5 ms·

It's surprising that markets are still so obviously irrational.

by RivieraKid 6y ago

phoe-krk 6y ago
Markets can stay irrational longer than you can stay solvent -- Keynes.
- RivieraKid 6y ago
  Yeah, I know... But it's annoying to see money getting transfered from people who are good at valuation to people who're clueless.
  - thatswrong0 6y ago
    > people who are good at valuation I wouldn't call people who short 140% of available shares good at anything
    - stephenhuey 6y ago
      Greedy gamblers who assume everyone else is incapable of calling their bluff?
  - _jal 6y ago
    And here I've been told that the market price is the price, because that's the price, and don't get emotional about the market. I guess that only applies when the 'right' people are involved?
    - johnhartigun 6y ago
      See, this is what I mean by clueless. Price and valuation are completely different concepts. An asset that will never generate any cash has a valuation of zero, but its market price could be anything.
      - _jal 6y ago
        See, this is what I mean by how econ 101 reasoning makes people weirdly arrogant and impossible to talk to. Parent is so quick to try to score a point arguing definitions that they entirely missed the point.
        johnhartigun 6y ago
        I'd be happy to discuss substance but your comment brings up no actual points, only ad hominem.
  - phoe-krk 6y ago
    Right now, money isn't getting transferred from people who are good at valuation to people who're clueless. I'd say it's quite the opposite.
    - johnhartigun 6y ago
      Well any reasonable GameStop valuation is at least an order of magnitude below current market price.
      - fileeditview 6y ago
        The value currently is not in GameStop itself but in the need for the short sellers to buy back the shares. So there is value in buying & holding. How much is still open.. The situation is pretty bonkers but I hope in the end that the hedge funds have learned a lesson.
      - phoe-krk 6y ago
        The whole affair isn't, and wasn't, about GameStop's valuation, or even about Gamestop as a company whatsoever. It's about stock market mechanics and the ability to leverage them to make a profit.
  - josephorjoe 6y ago
    not to pile on here, but what is happening is money is getting transferred from one gambler to another
  - tylerjaywood 6y ago
    I press f on the worlds smallest keyboard to pay respect to the billionaires betting they could grind the company out of existence through aggressive shorting who lost money on this.
  - Bakary 6y ago
    The real conclusion would be to realize that the people "good at valuation" are glorified gamblers and not on another plane of existence from the rest. In fact, it's tautological to state that if they got burned, then they are not that good. Or perhaps the entire thing is pareidolic nonsense.
    - RivieraKid 6y ago
      Disagree. The short-sellers are correct about GameStop's valuation. In a liquid and competitive market they would profit and help the price move into the direction of correct valuation.
      - Bakary 6y ago
        Isn't that essentially magical thinking? The market is what it is, and their strategy failed. It doesn't really make sense to blame the market when the scheme fails and presumably celebrate the individual or group's purported brilliance when the scheme works. What actually happens is the ultimate arbiter of who profits and who doesn't, not the hypothetical fairer environment that "should" have existed to reward certain strategies. It's similar to blaming the roulette wheel when the gambler fails and praising the gambler when they succeed.
      - zeusk 6y ago
        Well, the market thought otherwise and market is always right. They just forgot that efficient market hypothesis is just that, a hypothesis. Real world markets behave differently thanks to finite resources and secondary markets (essentially leveraged derivatives caused 2008 crash and I believe they'll cause another before regulators wake up from their sleep).
TheAdamAndChe 6y ago
This is a short squeeze. My understanding is that hedge funds shorted the company massively, covering something like 130% the price of the company. These companies are contractually obligated to buy the stock at whatever price it's at in the future, giving people a good reason to pile into the stock for guaranteed gains. This is causing a frenzy. Someone correct me if I'm wrong, I only learned about it yesterday.
- chrisseaton 6y ago
  > These companies are contractually obligated to buy the stock at whatever price it's at in the future Normally you set a limit when you short. You don’t agree to pay an unlimited amount of money.
  - sidr 6y ago
