What Can We Learn from the GameStop Short-Selling Drama? - Jentner Wealth Management
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WINTER 2021
THE
Wealth Management Strategies from Jentner Wealth Management
What Can We Learn from the
GameStop Short-Selling Drama?
Hedge funds are alternative broker and then sell the shares. Then
investments using pooled funds to they wait until the stock drops in
employ different strategies to earn price, buy the shares back, return the
active returns, or alpha, for their shares to the broker with interest,
investors. Some of those strategies and keep the profit. Essentially, they
are to sell stock short, use leveraged inverse the winning formula for
and structured investments, and use stock picking: sell high and buy low.
derivatives. There are stories of great
success but also some spectacular Here’s the risk. If the speculators
implosions. The recent controversy cannot buy the shares back at a
INSIDE THIS ISSUE surrounding a retail video-game lower price, they are forced to
store adds several more hedge funds buy the shares for more than they
to the list of those who have lost sold the borrowed shares for. This
billions of dollars. For the long-term is called a short squeeze. Enter a
investor, this situation shows how little-known chat room on a blog
What Can We Learn quickly information gets priced into site called Reddit. Here, millennial
from the GameStop stocks and how the active stock investors grew angry that hedge
picker can be taken by surprise. funds were targeting GameStop and
Short-Selling collaborated to buy the stock in
Drama? . . . . . . . . . . . . . . . 1-2 Around August of 2019, GameStop mass. They used a favorite trading
announced its plan to restructure app among younger investors
its organization. It would close called Robinhood to begin buying
numerous locations and lay off up GameStop stock. This drove
Is This Time 120 employees to regain solvency the price significantly higher and
Different? . . . . . . . . . . . . . . 3 and return to a profitable business squeezed hedge funds out of their
model. Investors cheered, and the positions for losses. It began a
stock rose in price. However, several few months ago, but the squeeze
large hedge-fund managers were crescendo peaked in late January.
New Standards of skeptical of the struggling retailer Some hedge-fund managers lost
Conduct for Certified being able to turn things around, and billions and were forced to turn to
Financial Planners . . . 4 they began to short the stock. This banks and other investment houses
is essentially when stock speculators for loans.
borrow shares of a stock from a continued on page 2
The Jentner Report is published periodically by Jentner Wealth Management.
3677 Embassy Parkway, Akron, Ohio 44333 | 330-668-1000 | 1-866-JENTNER
THE
WINTER 2021
What Can We Learn from the GameStop Short-Selling Drama?
(continued from page 1)
What makes the story notable is appeared brokerage firms were in limits for buying GameStop stock,
the David versus Goliath aspect: cahoots with hedge-fund managers. the price crashed. When they
the little guy seeking to save the In its defense, Robinhood said announced the restriction had
retailer and punish the wealthy it created the limit to protect been lifted, the price exploded
hedge-fund investors. In a stunning investors from taking on significant upwards. While not to these
and surreal moment, hedge- losses in GameStop once the extremes, this happens to all
fund managers went on national frenzy died down and the stock stocks every day. Information about
media outlets and decried these returned to a more normal price. stocks is quickly priced in, often
millennials for manipulating stock It will be up to the SEC to sort at breathtaking speed. This is why
prices without any self-awareness it out; lawsuits have already been most mutual-fund managers, even
of their own manipulation through filed. hedge funds, don’t outperform
shorting. Brokerage firms heard their index. The lesson here is to
the cries and began to limit how In our opinion, the take-away from avoid the drama, hold stocks for
much GameStop stock small the whole ordeal is understanding long-term growth, and stay out of
retail investors could buy. The how fast information gets priced the frothy world of day traders.
Robinhood app set the limit at one into a stock position. Once
share. This infuriated traders. It brokerage firms announced the
What is Short Selling?
Short seller borrows 10 Short seller sells 10 shares
shares of ABC stock. of ABC stock for $500.
1 2
BROKER SHORT MARKET 3
SELLER
Stock
loses
value.
5 4
Short seller returns 10 shares Short seller buys 10 shares
of ABC stock, keeping $100. of ABC stock for $400.
THE
WINTER 2021
Is This Time Different?
Is the current crisis all that different from the other crises of the last century? How should we respond?
With 2020 ending, we wanted story. It shows us that people also see significant breakthroughs
to take time to review an have rallied to better their lives. in medicine and technology. We
unprecedented year. We were In the last century, the world do not have a crystal ball to tell
hopeful going into 2020 with has weathered two World Wars, you who the next Steve Jobs will
significant equity-market gains, the Spanish-flu pandemic, a cold be or what the next hot tech
and the U.S. economic outlook war, the 9-11 terror attacks, and stock is. We will not be able to
was bright. Unemployment had the subsequent war on terror. predict the next crisis. Instead,
hit lows not seen since the great Despite it all, humans have sought what we do is provide our clients
recovery on the heels of WWII. to recover and rebuild. That same with sound investment advice
Wages were up, and consumer tenacity resides in us today. It is using diversification to capture
confidence saw record highs. the human condition. market gains during good times
and provide downside protection
Unfortunately, shortly into 2020, History also demonstrates that for when markets fall. The reason
the COVID-19 pandemic spread free people making financial we have such confidence is
globally. The social and economic decisions create significant wealth. because despite what the media
impact drove investment markets Henry Ford’s decision to take may tell you, this time is not all
lower and brought unprecedented a fledgling idea of gas-powered that different.
governmental action to contain buggies to the masses created
the virus. Due in part to the quick the assembly line and changed
passage of an economic stimulus manufacturing forever. The idea
bill to the tune of several trillion of placing a computer in every
dollars, the markets recovered at home drove International Business
such a rapid pace that many were Machine (IBM) to create the
caught flat footed. In addition to personal computer, and technology
the chaotic economic year, the never looked back. Today, we have
Presidential campaign drove an more computing power in our
already-divided country further cell phones than the engineers at
into the trenches. IBM could have imagined possible.
While these inventions created
Despite the uncertainty, stock significant wealth for some, they
markets continued to hit all-time also destroyed the livelihoods
highs. Growth stocks like Amazon, of others as Kodak and the
Apple, and Google rebounded manufacturers of buggy whips can
quickly from March’s lows to soar attest. It is the ebb and flow of
to record highs. free-market economies.
We are often asked how stocks As we move into the next decade,
could recover so quickly. The the possibilities are boundless.
temptation during a crisis is to Yes, we will see significant market
think, “This time, it’s different.” disruptions, political rancor, and
However, history tells another unexpected events. But we will
Seth Jentner, CFP®
Vice President and COOJentner Wealth Management
3677 Embassy Parkway, Akron, Ohio 44333
330-668-1000 1-866-JENTNER
ADDRESS SERVICE REQUESTED
WINTER 2021
THE
Wealth Management Strategies from Jentner Wealth Management
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