Stocks and Trading Thread - Channeling your inner Mono

[Admiral Yi]

But if you say it surely has been done that's good enough.

[Oexmelin]

Facts and logic seem a bizarre basis for a discussion of the stock market.

I'll bite.  Why?

For two reasons:

1) Generally, the stock market's whole schtick is greed, fear, exhilaration. These are powerful emotions. We harness facts to these emotions, not the reverse. It therefore shouldn't be surprising that emotions play a very important role in assessing how it operates.

2) Specifically, because here, the issue is divided on the very notion of what ought to be. Stating what the rules are is an important element in any discussion, but the crux of the matter is always what they mean, and that discussion itself is almost impossible to disentangle from what we think they ought to achieve. And in that regard, we can only work through metaphors.

[Tamas]

But if you say it surely has been done that's good enough.

Are we really arguing that all short squeezes of history until now had been achieved by single actors with them never informing anyone of their intentions or actions? Really?

[DGuller]

Facts and logic seem a bizarre basis for a discussion of the stock market.

I'll bite.  Why?

Why, Yi, why?

[Admiral Yi]

Are we really arguing that all short squeezes of history until now had been achieved by single actors with them never informing anyone of their intentions or actions? Really?

Single actors has not been brought up.  Straw man.

I've never been made aware of some individual or group or fund announcing they were going to bid up shares in an effort to induce a short squeeze and inviting others to join.  Do I *know* this has never happened?  I do not.  I have not analyzed 100% of communication regarding the stock market since the invention of the Dutch East Indies Company.

[Oexmelin]

Facts and logic seem a bizarre basis for a discussion of the stock market.

I'll bite.  Why?

Why, Yi, why?

?

[Sheilbh]

Facts and logic seem a bizarre basis for a discussion of the stock market.

It's always been animal spirits, no?

I thought this take was interesting:

The GameStop affair is like tulip mania on steroids
Dan Davies
It's eerily similar to the 17th-century Dutch bubble, but with the self-organising potential of the internet added to the mix
Fri 29 Jan 2021 14.20 GMT
Last modified on Sat 30 Jan 2021 04.37 GMT

Towards the end of 1636, there was an outbreak of bubonic plague in the Netherlands. The concept of a lockdown was not really established at the time, but merchant trade slowed to a trickle. Idle young men in the town of Haarlem gathered in taverns, and looked for amusement in one of the few commodities still trading – contracts for the delivery of flower bulbs the following spring. What ensued is often regarded as the first financial bubble in recorded history – the "tulip mania".

Nearly 400 years later, something similar has happened in the US stock market. This week, the share price of a company called GameStop – an unexceptional retailer that appears to have been surprised and confused by the whole episode – became the battleground between some of the biggest names in finance and a few hundred bored (mostly) bros exchanging messages on the WallStreetBets forum, part of the sprawling discussion site Reddit.

The rubble is still bouncing in this particular episode, but the broad shape of what's happened is not unfamiliar. Reasoning that a business model based on selling video game DVDs through shopping malls might not have very bright prospects, several of New York's finest hedge funds bet against GameStop's share price. The Reddit crowd appears to have decided that this was unfair and that they should fight back on behalf of gamers. They took the opposite side of the trade and pushed the price up, using derivatives and brokerage credit in surprisingly sophisticated ways to maximise their firepower.

To everyone's surprise, the crowd won; the hedge funds' risk management processes kicked in, and they were forced to buy back their negative positions, pushing the price even higher. But the stock exchanges have always frowned on this sort of concerted action, and on the use of leverage to manipulate the market. The sheer volume of orders had also grown well beyond the capacity of the small, fee-free brokerages favoured by the WallStreetBets crowd. Credit lines were pulled, accounts were frozen and the retail crowd were forced to sell; yesterday the price gave back a large proportion of its gains.

To people who know a lot about stock exchange regulation and securities settlement, this outcome was quite inevitable – it's part of the reason why things like this don't happen every day. To a lot of American Redditors, though, it was a surprising introduction to the complexity of financial markets, taking place in circumstances almost perfectly designed to convince them that the system is rigged for the benefit of big money.

Corners, bear raids and squeezes, in the industry jargon, have been around for as long as stock markets – in fact, as British hedge fund legend Paul Marshall points out in his book Ten and a Half Lessons From Experience something very similar happened last year at the start of the coronavirus lockdown, centred on a suddenly unemployed sports bookmaker called Dave Portnoy. But the GameStop affair exhibits some surprising new features.

