GameStop in the last year

The GameStop story is dominating the news. The brick-and-mortar, in-person retailer that sells games has had its stock skyrocket recently.

No one actually thinks GameStop is a good company to invest in because of the rise in online retailers like Amazon. Short sellers like Citron Research make money by bad mouthing such "dying" companies and profiting as stock prices go down.  Reddit users on WallStreetBets decided to bring the pain to these institutions by purposely buying into GameStop, which forces short sellers to lose even more money in a short squeeze. This is a fight between retail (individual) investors vs. institutional investors (big Wall Street firms), or the “little guys” vs. the “big guys.”

These are all correct ways of viewing the situation, but we are missing something bigger if we only focus on the specifics of this situation rather than its larger context of how Millennials think about investing. Much of this conflict is actually a conflict between the investment styles of Millennials vs. Baby Boomers.

Main Point: The GameStop chaos illustrates major differences between the investing styles of Millennials vs. Boomers: risk vs. safety, concentrating vs. diversifying, trusting financial "experts" vs. trusting peers and your own convictions

What Millennials have been told

Millennials have been told by their parents (who themselves were taught by financial advisers) that they should: 

  1. Diversify, diversify, diversify! This was Investing 101 as taught by their parents -- diversify your investments rather than risk too much by buying individual stocks.
  1. The unspoken assumption was that investing is too complicated for amateurs. All the jargon: futures, short selling, options, ask/bid price, market capitalization, tickers, commissions, capital gains -- too complicated!  The Efficient Market Hypothesis states that people shouldn’t pick stocks because markets are efficient and it is all priced in.
  1. Therefore, let the experts pick for you. The easiest way to diversify and to avoid having to learn the complexity of investing was to trust the financial “experts” to pick stocks for you. For Boomers, such a choice was “safe” because the experts were experts, after all. What could go wrong?
  1. Buy mutual funds and bonds. Buying mutual funds was considered to be “safe” since they are a large, diversified “basket” of stocks hand-picked by the “experts.” And bonds were considered to be even safer than mutual funds since they are backed by governments.
  1. Be passive and patient. Millennials were told that they should be passive and patient, leave their investments alone, and watch them grow over the next 30-40 years until retirement.

So much of this advice is still taken for granted by Millennials, as if what worked for their parents will work for them

But things have changed . . .

  1. Globalization and technology means that almost no one will work one stable job their entire lives. Workers of the 21st century have to constantly adapt, learn new things, and will inevitably hold many jobs in many industries throughout their lives. Millennials do not and will not experience the same financial safety and stability as Boomers.
  1. The 2008-2009 crash/recession was devastating for Millennials, as they watched Wall Street bailed out rather than held accountable for their actions. Interest rates have been kept perpetually low or near zero since 2009, so that savings accounts and bonds are actually losing money to inflation.
  1. Millennials are burdened with student loans, low-paying jobs, unable to buy a home, delaying marriage and family (at least partially for financial reasons). These struggles make riskier investments (that bring greater returns) more enticing for Millennials.
  1. Technology and the Internet have changed investing: the Internet made it easy to place trades rather than having to call a broker, smartphone apps made investing even easier and quicker, and the big change was when brokers removed commission fees (starting with Schwab in 2018). No commissions is probably the biggest change to investing for Millennials, compared to their parents’ generation. And the Internet has so many good resources for learning about investing (think: Investopedia). There used to be so much friction to investing, but now it is so easy, almost too easy!
  1. Social media has given retail (individual) investors strength in numbers never before seen. In the past, big Wall Street institutional investors had an advantage that was impossible for retail investors to match -- they managed millions of dollars of money that could be easily coordinated towards specific strategies. But with social media (and now, Reddit), individual investors also have strength in numbers and can move millions of dollars in the stock market in coordinated fashion. This is probably the biggest takeaway from the Gamestop story in terms of changes to investing.

So, what does this say about the Millennial mindset?

