WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

One of the craziest weeks explained…

Hedge Fund nearly bankrupt as day traders attack wall street

In case you have been wondering why you have been seeing Gamestop (GME) and AMC in the news a lot this week, it’s due to the fact that these two failing companies nearly took out one of Wall Street’s biggest hedge fund managers in a span of three days. That’s just part of the story that also includes Reddit Users, Twitter Wars,  Elon Musk, Chamath Palihapitiya, Memes, and what may ultimately be an ugly ending for stock holders, even if you weren’t involved. 

Full disclosure, I did not buy into the $GME craze. In these cases if you’re initiating this type of pump, or you’re not already in it, it’s too dangerous to just “hop on” – while there were a few millionaires, and reportedly one billionaire made this week, the truth is someone will be left holding the bag at the end, and it won’t be pretty. 

I was however in $BB, and $NOK BEFORE all this started. Both of those stocks got sucked into the frenzy. So I did benefit and sold yesterday.  I was in these stocks for my own separate reasons. When they spiked, I took my profits and will look for future entries when all this subsides.

How is started…

It’s not entirely clear to me exactly how this started, but apparently an intrepid Reddit user discovered that Melvin Capital had a huge short position on $GME. This was key, since hedge funds are not mandated to report their short positions. As this information became publicly available, a user named WallStreetBets on Reddit, started using his forum to let people know he was buying the stock, and buying it big. People followed. Both regular stock and call options were purchased in great size. This caused two types of squeezes, the short squeeze, which causes anyone who bet short to buy back their shares. It also called what’s known as a convexity squeeze. Money makers need to keep a certain amount of stock on hand as it rises. Since money makers (the middle men in the stock market) had to join in the buying, it caused an endless feedback loop.

Retail investors bought shares/calls –> shorts had to cover –> money makers had to buy shares to have on hand to remain “delta neutral” – a lot of this was knew lingo to me as I do not short stocks and I am not really well versed in that section of the market. Matthew Kratter has a good video explaining what happened below.

While all this was happening, Melvin Capital, was in real financial trouble. Two other hedge funds had to come in to save them by investing billions in Melvin. Those other hedge funds were Citadel, and Point72. Citadel also happens to be one of Robinhood’s biggest clients, if not the biggest. So when Robinhood banned these stocks from trading this morning, there was quite an uproar from the trading community.

If the point of this whole exercise was to bring the Wall Street establishment to its knees, WallStreetBets and his followers definitely succeeded. If the goal was to bring about some sort of systematic change, they may also succeed in the long run, but maybe not in their favor. It’s too soon to tell at this point. 

 

How it’s going…

This story is evolving quickly. As of writing this article $GME has fallen about 50%, $AMC, $BB, and $NOK also faded hard from yesterday’s highs. 

Brokers Get Involved

This morning Robinhood, a popular investing app with millenials, along with several other large brokerage houses either restricted the buying and/or selling of all these stocks, or they were down completely for a period of time, thus reducing the volume of buying and selling and in some cases only allowing people to sell. This was market manipulation at the highest level! 

The exact thing that the hedge funds were accusing WallStreetBets of doing, they did to the little guys today. A class action lawsuit was already filed against RH today. We’ll see how this goes. 

Billionaires Cry Foul

It’s not surprising that most of the billionaires that went on CNBC today or yesterday were there to demonize the retail investor.  Billionaire, Leon Cooperman, saying it was an “…attack on the wealthy”. The CEO of Nasdaq tweeting that maybe brokerages should stop trading all together to allow huge firms to reposition themselves and quote “stop the spread of profits outside of wall street.” In other words, you don’t want the little guy to make money at the expense of the big guy. EXCUSE ME?!

So when my stocks take a nose dive can I ask a brokerage to halt trading for a couple of weeks while I reposition myself?  They would laugh me off their customer service line. A hedge fund can short a stock %140 percent (meaning shorted more than the available amount of shares) and completely wreck a company, but when the little guys does it to them, they’re calling it a crime. 

