Let the game never stop

Vol #23- January 29th, 2021

Gamestop has transcended meme stock status, and has become zeitgeist.

Just yesterday, my barber, my bartender, and even my mother were asking about short squeezes. Politicians and pundits opined on the meta-story here, and even the strangest bedfellows came together.

It’s an opportunity for market structure geeks to shine, and talk about the nuances of DTCC clearing, hypothecation, and delta hedged call options. When new investors come to the market - hungry to learn - great things happen.

The David vs. Goliath storyline, where “novice” investors squeeze the hedge funds and beat them at their own game is compelling. But more fundamentally, it highlights an incredibly important fact about the markets - they exist because of participants.

Trading is a very simple game, it’s matching buyers and sellers. A market has two sides, and a trade only occurs when they meet. If there is no agreement on price, there is no trade. The more people there are to trade, the more likely there is to be someone else to match your trade. That’s liquidity.

When more participants are playing the game, the market gets better faster. Exploiting the loopholes and inefficiencies of the marketplace is how the market serves its function of resource allocation. If gold is more expensive in New York than Chicago, entrepreneurs will find a way to buy in Chicago and sell in New York, until the prices reflect the risk and cost of carry between the cities.

Arbitrage isn’t always that simple, but in a market that is made up of participants, there will always be evolving opportunities. Buyers and sellers are humans with emotions and both individual and systemic constraints. Prices will move according to those laws. Ultimately the market is organic, and will adapt to these changes and find equilibrium.

If you watched the activity in Gamestop (GME), it’s hard to believe that things are efficient. The price action was a rollercoaster and standard assumptions flew out the window. Broker restrictions and arcane clearing and funding questions engendered conspiracy theories about Wall Street cronies pulling backdoor tricks.

While this defies any standard approach to investing, and throws risk management out the window, investors have made money- lots of it. The vast majority of investors come to the marketplace with a glimmer in their eye, looking for opportunities to stake a claim based on their wit and gumption. Many Gamestop investors earned life changing money thanks to this ephemeral point in time. Kudos!

While I don’t think you’ll ever see the gamma squeeze written about like the 60/40 portfolio, there’s nothing wrong with speculation. Play money keeps you interested.

Even the grandfather of value investing Benjamin Graham saw importance in keeping a “mad money” account where speculation could be indulged. It’s important to keep this both small and segregated, but it plays an important psychological role.

Staying engaged, making a little money here, and losing a little there, is tuition that will pay off in the long run. Seeing the ups and downs of the market, and breathing in losses and gains lets investors become more confident about long term allocations.

It’s hard to be passionate about diversified low fee investments or risk management techniques if you haven’t tasted a little bit of risk. It’s in all of our best interest, that this game never stops.