  1. Millennials don't trust self-proclaimed financial “experts.” In fact, millennials are more swayed by their peers than by experts (FOMO, fear of missing out).
  1. Millennials are more willing to take risks than their parents (YOLO, you only live once!). Millennials understand diversification has its place, but they should also be able to vote with their wallet and invest in individual companies if they wish. Millennials have a 30-40 years before retirement, so they have time to ride out volatility, dips, and even crashes in the stock market.
  1. Millennials are concentrating their investments into individual companies that they like and use their products (Apple, Facebook, Google, Netflix, Amazon) rather than bland mutual funds filled with companies they don't recognize.
  1. Millennials have easy, free access to online investing education and many are willing to learn.
  1. Millennials can easily place their own trades on their smartphones just as quickly and easily as they can send a text message. There is no need to call a stock broker or even be at a computer. The Robinhood App is particularly popular among Millennials, which is why there has been such a negative reaction against Robinhood stopping trades of Gamestop.

What do we think?

Robinhood has always claimed to be for the little guy. They were made famous for this statement:

Yet amidst the large run-up in Gamestop stock, Robinhood has blocked all buys of $GME today, along with many other brokerages:

This is a historic moment for stock investing: Millennials have spoken that they believe in freedom in the markets and don't want to be told what they can or cannot invest in. 

Yes, there will be many investing styles and some we may disagree with, but we believe the public markets should be as free as possible. It is not the responsibility of the brokerage to play the role of an investment advisor. Put another way, Robinhood should allow people to trade as they want; Robinhood is fundamentally a stock broker, not a financial adviser. And likewise, people should be free to speak their minds on their thoughts about investing in different companies. That being said, Robinhood has said that they have not restricted trades due to an idealogical reason, but for regulatory reasons, so history will show how this plays out.

This was just the first flex of the Millennial investor and will not be the last. Millennials will likely be experiencing the biggest wealth transfer in history in the coming decade (mainly via inheritances), and they have shown to have different investing styles than their parents’ generation. It will be important to notice the power of the millennial investor and it will be important to keep the markets open and free.

Takeaway: Millennials are investing in a very different way than the Boomer generation of their parents: they are taking more risks, concentrating more heavily on individual companies, and taking matters into their own hands rather than trusting so-called financial "experts."

Side note: Reddit user /uDeepF--ingValue going from $10,000 to $10+ million

By the way, some have asked about that guy (Reddit username /uDeepF--ingValue), who made $20 million dollars on GameStop, even though he only invested $10,000. The Wall Street Journal did a profile on him on January 29, 2021.

/uDeepF--ingValue's positions in GME, as of January 28, 2021 (from r/WallStreetBets)

What happened?

/uDeepF--ingValue combined buying GME stock + buying GME options:

As you can see from his January 28, 2021, update, /uDeepF--ingValue holds 50,000 shares of GME stock which he bought at a cost basis of $14.89; GME is up to $193.60. If he were to sell now (hypothetically), that would mean a 1,300% gain on his GME stock.

However, /uDFV also holds 500 call options contracts for GME (you can learn more about call options here at Investopedia). He bought those call options at ($0.20*100) or $20 per contract, meaning that he spent (500*$20) or $10,000 on the 500 call options contracts.

Those call options are now selling at ($218*100) or $21,800 per contract, meaning that if he sold, his 500 call options contracts would hypothetically be worth (500*$21,800) or $10.9 million. That is a 109,000% gain on his options contracts! That's not a mistake! (I checked my math on that a couple times because it sounded crazy). And, yes, that is a crazy return on investment, but it is exactly what happened with his options contracts. His GME options returns were were 8,384% higher than his returns on GME stock.

If options contracts are cheap (< $0.50), unexpected/sharp market moves can have huge implications on your portfolio. None of this is investment advice, and we will not share any thoughts on investing in Gamestop, but we do think a takeaway here is that options can be a useful tool to expand potential returns if used strategically. This is why we use options in our own investment strategies at Volt Equity.

Takeaway: Buying options contracts can be a useful tool to magnify potential gains if used strategically and carefully