Short-Selling & Lesson for GME Investors

As a Co-Founder of FF101 it is a goal of mine and my partner to educate young adults in current and future market trends. We have reviewed SPACs, Stock Splits, Crypto, Real Estate, Moving Averages, and much more. Today we want to discuss the BIG topic of SHORT-SELLING.

Short-selling works this way: An investor, who expects a stock price to fall, borrows shares of that company from another investor for a fee and sells it immediately, hoping that when the price does fall, they can buy the shares back cheaply, return them to the owner and pocket the difference. It’s a risky trade. If the stock rises, the short seller is exposed to losses that are theoretically infinite. (After all, share prices can keep rising, while they can only fall to zero.) For that reason, when a bet goes wrong, short sellers rush to repurchase the shares they borrowed so that they can return them and exit their trades — a process known as covering.

Here you can see the graph of the short squeeze that occurred on VW back in 2008

That’s what is happening with GameStop. As retail investors began to buy up its shares and options — many of them egged on by Wall Street Bets (WSB) and other forums — its stock began to surge, forcing the short-selling hedge funds to buy back the borrowed shares at a higher price, which itself pushed the stock price higher. In Wall Street parlance, this is a “short squeeze” — a strategy sometimes employed by sophisticated investors against one another.

I think this is amazing! Finally the little guys like us are sticking it to the big Hedge Funds such as, Melvin Capital and Citron. Of course this Hedge Funds are furious and are acting to sway the average retail investors to sell their positions. They are using their power to trade post and pre market to drive the price of $GME down and scare off retail investors like us. Even TD, Investment Brokers, and Robinhood have now limited the buying of several stocks including $GME and $AMC, and more then half of all Robinhood users own $GME stock. What kind of turmoil is this creating?

$GME has increased a staggering 1700% since December. Along with Blackberry increasing 280% and AMC increasing 840%. A majority of these gains have been egged on by the Reddit page called Wall Street Bets. Which in a NY Times article was called a “Juvenile, Foul-Mouthed Reddit Page”. I think someone is jealous…

I believe this kind of growth is the combination of a few factors. First is the act of catching Hedge Funds off guard trying to hedge a losing position, followed by social media ganging up on them with their stimulus checks and ample time thanks to COVID, and then topped off by well know entrepreneurs such as Elon Musk and Chamath Palihapitiya tweeting about $GME and other stocks.

So after all that what do I have for my readers? I want to say I am happy for everyone out there sticking to it the big guys and making great profits. Yes it is great to see retail investors finally stab the big guys in the back after so many years of hedge funds using us to make money. BUT lets remember that they are the big guys for a reason. They have a system and in this case it failed due to market inflation, celebrity tweets, stimulus checks, and WSB. So the big guys lost this ONCE but will continue to win throughout the next ten years. While the little guys get this one “bagger” and will most likely squander their returns in the future. As young investors it is easy to make great gains and then lose them all in the next trade or two.

Some drawbacks to this current style of trading I am noticing is STRESS. I see it in my roommates who have been staring at the $GME chart every hour of the day. Their moods are effected by its swings and this is an unhealthy style of trading. Yes a few of them have made 100s if not 1000s of dollars in profit (at the moment they have not made any gains because they haven’t sold yet… not profits till you cash out). One my roommates has even spent 2-3 hours a night doing his DD and that is awesome to see. Yet I stress to them that this not a sustainable style of trading throughout their lives and they need to understand that. Taking profits from this one trade and expecting to pour it into another trade and expect another +500% return in a one week time frame is ridiculous. Another roommate of mine was expecting $GME to close at $500 when it opened at $250. To expect a stock to have such a great movement is absurd. You cannot train your mind to think this way.

Lastly, I also think this a great opportunity to show the world how messed up the “higher level” officials have over the general public. The fact that brokerages and government officials can limit what traders can buy/sell and even place large call options on stocks is unfair and should be banned.

An individual such as Nancy Pelosi who has spent here whole life as a politician should not be worth $115 million. Also a trending tweet that was shot around about how she purchased between $500k-$1M in Tesla calls while being in power to sign orders for climate change and the transfer from gasoline to electric cars should not be allowed. And no one questions it!!! While when the general public attempts to make money off a failing hedge fund short we get halted from trading and our brokerages limit who can buy specific stocks. Munity!!

So my message to my subscribers and readers is to enjoy these profits! Cash out when you can to retain your profits!. But remember we are the little guys and the big guys are bullies who want to take your lunch money every day. Be weary that gains don’t come this quickly and to be successful in the long term it’s important to develop a healthy system that balances gains, losses, time, and mental health. I feel this current market trend has stressed out teammates, roommates, and friends of mine and this kind of trading cannot be sustained through their life.



Categories: Financial Advice

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