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AMC, GameStop and retail traders changing the game, as short sellers continue getting burned

360 Report: Smart investing or glorified gambling?
GameStop-Stock Surge
Posted at 10:23 PM, Jul 20, 2021
and last updated 2021-07-21 01:44:49-04

HIGHLANDS RANCH, Colo. — Sitting behind a bank of computer screens in the basement of his Highlands Ranch home, Justin Martiniak has amassed a small fortune during COVID-19 lockdowns.

“I just happened to learn financial exchange through my work,” Martiniak said. “A $35,000 investment at one point, I think, it was up $100,000, which is crazy to think about.”

Martiniak bought GameStop early in its rise.

“It was $4, slowly grew to $10, started to pay a little attention to it,” he said. “It hit $40 and that’s when I started to buy. At one point, you’re so far up, it’s like, what do I do now? I’ve never been in a position like this.”

Martiniak is part of a growing trend of meme stock retail traders using apps like Robinhood to buy and trade stocks instantly.

They are typically younger traders who buy and trade stocks based on behaviors and emotion rather than traditionally gauging a company’s performance and potential future earnings.

“I think bull markets make people geniuses, but the question is – is it enduring?”

We’re going 360 by asking is this smart investing or glorified gambling? Are apps like Robinhood completely changing the game? How is this impacting traditional investing, and what’s the difference between meme stocks and blue chips?

Let’s start there. Meme stocks see dramatic price increases, not fueled by a company’s performance, but rather people on social media, primarily Reddit, Twitter and TikTok influencing their peers to buy.

Experts say the stocks rarely have company success or fundamentals backing their quick rise, which makes them volatile and risky.

Such was the case with GameStop. The company was failing, hedge funds were shorting the stock and a page on Reddit called WallStreetBets sent the stock price soaring into outer space earlier this year by creating an army of retail traders, like Martiniak, who gobbled up the once worthless stock.

“The tip-off is probably WallStreetBets and just sentiment,” Martiniak said.

He gambled, and it paid off big time.

“It’s life-changing,” Martiniak said.

But there are just as many losers as winners.

“Investing is not about psychology and trying to predict people’s short-term behaviors,” said Adam Schor, a professor at Metropolitan State University of Denver and president of NZS Capital, a Denver-based investment firm that started in January 2020 and now has $1.2 billion in assets. “Investing is about trying to predict where this business is heading. In my view, if you’re invested in GameStop, you’re investing in trying to predict when a panic occurs.”

Schor sees meme stocks as gambling.

“There’s people who are going to hit 12 red up in the casino, but it’s what you do with your next round,” Schor said. “There’s a lot of opportunities to make a lot of money, but that’s not saying that your investment process is solid or sustainable.”

Capturing lightning in a bottle once is one thing, but doing it twice? Schor says good luck.

“Risky business,” Schor said. “So, you can get it right, but it doesn’t mean you can do it again.”

Perhaps that’s true, but Martiniak points out that what he did is no different than what day traders do every day on the floor of the stock exchange.

“They’re just people like me and you,” Martiniak said. “They just wear a suit when they do what I do. Yes, there’s risk involved, but it’s not like a lottery ticket. It’s all percentage based, so if you buy for $10 and it goes down $5, you’ve lost half. If it goes up to $20, you’ve doubled.”

What’s perhaps riskier is what some hedge funds did. They were shorting GameStop thinking it would lose value.

“You’re selling something that you hope to buy back later at a lower price,” Schor said of shorting stocks. “If I borrowed your car and sold it to a friend of mine, in three months when you want your car back, I better hope I can get that car. And if I’m smart, I’ll get it back cheaper. You’re smart as the stock goes down, but as soon as it goes up, you have this panic and a lot of people going to a very narrow exit.”

That panic put some hedge funds out of business while GameStop gained tons of value thanks to WallStreetBets.

“When you buy a stock, the most you can lose is what you paid for it,” Schor said. “When you short a stock, your losses are, theoretically, infinite.”

What Schor and Martiniak do agree on is that apps like Robinhood are giving more and more rookie investors a platform.

“I think it’s great that there’s more access to the markets for more people,” Schor said. “But inherent in that opportunity is to still understand that it’s not a casino — it’s a place to allocate capital.”

“It made me aware that I didn’t need some super knowledge for this,” Martiniak said.

They also both believe that if and when you do hit a windfall, you should go back to basics and put your money in more sustainable, long-term investments.

“My current philosophy right now is very diversified stock picks,” Martiniak said. “The best thing to do is put it into an ETF, like Vanguard. It covers the entire stock market, every business. The world literally has to implode to lose money on that.”

“There’s always going to be random events,” Schor said. “But you need a portfolio that can withstand random events — something that allows you to have some ballast, and then you can still have your opportunity to invest in ideas that you get excited about. That’s the beautiful thing about Robinhood or Fidelity or whatever.”

As for Martiniak’s stock in GameStop, he says, “Oh, I sold it all." And he’s now planning his next move.

“From now on, my goal is to pay taxes to the government,” Martiniak said. “I always thought it would be great to get a tax refund. Not really — you want to be paying them because you’re making so much extra money.”

For the first time in 35 years, he sees the dream of retirement as a reality.

“The whole reason I’m doing this is because I want to retire early,” he said. “I don’t want to keep working, making someone else money. I want to be on a beach in Hawaii.”

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