Most importantly, it was a largely self-organising phenomenon. For most of stock market history, orchestrating a pool of people to manipulate markets has been something only the most skilful could achieve. Some of the finest buildings in New York were erected on the proceeds of this rare talent, before it was made illegal. The idea that such a pool could coalesce so quickly and without any obvious sign of a single controlling mind is brand new and ought to worry us a bit.

And although some of the claims made by contributors to WallStreetBets that they represent the masses aren't very convincing – although small by hedge fund standards, many of them appear to have five-figure sums to invest – it's unfamiliar to say the least to see a pool motivated by rage or other emotions as opposed to the straightforward desire to make money. Just as air traffic regulation is based on the assumption that the planes are trying not to crash into one another, financial regulation is based on the assumption that people are trying to make money for themselves, not to destroy it for other people.

When I think about market regulation, I'm always reminded of a saying of Édouard Herriot, the former mayor of Lyon. He said that local government was like an andouillette sausage; it had to stink a little bit of shit, but not too much. Financial markets aren't video games, they aren't democratic and small investors aren't the backbone of capitalism. They're nasty places with extremely complicated rules, which only work to the extent that the people involved in them trust one another. Speculation is genuinely necessary on a stock market – without it, you could be waiting days for someone to take up your offer when you wanted to buy or sell shares. But it's a necessary evil, and it needs to be limited. It's a shame that the Redditors found this out the hard way.

    Dan Davies is a former regulatory economist at the Bank of England and the author of Lying For Money: How Legendary Frauds Reveal the Workings of Our World

[Admiral Yi]

For two reasons:

1) Generally, the stock market's whole schtick is greed, fear, exhilaration. These are powerful emotions. We harness facts to these emotions, not the reverse. It therefore shouldn't be surprising that emotions play a very important role in assessing how it operates.

My opinion differs.  Shocker!

As you might be aware, I watch a good bit of CNBC, and I read the ocassional piece from Motley Fool or other investment web sites.  Nothing on those sources fits your description of (if you will excuse the paraphrase) rationalizing facts to fit our emotions.

What I see much more fitting your description is popular culture discussions.  Wallstreetbets writ large.  "OMG Elon is King!  Tesla to $20,000!"

I also have seen a great deal of discussion about common mistakes of retail investors based on irrationality: assuming an uptrending stock will keep on, not selling off losers, etc.  Those are arguments against emotionally informed stock choices.

So if your thesis is that irrationality exists in the market, I agree.  If your thesis is that facts and logic play *no* part, I completely disagree.  P/E ratios are facts.  Monetary and tax policy are facts.  Free cash flow is a fact.  Earnings per share is a fact.

2) Specifically, because here, the issue is divided on the very notion of what ought to be. Stating what the rules are is an important element in any discussion, but the crux of the matter is always what they mean, and that discussion itself is almost impossible to disentangle from what we think they ought to achieve. And in that regard, we can only work through metaphors.

Here we might actually have some partial agreement.  The way I see it, there are two separate grown-up discussions one can have about WSB/Gamestop.  One is what is actually happening.  The second is what, if anything, should be done about it.  And obviously the second must be informed by our sense of right and wrong, our morals, our ethics, etc.

[Oexmelin]

I've never been made aware of some individual or group or fund announcing they were going to bid up shares in an effort to induce a short squeeze and inviting others to join. 

It seems we return to the dividing point. If the novelty here is that the group of investors was coordinated through the internet, it seems you can either ask: what in essence, differentiates that from a group of investors coordinated through either a legal vehicle (a hedge fund) or a shared sociability (Wall Street traders); or you can ask what consequences this has for the future of online trading. I.e., the existing rules are unfair vs the existing rules are threatened.

[DGuller]

Facts and logic seem a bizarre basis for a discussion of the stock market.

I'll bite.  Why?

Why, Yi, why?

?

Just seemed obvious that you threw the hook there, waiting for someone to ask you to elaborate.  https://youtu.be/sDEL4Ty950Q?t=25

[Oexmelin]

So if your thesis is that irrationality exists in the market, I agree.  If your thesis is that facts and logic play *no* part, I completely disagree.  P/E ratios are facts.  Monetary and tax policy are facts.  Free cash flow is a fact.  Earnings per share is a fact.

