Friday, January 29, 2021

Lessons from Gamestop

Quite a lot has happened over the past few days. If you've been living under a rock, here's what happened in a nutshell :

Hedge fund short-sellers over-extended themselves when they oversold Gamestop (GME). This was flagged by retail investors who decided to take collective action to punish these large speculators, so thousands of retail investors decided to buy the GME counter knowing that short-sellers would eventually have to buy back the stock. As they pushed the stock value, the hedge fund investors started to lose money as they unwound their positions. 

What happened next was really unfair to Main Street, the major players, massively butt hurt by GME rally,  managed to convince brokerages like Robinhood to prevent further purchases from retail investors. Angry retail investors decided to take Robinhood to court.  

At this moment, we are probably not seeing the end of the story because this episode was framed as an instance of class warfare. It's manifestly unfair that hedge funds can prevent retail investors from market participation when they were allowed to manipulate the market all these years. 

I don't have any skin in the GME trade but I have two insights to share :

a) Be at peace and accept that stupid people can make a lot more money than you do

I was asked what's the ideal market return to target by a group of investment experts. They all have big numbers for themselves, like an 8% over the next few years. I said that my target was about 3% and one guy joked that I'm like a terrorist who aimed to blow up a propeller plane when everyone else were targeting passenger jets.

Actually I felt that his comments were too kind. My back-tests routinely flag 17% returns over 10 years and my ERM leverage accounts just deleveraged from x2.4 to x2. My 3% is more akin to an attempt at blowing up a sampan. 

Investing should be divorced from self-esteem and ego. A multimillion portfolio generating 3% returns would still generate $60,000 a year and it can feed a family of five in the HDB heartlands.

The key psychological skill in investing is to be at peace when people whom you think are stupid and making a lot more money than you do. If you adopt that mindset, you would have avoided the crash in Bitcoins when it first peaked in 2018/19 as well as the GME crash when brokers decided to intervene in otherwise fair markets. You also would have avoided real estate just before cooling measures in Singapore, I know FOMO hurt a lot of real estate buyers about 5-6 years ago.

I think this is really hard in Singapore because we're brought up to think that just because we have better paper qualifications, financial markets will automatically reward you for that. 

The financial world works differently from real life and if you're smart you better not invest your ego in your investment portfolio.

b) Can Gamestop happen in Singapore ?

The GME episode arose from class warfare. It's really horrible to think that big boys playing the markets can stop trades from happening when the man of the street is starting figuring out how to win the game. 

I'd imagine this scenario. Suppose a lot of wealthy HNW individuals start leveraging on REITs and someone flag this on EDMW. Imagine that REITs have been pushed up to a PB ratio of >3 and yields less than 3%.

What would happen if angry Millenials begin to short the REIT market ? A lot of Singaporeans blame escalating prices on REIT landlords so it is not too hard to cultivate a desire to hurt SG REIT investors.

What can theoretically happen is that the short will pressure REIT prices. Then a drop in REITs by 5-10% can trigger margin calls for overleveraged investors. This can potentially trigger a tsunami as margin calls ala March 2020 !

But this scenario is unlikely to play along the same way as GME. 

Leveraged investors still collect dividends from short sellers. And these imaginary Millenials will find themselves the same position as GME  hedge fund short-sellers, they have to cover their shorts sooner or later. Can these guys short a REIT to half it's value to hurt those leveraged at x1.5 ? I'm not too sure about that.

Should this happen, there will be plenty of high net worth individuals who will apply for a Home Equity Loan to buy up REITs at a 50% discount.

Fortunately, I have levelled up on programming once again and have developed the ability to optimize relative strength based trading strategies based on local stocks. The empirical evidence on REITs show that it has properties of a mean reverting stock counter as opposed to momentum based properties in counters like GME. 

For local REITs, what goes down must eventually come up.

A more detailed write-up should be available at the Dr. Wealth blog by next week.  

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