 

What happens now…

Unfortunately, nothing in my opinion. What’s done it done. The few lucky ones that got rich…congrats. The few that will be left holding this stock all the way back down…my condolences. Hopefully you cut your losses as quickly as you can. The report is that the hedge funds have already rebought their short positions now that $GME will almost certainly return to normal levels.

One big issue that became clear to retail investors this week was how blatant the game is rigged against us. If companies can randomly stop trading in an asset (other than normal trading halts) and completely remove them from being available at the whim of hedge fund who come crying to them, then what are we doing here? It clearly isn’t the “free market” economy that so many of these billionaires want to champion. It’s a rigged economy in their favor.

Hedge funds will likely look at ways of preventing this from happening again. By one estimate hedge funds lost $90 billion dollars this week trying to cover their short positions. The effect of that was them having to sell their long positions and causing the markets to drop (see 1/27) – a lot of good deals this morning if you were hunting for entry points.

Moving forward and learning from this week’s events.

I have learned to sit back, relax, and watch these events like a reality TV show. Not participating, sticking to your plan, and not getting caught up in stories like these are your best bet to keep your money safe. Unless you were lucky like I was with $BB and $NOK to already be in those stocks when it happened, I would avoid these types of moves in the future.

If you are itching for that excitement, in which case I would avoid the stock market altogether if I were you, you could hop on with a small amount to scratch that itch. Just don’t invest more than you are willing to lose. Way too much risk for me.

 

Nasdaq CEO Tweet
Humorous meme
WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

How To Start Investing: How to trade in an IRA vs Brokerage Account

IRA vs Brokerage Account

The other day as I was flipping through my Twitter feed I came across a tweet from @alphatrends (great guy to follow for trade ideas and general knowledge) that made me stop and think about how I had structured my investments in my portfolios. I have two accounts (three if you count my crypto account), one is my IRA, where I am of course, saving for my retirement. The other is a regular brokerage account where I can pull money out if I needed, but still trade and grow the account more then say, a savings account. 

The way I have been trading/investing to date is mostly swing trades/day trades. However, I do have a couple of long term holds (Dividend ETFs) that I plan to just add and let grow in my IRA. My brokerage account is smaller than my IRA at the moment, and I only swing trade in that account. 

This made sense to me. I hold my long term investments in my IRA, since I am not touching that for 25-30 years, and my short term investments in my brokerage account since I hope to have easy access and pull money from it when needed. Makes sense, right? At least to me it did.

 

Tweet from @alphatrends

@alphatrends on Twitter

The tweet I read flipped that whole idea upside down. One of the main benefits of having an IRA is that your taxes are deferred until you withdraw (hopefully not until you’re retired). Which means that you don’t have to worry as much about holding investments over a year to avoid capital gains taxes. That would lend itself to be used better as a swing trading account. 

My brokerage account on the other hand is not a tax deferred account. I will be taxed on every transaction I profit from at either the capital gains rate or the long term investment rate. Since the long term investment rate is lower, it would make more sense to have my brokerage account setup to hold mostly long term holdings. 

Mind blown…I have been doing this wrong. But I also can’t believe I didn’t think of it sooner. So thank you to @AlphaTrends for bringing up this good point. 

So as of this month I am starting to reallocate some of my investments. I will shift my brokerage account to more low cost ETFs, Bonds, and maybe a couple of individual stocks I want to hold longer term. In my IRA I will start to focus more on swing trades, while maintaining some longer holds as well.

Taxes are often the most overlooked aspect of investing and trading for newbies. It’s something that I have been learning more about in the past year. My investment journey is still relatively young, so making changes now will have a huge impact 20-30 years down the road. 

Hope this helps some of you think about how you have allocated your own investments. Remember, do your own research. Good luck!

WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

Understanding the 4% Rule – Setting Your Goals

Understanding the 4% rule – Setting your goals

You can’t get to your destination if you don’t know where you’re going

Early in 2019 I made my first trades in my entire life. I think I bought $KO, and $BEN, for no other reason than I knew Warren Buffet like $KO, and they paid a dividend, which sounded nice. I picked $BEN because they have a big headquarters a couple of miles from my house and their stock seemed cheap. I HAD NO IDEA WHAT I WAS DOING. 

