COLLATERAL DAMAGE AS RETAIL INVESTORS WEIGH IN

In January, retail investors who post on a Reddit thread called wallstreetbets, which now has 3 million subscribers, decided to buy GME (GameStop), a small US gaming retailer whose profits have been in decline. This stock was chosen because it was a popular short for hedge funds and was illiquid. The aim was to cause a short squeeze which, due to the illiquidity, would drive the price high. After retail investors passed around the cheat code amongst themselves, the play went viral. On 12 January, GME traded at US$20 a share, by 27 January it reached a peak of $483, exceeding even the wildest of expectations. In what gamers would describe as an OG move, retail investors have taken on hedge funds and won (for now). Hedge funds lost money, including one reportedly losing 50% in January, because they bet the company’s shares would drop and the struggling video game store would fail (a short sell).

Unfortunately, it has caused significant collateral damage. I was reading this forum watching events in real time. Hundreds of posters were ecstatic about the fortunes they had made; money to pay for their children’s education or an operation their dog needed. However, those late to the party (enabling the first group to get out) will be left holding shares in a company trading at 10-15x fair value. The stock has started to fall again, and in early February was around US$60.

As a professional investor watching on, it’s sad to watch the train wreck. I personally believe the stock should have been halted because this is market manipulation. But in the world’s biggest free market, it looks like anything goes. Covid-19 has accelerated the adoption of at-home-trading by retail investors with small amounts to invest and, while $10k is not going to move a market, when 3m of them are combined it’s an army that’s a force to be reckoned with. They trade through low-cost-entry share platforms like Robinhood and, closer to home, Sharesies and Hatch. In their minds, it’s just vigilante justice, Main Street versus Wall Street, and doing their part to rebalance the wealth inequality. While I sympathise with the rhetoric, the outcome is that a few people make money and most are left holding the baby. Even though Main Street has won this battle, we don’t yet know the true cost for the millions of retail investors caught up in this game, as the price of GME is still falling (at the time of writing). Whatever happens, the GME saga is far from over and the US Securities and Exchange Commission (designed to protect investors) is likely to have a hand in how this plays out.

Some golden rules

If you’re a retail investor, don’t risk more than you can afford to lose. If your chosen investment is highly volatile, do not use margin lending. Recognise that sometimes making money is more luck than skill. Making mistakes is normal – you can’t get everything right and you will learn far more from your losers than your winners. Know that at times, the share market can resemble a casino and, if you are a trader, the odds are stacked against you. So start small. Stick to companies that you know and understand, even if they are boring. Remember to follow logic not emotion. Tesla makes awesome cars, no doubt about it, and Elon Musk is a genius, however, if Tesla is worth more than all of the other major car companies combined and they only sell 500,000 cars a year against global sales of 60m, alarm bells should be ringing. That defies all logic. Finally, remember to stay humble. When you get cocky, that’s when you fall off your bike.

When overvaluation strikes

Bull markets don’t die of old age and overvaluation is also not a reason for a price collapse (look at the NZ housing market for example). In the tech bubble of the late 90s, anything with .com in the name was popular. We witnessed the price of technology companies bid higher and higher with valuations being ignored because it was the new exciting technology that was going to revolutionise the world so price was irrelevant. Sound familiar? All bubbles start out with some fundamental basis, but the market can easily detach itself from reality. There are history books with chapter and verse on this stuff.

January a mixed bag

The month was a mixed bag for Pie’s funds, with a couple of the funds giving up gains in the last three days of January. Standouts for the month were the UK & Europe Fund up 1.4% and Australasian Growth 2 Fund up 3.9%. 12-month returns for these funds, and this before the Covid sell off, are 27.7% and 49.7% respectively.

Term deposits under 1%

We are continuing to experience strong demand for our funds, with term deposit rates now firmly under 1% being cited as the main reason investors are looking elsewhere. A lot of people are telling us that earning 0.5% on a term deposit, it might as well be zero, so they’ve decided they have no choice but to take on a bit more risk to achieve a return.

I also know that some clients have been waiting for a market pullback to enter equities. However, when that market pullback happens it always looks scary. If you are on the sidelines and looking to invest, give one of the team a call and we can discuss averaging in. Remember, bull markets have corrections, it’s healthy and normal. So, while there is plenty of talk of bubbles, I do not believe we are on the edge of the precipice yet. Liquidity is not being tightened, rates are low, and governments are spending.

As always, thank you for your support. If you have any questions please don’t hesitate to call me on (09) 486 1701, or email me, mike@piefunds.co.nz.

Mike Taylor, Founder and CEO

Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.