I only disagree inasmuch as our reason is mostly rationalisation. Which doesn't mean it can't be powerful, nor that facts can't exist - in this case, it succeeds at making uncomfortable discussion about greed, injustice, purpose, etc. very distant, very removed. In essence, I think you see emotion as an unavoidable parasite in what ought to be rational; I see it as the underlying assumption that is being channeled in very specific ways. But that is mostly a generic point.

Here we might actually have some partial agreement.  The way I see it, there are two separate grown-up discussions one can have about WSB/Gamestop.  One is what is actually happening.  The second is what, if anything, should be done about it.  And obviously the second must be informed by our sense of right and wrong, our morals, our ethics, etc.

I was attempting to rephrase to explain the disconnect, maybe only for myself.

(I do think you are too quick to ascribe to people who denounce the underlying injustice that peeks through as throwing a tamper tantrum, but what else is new  )

[Admiral Yi]

It seems we return to the dividing point. If the novelty here is that the group of investors was coordinated through the internet, it seems you can either ask: what in essence, differentiates that from a group of investors coordinated through either a legal vehicle (a hedge fund) or a shared sociability (Wall Street traders); or you can ask what consequences this has for the future of online trading. I.e., the existing rules are unfair vs the existing rules are threatened.

If you've been following this entire Gamestop discussion, you'll know I kind of asked Joan this same question more or less.  I don't think there's a pat answer.

What i think would help clarify this particular issue is a concrete historical case of this strategy being executed by an institutional investor.  Joan tried, and came up with the Hunt brothers cornering the silver market (the entire world's silver market!!) but to my mind that doesn't help because it doesn't include the short squeeze mechanism.

Or to put it another way, if your argument is that institutional investors have done this so it's only fair that retail investors get to do it too (or outlaw it for institutional investors), we need to establish whether in fact the big boys have actually done it.

[Oexmelin]

Just seemed obvious that you threw the hook there, waiting for someone to ask you to elaborate.  https://youtu.be/sDEL4Ty950Q?t=25

Of course.

I love Yi, but he has the tendency to answer long posts with a sentence or two. I'd rather not lose my time if he's not interested in an exchange. I assume you were not.

[Admiral Yi]

I only disagree inasmuch as our reason is mostly rationalisation. Which doesn't mean it can't be powerful, nor that facts can't exist - in this case, it succeeds at making uncomfortable discussion about greed, injustice, purpose, etc. very distant, very removed. In essence, I think you see emotion as an unavoidable parasite in what ought to be rational; I see it as the underlying assumption that is being channeled in very specific ways. But that is mostly a generic point.

So you're arguing that investors that outperform have superior emotions that they rationalize?

(I do think you are too quick to ascribe to people who denounce the underlying injustice that peeks through as throwing a tamper tantrum, but what else is new  )

I criticize people who build narratives based on made up facts.

[Oexmelin]

Or to put it another way, if your argument is that institutional investors have done this so it's only fair that retail investors get to do it too (or outlaw it for institutional investors), we need to establish whether in fact the big boys have actually done it.

Yes, I have been following - if only because I am fond of moments like this where we are forced to peer behind the curtains of what the economy is "made of". (And so I am more invested - haha - in reintroducing the notion of power in this than in suddenly making every little investor capable of coordinating with thousands others. I don't have a clear sense of what we ought to do about it).

And ultimately, this is a political case. I don't think most Redditors were seeing it primarily as an investment strategy; they were seeing it as a political strategy, a power-play. Which I think some people will want to read as an undue intervention of political preferences in the economy, and some people will want to read as a welcome reminder that the economy is political. I think the main issue is less about the mechanisms of the short-squeeze than about the capacity of certain individuals and groups to leverage way more power, and profit from it, than even great multitudes.

I think one of the issue here is that, as Tammas vaguely suggested, we'll have a lot of stories of controversial squeezes (and so the failed ones), because they are the ones generating the paper (and therefore, generating the regulation mechanisms), whereas if it's a "business-as-usual" thing, that will go largely unnoticed. I can't really tell - but since the sociology of traders and arbitrage shows a lot of ordinary coordination that gets erased by official paper, I wouldn't be surprised and wouldn't find it shocking to assume it happens in this case too.