More to the point, I had no idea where I was going. I didn’t have a goal in mind for my finances. I just knew I had $2500 from a retirement account and I wanted it to grow. Wanting an account to grow is a nice though, but it is hardly a goal. 

It wasn’t until earlier this year (2020) that I had an AHA moment. In one of the trading courses I took the instuctor casually mentioned the 4% rule, and how he planned to live off that in retirement. I will do my best to explain the 4% rule to you now, and how it can help guide your goals. 

The 4% Rule

The 4% rule simply put means that you should be able to live off 4% of your retirment account every year during retirement, while still growing your account, and not run out of money while you’re retired. Knowing your 4% will give you a target for how much money you will need in your retirement account in order for it to work. 

So how do you know what your 4% is?

Everyone’s 4% will be different. It may depend on many other factors like income, savings, pension income, social security benefits, inheritance, rental properties, owning a home, age, etc. My current goal is based on the following criteria.

  1. I need to own a home outright and not have mortgage payment each month.
  2. My wife and I’s combined needs will have to be taken into account. (she also has a retirement account we will be able to pull from)
  3. We won’t have any personal debt. We currently don’t have any CC debt and hope to keep it that way. Just day to day expenses.
  4. I would ideally like to retire in CA. and not move to a “retirement friendly” state. Just a personal preference. 
  5. Knowing all of that and taking into account inflation, I would think my wife and I would be able to live off $100-120k per year and lead the life we want to lead. 
  6. That means I need to be able to withdraw $50-60k per year from my account. 

Now we do math. I know, math sucks. $60/x = 4%/100 – Cross multiply, divide, yadda, yadda, and I come up with x=$1.5 million. 

That it’s. That is my magic number. I need $1.5 million in my IRA by the time I retire in order to be able to pull out $60k/year and still grow my account. 

Now that I know my magic number I can work backwards and figure out how much money I need to add to my IRA yearly (hopefully you are maxing out anyway) – and how much I need to grow my account every year to reach the goal. 

In essence you have given yourself a high level map to your destination. Now you know where you’re going. How to get there…well, that’s a whole lot more complicated.

So why 4%?

We are basing the 4% rule off the notion that a well diversified portfolio exposed to stocks and bonds will give an average return of 6% per year. If  you’re pulling out 4%, but making 6% then you’re still up 2% each year. Remember though, that is an average. There are years when the markets may lose money, and there are years where the market may go nuts and make you 10-15% returns. 4% is just a guide. 

Beyond the 4% rule

The following section is advice from Schwab and not my own.

However you slice it, the biggest mistake you can make with the 4% rule is thinking you have to follow it to the letter. It can be used as a starting point—and a basic guideline on how much to save for retirement—25x (or the inverse of 4%) of what you’ll need in the first year of a 30-year retirement from your portfolio. But after that, we suggest adopting a personalized spending rate, based on your situation, investments, and risk tolerance, and then regularly updating it.

How do you determine your personalized spending rate? Start by asking yourself these questions:

  1. How long do you want to plan for? Obviously you don’t know exactly how long you’ll live, and it’s not a question that many people want to ponder too deeply. But to get a general idea, you should consider carefully your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio (for example, Social Security, a pension, or annuities), and other factors. This online calculator can also assist you in determining your planning horizon.

     

  2. How will you invest your portfolio? Stocks in retirement portfolios provide potential for future growth, to help support spending needs later in retirement. Cash and bonds, on the other hand, can add stability and can be used to fund spending needs early in retirement. Each investment serves its own role, so a good mix of all three—stocks, bonds and cash—is important. We find that asset allocation has a relatively small impact on your first-year sustainable withdrawal amount, unless you had a very conservative allocation and long retirement period. However, asset allocation did have a significant impact on the portfolio’s ending asset balance. In other words, a more aggressive asset allocation had the potential to grow more over time, but the downside is that the “bad” years were worse than with a more conservative allocation.