    This runs completely counter to my understanding of shorting and I just checked on my brokerage - there is no limit. The unbounded losses bit is the whole point of put options instead of shorts.
    - chrisseaton 6y ago
      > Many short sellers place a stop order with their stockbroker after selling a stock short—an order to the brokerage to cover the position if the price of the stock should rise to a certain level. This is to limit the loss and avoid the problem of unlimited liability described above. In some cases, if the stock's price skyrockets, the stockbroker may decide to cover the short seller's position immediately and without his consent to guarantee that the short seller can make good on his debt of shares. https://en.wikipedia.org/wiki/Short_(finance)#Risks https://en.wikipedia.org/wiki/Short_(finance)#Risks Otherwise you'd make yourself liable for a literally unlimited sum of money. Any short could completely bankrupt your entire personal finances or your entire institution in that case.
  - kangnkodos 6y ago
    If an individual shorts stock at an investment bank, there is a limit to the amount of money the individual can lose. The investment bank has some type of collateral, usually the rest of your portfolio. When your net worth hits a certain threshold, perhaps $0 net worth of your portfolio, the bet is over. You lost all your money, and you don't end up in debt. In practice, the investment bank will cut you off before you reach this point. But if you are an investment bank, there is no one controlling you on a daily basis, so you can dip into the negative in theory. The problems with doing this are: - Regulators. Once the regulator finds out you're negative, they will shut down your investment bank. Hopefully, they do this before you hit 0, but they may not get it exactly right. - Counterparties. Other investment banks will refuse to do business with you when they know you are negative, or close to it. Once this happens, it's game over. So in both cases, individual or investment bank, there is a practical limit on how much you can lose from one short bet. That limit is equal to your net worth. You could lose any amount of money up to that on one short. It's risky. There are also ways to limit your losses. You can purchase other contracts to limit your losses. This is kind of like insurance. In general, you are not required to buy this. Some people and institutions do not do this because of the expense. Most institutions structure each deal so there is no way one deal will risk the entire business. Smart people also take steps to make sure one trade does not wipe them out. But sometimes mistakes happen.
mywittyname 6y ago
This is pretty rational behavior. The short sellers are paying (a lot of) interest on their positions and they need those shares. The higher the price goes, the higher the interest rates get. People long $GME can maintain their positions indefinitely while the short sellers bleed. This situation could have been prevented if the short sellers acquired enough calls to cover their position in the event of a price spike. One would think that a rich-ass hedge fund manager would do something basic like that.
- tootie 6y ago
  Rational from the POV of investors looking to extract some short-term returns. Completely irrational in that nobody seems to give a shit about Gamestop and they're actual performance as a business.
  - thatswrong0 6y ago
    A stock price is never just about the fundamentals of the company. It's not rational to think of stock prices only from that limited perspective. You _must_ consider the supply and demand for the stock and the people that are currently trading it. They are a part of the equation.
    - josephorjoe 6y ago
      Exactly. Stock owners are free to not sell their stock and this cannot be ignored. I have a guitar that I could sell on the open market for ~$300. But I don't want to sell it. If someone offered me $300 for it, I'd say no. If they offered $400, I'd still say no. I'd say no at $900. Why? Because I don't want to sell it and I don't have to. There is some price that will change my mind, of course, but it has nothing to do with the actual value of the guitar.
    - Miner49er 6y ago
      An argument could actually be made that Gamestop should be worth about $250 a share, assuming they capitalize on this short squeeze by issuing new shares and turn things around/pivot well.
brightball 6y ago
I think it was Buffet who said that the stock market is a voting system.
- mcv 6y ago
  And it just got a lot more democratic.
Symmetry 6y ago
There is a weird asymmetry between moving a stocks value up and moving it down. Shorting is weird and sort of dangerous as we're seeing here and doesn't move the price down very directly. By contrast, a group of people can move a price up pretty easily.

