in the stock market. Absolutely Now again, this happens. It's not only driven by nihilism. It's just driven by Madness of crowds. It happened with a tulip bubble. It's happened with other It's happened with other bubbles. It happened at the dot-com. It happened with bank stocks during the dot-com The story I told you before Sure hundred and forty percent. They didn't it wasn't a hundred and forty percent You know, that's their problem It's nothing wrong with naked shorts You just have to buy more stock in order to cover them And if the price of the stock is so ridiculously high Why not short as much as you can? That's completely connected to reality because it's completely connected to the actual value Underlying this now if you're interested in my arguments for the stock market, I've got a book that I wrote called Mall defensive capitalism Which you can buy on amazon you can get it on kindle mall defensive capitalism, which actually goes Through why financial markets are moral why they're good why they're right why they work Why and why short selling is a good thing Short selling was turned into 60% of float After the stock price has already gone up quite a bit not After the latest bump up but after a significant increase a significant increase that had driven the company up Way above anything that was reasonable in terms of what the fundamentals indicated And again, I don't have a problem with shorting more than the float right The people who crashed the plane are the people who playing this as if it's a well-lit wheel It's not the model defensive capitalism. It's the model defensive finance and it came out Three years ago and it's co-authored with don watkins So it's don watkins and myself The model case for finance and you can find it on amazon just put my name on amazon and you will find it There's a hatred of hedge funds. Why because people don't understand what they do They don't understand the importance of a stock market. They don't understand the importance of stock prices. They don't understand the objective Value of marketplaces And they resent wealth. They've always resented wealth derived from finance always going back To jesus kidding out kicking out the the money changes from the temple Money derived from money has always been resented resented and again, I go into great depths in analyzing the hatred of financiers In the model case of finance Let me just look I thought maybe I had a copy back here of the book, but I can't I can't see it Yes, and I connected to anti-semitism in the book, but the model case of finance on amazon Indefensive finance on amazon. I've given a course on it. I you know, you'll find it You'll find it You'll find it in the bookstore All right, that's my commentary on reddit You know if you own these stocks sell Here's my investment advice if you own blackberry or game stop Sell you might miss out On on the next layer up, but you will also miss out on the big Big move down which is coming and it'll happen quick and it'll happen fast And it whipsaw these people they won't know what hit them They won't know what hit them when it happens and it's going to happen. I mean remember these are not technology companies These are these have become water companies All right What we need today what I called a new intellectual would be any man or woman who is willing to think Meaning any man or woman who knows that man's life must be guided by reason By the intellect not by feelings wishes wins or mystic revelations Any man or woman who values his life And who does not want to give in to today's cult of despair cynicism and impotence and does not intend to give up the world To the dark ages and to the role of the collectivist roads All right before we go on reminder Please like the show. We've got 163 live listeners right now 30 likes That should be at least a hundred. I figure at least a hundred of you actually like the show Maybe they're like 60 of the matthews out there who hate it But but at least the people who like it, you know, I want to see I want to see a thumbs up There you go start liking it. 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