Quarterly Newsletter- 04/06/2021
April 6, 2021
For those of you who do not already know, I was born in New York and spent the first 9 years of my life living on Long Island. I really enjoyed living there, not only because of all the fun times I had in the snow, but because I was surrounded by immediate and extended family. Both sets of aunts and uncles lived close by as well as grandparents. One family member I loved spending time with was my grandpa. We would fish, go to museums and go out to eat together all the time. One of the fondest memories I have of my grandpa was one day we were walking down the street in Manhattan and we came across a crowd of people playing 3 Card Monte. My grandpa and I stopped to watch this “sideshow,” as he called it. For those of you who do not know, 3 Card Monte is a fast-paced card game were a dealer deals 3 cards on a cardboard box. An audience member then bets cash on the card he/she/they believe is the designated winning card (usually the queen of hearts). If the player guesses right, they win. If they guess wrong, they lose. The sad thing is, they always lose because the dealer and his henchmen are trained, sleight of hand crooks, who know how to manipulate the game in their favor. Having spent years working in Manhattan, my grandpa knew these tricks and knew to stay away from these types of games. So, we would watch for a little while and chuckle every time we saw a new unsuspecting sucker arrive.
I tell you this story because of recent “sideshows” that have been happening in the stock market. One of these events in particular is called a “short squeeze”. I recently explained to my wife Melissa, there are two ways to make money in the stock market. Buy a stock, wait for it to increase in value, then sell it or sell a stock, wait for it to decrease in value, then buy it back. This second method is called “shorting” a stock. Shorting stock is very risky because if the stock increases in value when you thought it would decrease in value, you will most likely lose a lot of money. If the stock price spikes up in value, you may be “squeezed” out, or forced to buy back your position at much higher prices most likely causing a SUBSTANTIAL loss. Recently a few large hedge funds who specialize in shorting companies have been short squeezed. As mentioned before, these hedge funds are selling stock they do not own in hopes prices will drop and they can buy back the stock at lower prices and profit. Much to their chagrin, a whole slew of Online investors banded together and purchased heavily shorted stocks (i.e., GameStop, AMC). This forced the price of these stocks up and forced the hedge funds to buy back the shares at higher prices. This pushed the prices of these stocks up even higher, ultimately causing a “short squeeze”. Many people made a lot of money doing this and many hedge funds lost a lot. It was as if Main Street was sticking it to Wall Street. We have never seen anything like this before because never in history have individuals been able to band together and create such a large buying force. Social media has completely changed the playing field. Many have argued the legality of this type of behavior. Are we finally seeing the players of the 3 Card Monte game beat the dealer? Only time will tell, but I highly doubt it.
Remember, all this craziness in the market is a sideshow. Do not let the gamblers on the sidelines distract you from the goal of investing for the long run in good quality companies and mutual funds that can grow in value over time and help provide you and your family with a more comfortable retirement.
Craig Rosenblatt, CPA
California Insurance License #0E18620
The views stated in this newsletter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.