It's surprising that markets are still so obviously irrational.

phoe-krk 6y ago

Markets can stay irrational longer than you can stay solvent -- Keynes.

RivieraKid 6y ago
Yeah, I know... But it's annoying to see money getting transfered from people who are good at valuation to people who're clueless.
- thatswrong0 6y ago
  > people who are good at valuation I wouldn't call people who short 140% of available shares good at anything
  - stephenhuey 6y ago
    Greedy gamblers who assume everyone else is incapable of calling their bluff?
- _jal 6y ago
  And here I've been told that the market price is the price, because that's the price, and don't get emotional about the market. I guess that only applies when the 'right' people are involved?
  - johnhartigun 6y ago
    See, this is what I mean by clueless. Price and valuation are completely different concepts. An asset that will never generate any cash has a valuation of zero, but its market price could be anything.
    - _jal 6y ago
      See, this is what I mean by how econ 101 reasoning makes people weirdly arrogant and impossible to talk to. Parent is so quick to try to score a point arguing definitions that they entirely missed the point.
      - johnhartigun 6y ago
        I'd be happy to discuss substance but your comment brings up no actual points, only ad hominem.
- phoe-krk 6y ago
  Right now, money isn't getting transferred from people who are good at valuation to people who're clueless. I'd say it's quite the opposite.
  - johnhartigun 6y ago
    Well any reasonable GameStop valuation is at least an order of magnitude below current market price.
    - fileeditview 6y ago
      The value currently is not in GameStop itself but in the need for the short sellers to buy back the shares. So there is value in buying & holding. How much is still open.. The situation is pretty bonkers but I hope in the end that the hedge funds have learned a lesson.
    - phoe-krk 6y ago
      The whole affair isn't, and wasn't, about GameStop's valuation, or even about Gamestop as a company whatsoever. It's about stock market mechanics and the ability to leverage them to make a profit.
- josephorjoe 6y ago
  not to pile on here, but what is happening is money is getting transferred from one gambler to another
- tylerjaywood 6y ago
  I press f on the worlds smallest keyboard to pay respect to the billionaires betting they could grind the company out of existence through aggressive shorting who lost money on this.
- Bakary 6y ago
  The real conclusion would be to realize that the people "good at valuation" are glorified gamblers and not on another plane of existence from the rest. In fact, it's tautological to state that if they got burned, then they are not that good. Or perhaps the entire thing is pareidolic nonsense.
  - RivieraKid 6y ago
    Disagree. The short-sellers are correct about GameStop's valuation. In a liquid and competitive market they would profit and help the price move into the direction of correct valuation.
    - Bakary 6y ago
      Isn't that essentially magical thinking? The market is what it is, and their strategy failed. It doesn't really make sense to blame the market when the scheme fails and presumably celebrate the individual or group's purported brilliance when the scheme works. What actually happens is the ultimate arbiter of who profits and who doesn't, not the hypothetical fairer environment that "should" have existed to reward certain strategies. It's similar to blaming the roulette wheel when the gambler fails and praising the gambler when they succeed.
    - zeusk 6y ago
      Well, the market thought otherwise and market is always right. They just forgot that efficient market hypothesis is just that, a hypothesis. Real world markets behave differently thanks to finite resources and secondary markets (essentially leveraged derivatives caused 2008 crash and I believe they'll cause another before regulators wake up from their sleep).

