Don’t Sell Yourself Short

By: Andrew J. Willms

President and CEO of The Milwaukee Company

The Reddit-driven GameStop short squeeze appears to be coming to a close, with shares of GameStop falling by more than 80% at this week. Other favorites of the online investment crowd suffered similar fates, with the prices of AMC Entertainment, Koss Corp, Express Inc. and silver plummeting as well.

Some members of the Wall Street establishment are boasting that their predictions of death and destruction of the social media investors have been fulfilled. But in my view, this is no time to say “I told you so.” To the contrary, I would not be surprised if social media platforms such as Reddit and Twitter continue to have a major influence on single small-cap stocks, which is all the more reason to avoid them in favor of low-cost, broad-market index funds.

I came to realize how widespread the Reddit investment movement had become when I learned my son Michael, a college sophomore, had opened a Robinhood account with a couple hundred bucks so he could get in the action. He ended up making about 400% on his small investment, as he was smart (or should I say lucky?) enough to get out before the bottom fell out.

Michael was far from the only novice investor who made some fast money these past weeks. There are numerous stories circulating online about social media investors who used their profits to pay off credit cards, close out student loans, settle medical bills and, for a fortunate few, buy a first home. Hopefully the winners realize that their short-term stock gains will be taxed as ordinary income, and have set aside enough of their profits to cover their upcoming tax bill.

While some have characterized the sudden surge in retail investing as a resurgence of the Occupy Wall Street movement, it wasn’t just the Redditors who made a killing during the recent market frenzy. Rather, the large and long-term shareholders and Wall Street institutions (that many of the Redditors hoped to stick it to) have been the biggest winners. Examples include:

  • Senvest Management, LLC, a hedge fund, made a profit of nearly $700 million on its investment in GameStop.

  • BlackRock, the world's largest asset manager, was positioned to make gains of about $2.4 billion on its investment in GameStop.

  • Executives, directors and members of the Koss family sold more than $44 million in stock of headphone maker Koss Corp. over the past week. That’s 60% more than the estimated $26 million the entire Company was worth at the start of the year.

Of course, the stock market is a zero-sum game which means there is a dollar lost for every dollar made. Melvin Capital, the $12.5 billion hedge fund founded by Gabriel Plotkin, was one of the biggest losers. It is estimated that the firm lost close to $3 billion on its bet against the GameStop stock.

Here are five important lessons I am hoping Michael learned from his recent investment experience

  • Price is what you pay; value is what you get.

  • Don’t confuse investing with speculation.

  • If you want to speculate, do so only with money you are prepared to lose.

  • No one ever went broke taking a profit.

  • Wall Street is not a playground, so don’t try to play the market.

Thank you for reading.


This Week’s Market Commentator’s Podcast.

If you haven’t had enough of the whole social-media -driven-market-madness saga, my oldest son Jake (a quantitative analyst with The Milwaukee Company) and I share our thoughts about what’s transpired and the long-term ramifications of the retail trade explosion, during this week’s Market Commentator podcast, which you can find HERE.

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