WallStreetBets is Mr. Market
The last week or so has been major in investing news. Just yesterday, even Jim Cramer on CNBC’s Mad Money was talking about it. Many institutional investors and hedge funds are complaining, but the community on Reddit known as r/wallstreetbets (WSB)is laughing and continuing to buy. Just what is happening, and why is it important to becoming cancel-proof?
The stock of the video game retailer GameStop is undergoing a short-squeeze (ticker symbol GME). Short-selling is when a stock is traded at a higher price in the hopes that the price will decline decently to be repurchased at a lower price. Investing firms and hedge funds often borrow stock to short and split the profits with the stock owner. The difference is that, since they are borrowed stocks, the short seller is obliged to return them to owner at some point. This means that, if the stock goes up in price, they have to buy each share back for more money.
WSB merely found some companies (mainly GME) and noticed that a lot of their shares were being sold short. Ergo, they knew the major, institutional investors would be obliged to buy them back, so WSB began buying a bunch of shares, in order to drive the price up. If they can drive the price up enough, the major firms will have to buy back a tremendous loss, with some estimating into the billions of dollars. For the anti-Wall St millennials of Reddit, this is an easy profit and feels like sweet justice.
Now, I’m not here to tell you that this is the kind of thing you should do. I intend to share my insights on the opposite kind of investing, one that focuses on buying shares at a low price and holding them for their dividend earnings. Having said that, WSB’s impact on prices means that there is potential for someone investing in good companies to be presented with opportunities, which I will now discuss.
Value investors have this character in their vernacular called Mr. Market. Imagine that the stock market is a living being who is a manic depressive. That is Mr. Market. He will come to you every day with different quotes for a stock. Sometimes he will be too optimistic about a company and buy from you high, and on other days he will think the end of the world is near and sell to you low. It’s your job to know when a price is too high or too low to sell/buy and take advantage of his moody pricing. With the price of GME going from just around $20 a share recently to almost $200 in the last couple of weeks, WSB shows how volatile Mr. Market’s mood swings can be.
Coca-Cola (KO) is Warren Buffett’s most famous dividend winner, so we’ll use that example to make things clearer. It’s been trading around $50 per share. If you buy it at this price, that implies you expect to collect about $50.00 in dividends over time, per share. If it rises to $55 or $60 per share, maybe that’s not a good enough margin of safety to sell. Maybe the price went up because the dividends are likely to increase from your initial calculation. WSB is showing an example where the price can change far more drastically than the fundamentals of the company would. If you bought KO at $50 per share, assuming that’s a fair value, and if WSB made it rise to $100, then you’d have a margin of safety, even if only for that day, of 100%. In essence, Mr. Market is offering to give you the value of your dividends upfront through a sale. We’re talking about the many years of dividends that you would have to wait patiently to collect, being offered instantly. That on its own is very tempting.
Moreover, if you are a value investor, you probably already have other companies on your list to buy, so you could sell your whole position in KO and then reinvest that profit into companies that you think are priced too low. You’re now set to collect significantly more dividends in the same amount of time, thanks to a random offer by Mr. Market that you were quick to take.
WSB is a community to watch for people planning to hold long-term, not because you should buy with them as part of a risky gamble. Rather, they give you a direct insight into the mind of Mr. Market and what overpriced buys he is willing to make from you. It is your job to do your calculations about the earnings you can make from an investment, and if you have done those, then you might find that WSB is willing to give you ten years (or more) of dividends in a day by buying your overvalued stock.
Value investors are focused on buying low and holding. Having said that, if the price is right, even value investors can benefit from selling. I will be watching WSB in the future for these very insights, to see if my shares in other companies that I already own spike. If so, these selling opportunities can bring me and investors like me closer to becoming cancel-proof.