TheAdamAndChe 6y ago

This is a short squeeze. My understanding is that hedge funds shorted the company massively, covering something like 130% the price of the company. These companies are contractually obligated to buy the stock at whatever price it's at in the future, giving people a good reason to pile into the stock for guaranteed gains. This is causing a frenzy. Someone correct me if I'm wrong, I only learned about it yesterday.

chrisseaton 6y ago
> These companies are contractually obligated to buy the stock at whatever price it's at in the future Normally you set a limit when you short. You don’t agree to pay an unlimited amount of money.
- sidr 6y ago
  This runs completely counter to my understanding of shorting and I just checked on my brokerage - there is no limit. The unbounded losses bit is the whole point of put options instead of shorts.
  - chrisseaton 6y ago
    > Many short sellers place a stop order with their stockbroker after selling a stock short—an order to the brokerage to cover the position if the price of the stock should rise to a certain level. This is to limit the loss and avoid the problem of unlimited liability described above. In some cases, if the stock's price skyrockets, the stockbroker may decide to cover the short seller's position immediately and without his consent to guarantee that the short seller can make good on his debt of shares. https://en.wikipedia.org/wiki/Short_(finance)#Risks https://en.wikipedia.org/wiki/Short_(finance)#Risks Otherwise you'd make yourself liable for a literally unlimited sum of money. Any short could completely bankrupt your entire personal finances or your entire institution in that case.
- kangnkodos 6y ago
  If an individual shorts stock at an investment bank, there is a limit to the amount of money the individual can lose. The investment bank has some type of collateral, usually the rest of your portfolio. When your net worth hits a certain threshold, perhaps $0 net worth of your portfolio, the bet is over. You lost all your money, and you don't end up in debt. In practice, the investment bank will cut you off before you reach this point. But if you are an investment bank, there is no one controlling you on a daily basis, so you can dip into the negative in theory. The problems with doing this are: - Regulators. Once the regulator finds out you're negative, they will shut down your investment bank. Hopefully, they do this before you hit 0, but they may not get it exactly right. - Counterparties. Other investment banks will refuse to do business with you when they know you are negative, or close to it. Once this happens, it's game over. So in both cases, individual or investment bank, there is a practical limit on how much you can lose from one short bet. That limit is equal to your net worth. You could lose any amount of money up to that on one short. It's risky. There are also ways to limit your losses. You can purchase other contracts to limit your losses. This is kind of like insurance. In general, you are not required to buy this. Some people and institutions do not do this because of the expense. Most institutions structure each deal so there is no way one deal will risk the entire business. Smart people also take steps to make sure one trade does not wipe them out. But sometimes mistakes happen.

mywittyname 6y ago

This is pretty rational behavior. The short sellers are paying (a lot of) interest on their positions and they need those shares. The higher the price goes, the higher the interest rates get. People long $GME can maintain their positions indefinitely while the short sellers bleed. This situation could have been prevented if the short sellers acquired enough calls to cover their position in the event of a price spike. One would think that a rich-ass hedge fund manager would do something basic like that.

tootie 6y ago
Rational from the POV of investors looking to extract some short-term returns. Completely irrational in that nobody seems to give a shit about Gamestop and they're actual performance as a business.
- thatswrong0 6y ago
  A stock price is never just about the fundamentals of the company. It's not rational to think of stock prices only from that limited perspective. You _must_ consider the supply and demand for the stock and the people that are currently trading it. They are a part of the equation.
  - josephorjoe 6y ago
    Exactly. Stock owners are free to not sell their stock and this cannot be ignored. I have a guitar that I could sell on the open market for ~$300. But I don't want to sell it. If someone offered me $300 for it, I'd say no. If they offered $400, I'd still say no. I'd say no at $900. Why? Because I don't want to sell it and I don't have to. There is some price that will change my mind, of course, but it has nothing to do with the actual value of the guitar.
  - Miner49er 6y ago
    An argument could actually be made that Gamestop should be worth about $250 a share, assuming they capitalize on this short squeeze by issuing new shares and turn things around/pivot well.

brightball 6y ago

I think it was Buffet who said that the stock market is a voting system.

mcv 6y ago
And it just got a lot more democratic.

Symmetry 6y ago

There is a weird asymmetry between moving a stocks value up and moving it down. Shorting is weird and sort of dangerous as we're seeing here and doesn't move the price down very directly. By contrast, a group of people can move a price up pretty easily.