Professional and retail investors have squared off over this continuing rebellion in the stock market, divided on whether to salute it as a blow against Wall Street billionaires or condemn it as dangerous speculation.
“It’s a great thing,” said Howard Lubert, founder of the Keiretsu Forum Mid-Atlantic chapter. A serial entrepreneur, accredited investor, and due-diligence specialist, Lubert saw the Keiretsu Forum as a way of promoting an innovation and entrepreneurial ecosystem in the Philadelphia region.
“What’s happening in the GameStop situation is long overdue. What we’re seeing now is the ability for average Joe investors to gang up with thousands of people they don’t know except for being on the same platform,” Lubert said. “They can invest [and] take a position, moving the needle on stocks that hedge-fund geniuses were absolutely sure would go way down.”
“They’ve become a force for themselves, and they don’t have to be second class to hedge funds. These folks will be ongoing, not just because of the pandemic,” he said.
Lubert doesn’t invest in public stocks, sticking instead to pre-IPO angel investments, often in companies that have yet to make money.
That said, “the American people were always second- or third-class citizens in the market. These platforms helped them figure out how to be a voice and a power. That’s a great thing. These hedge funds, instead of hedging bets, will have to make more informed decisions.”
Other Philadelphia-based investors aren’t so pleased.
Jason Pride, chief investment officer or private wealth at Glenmede trust company in Philadelphia, noted that some hedge funds have sustained major losses.
“When its price started to rise, hedge funds with bets against the stock were forced to become buyers to close out their positions,” he said.
Moreover, “this type of trading is not something our investors should participate in, as it’s far too volatile,” Pride said.
BlackBerry’s shares traded at higher volumes last week than when people were actually still using its phones. But as John Maynard Keynes once said, “Markets can remain irrational longer than you can remain solvent” — a fact some hedge funds were sorely reminded of last week, Pride said.
“This underlines the importance of conducting due diligence and sufficiently understanding the risks prior to making investments,” Pride said.
On Monday, GameStop ceased its frenetic run higher; the share price for the video game retailer dropped 31% to $225 a share. Another Reddit day-trader target, AMC Entertainment Holdings, closed up slightly at $13.30 a share, while BlackBerry closed at $14.63, up just over 3%.
Wall Street players have been beating up one another for decades — one example was the war over Herbalife between hedge-fund titans Carl Icahn and an investor who set out to short it, Pershing’s Bill Ackman.
“What is different about this episode is that it was led by retail traders utilizing chat boards,” said Richard Daskin, who runs his own hedge fund out of New York City.
Last week, brokerage firms began raising the margin requirement for stock and options transactions, which meant hiking the amount of money required in one’s account to make speculative trades.
“That’s the most direct way. Higher requirements are logical as volatility is now higher,” said Wallingford-based Phil Gocke, who with his partner William Wu runs Opus Investments, a registered investment advisory firm.
He’s worried by the day-trading trend, noting that it’s bleeding over into other parts of the stock and commodities markets.
“It becomes worrisome when unrelated positions are liquidating,” he said. “We believe regulators should take action to keep market conditions from becoming disorderly and panic genuine investors.”
It’s unclear why Reddit traders seized on the silver market, but they pushed the price up significantly on Monday.
Precious metals typically jump in response to social unrest, financial downturns, and geopolitical strife.
Still, Glenmede’s Pride said it will be much harder for Reddit online speculators to manipulate that price.
“The market for silver is a lot larger than GameStop,” he said. “It’s way more liquid and will be harder to push around.”
Silver futures on Monday jumped nearly 10% to close at $29.42 a troy ounce, on track for one of its biggest one-day advances of the last decade.