     

  3. Asset allocation can have a big impact on a portfolio’s ending balance Source: Schwab Center for Financial Research. Assumes a constant asset allocation, a 75% confidence level, and withdrawals growing by a constant 2.19%. Assumes a starting balance of $1 million. Confidence level is defined as the number of times the portfolio ended with a balance greater than zero. See disclosures for additional disclosures on allocations and capital market estimates. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product and the example does not reflect the effects of taxes or fees. Remember, choosing an appropriate mix of investments may not be just a mathematical decision. Research shows that the pain of losses exceeds the pleasure in gains, and this effect can be magnified in retirement. Picking an allocation you’re comfortable with, especially in the event of a bear market, not just the one with the greatest possibility to increase the potential ending asset balance, is important. We think aiming for a 75% to 90% confidence level is appropriate for most people, and sets a more comfortable spending limit, if you’re able to remain flexible and adjust if needed. Targeting a 90% confidence level means you will be spending less in retirement, with the trade-off that you are less likely to run out of money. If you regularly revisit your plan and are flexible if conditions change, 75% provides a reasonable confidence level between overspending and underspending.

  4. Will you make changes if conditions change? This is the most important issue, and one that trumps all of the issues above. The 4% rule, as we mentioned, is a rigid guideline, which assumes you won’t change spending, change your investments, or make adjustments as conditions change. You aren’t a math formula, and neither is your retirement spending. If you make simple changes during a down market, like lowering your spending on a vacation or for expenses you don’t need, you can increase the likelihood that your money will last.

     

  5. How confident do you want to be that your money will last? Think of a confidence level as the percentage of times in which the hypothetical portfolio did not run out of money, based on a variety of assumptions and projections regarding potential future market performance. For example, a 90% confidence level means that, after projecting 1,000 scenarios using varying returns for stocks and bonds, 900 of the hypothetical portfolios were left with money at the end of the designated time period—anywhere from one cent to an amount more than the portfolio started with.

Here are some additional items to keep in mind: 

  • If you are regularly spending above the rate indicated by the 75% confidence level (as shown in the first table), we suggest spending less.
  • If you’re subject to required minimum distributions consider those as part of your withdrawal amount.
  • Be sure to factor Social Security, a pension, annuity income, or other non-portfolio income, in determining your annual spending. This analysis estimates the amount you can withdraw from your investable portfolio based on your time horizon and desired confidence, not total spending using all sources of income. For example, if you need $50,000 annually but receive $10,000 from Social Security, you don’t need to withdraw the whole $50,000 from your portfolio—just the $40,000 difference.
  • Rather than just interest and dividends, a balanced portfolio should also generate capital gains. We suggest all sources of portfolio income to support spending. Investing primarily for interest and dividends may inadvertently skew your portfolio away from your desired asset allocation, and may not deliver the combination of stability and growth required to help your portfolio last. 
  • The projections above and spending rates are before asset management fees, if any, or taxes. Pay those from the gross amount after taking withdrawals.

Stay flexible—nothing ever goes exactly as planned

Our analysis—as well as the original 4% rule—assumes that you increase your spending amount by the rate of inflation each year regardless of market performance. However, life isn’t so predictable. Remember, stay flexible, and evaluate your plan annually or if significant life events occur. If the market performs poorly, you may not be comfortable increasing your spending at all. If the market does well, you may be more inclined to spend more on some “nice to haves.”

Bottom line

The transition from saving to spending from your portfolio can be difficult. There will never be a single “right” answer to how much you can spend from your portfolio in retirement. What’s important is to have a plan and a general guideline for spending—and then adjust as necessary. The goal, after all, isn’t to worry about complicated calculations about spending. It’s to enjoy your retirement.

12-1-20 Recap of $YALA

12-1-20 Recap of $YALA

Reversal Play

$YALA – 12-1-20

Found $YALA on my morning scanners and kept an eye on it for a potential reversal play. Worked out this time, and looking back at it, I played it perfectly. That rarely happens. Here is a quick overview of what I was looking for this morning and why it worked. 

Disclaimer: This is not investing advice. Due your own research and perfect your own strategies before entering any trades. This video is for educational purposes only. 

How To Start Investing: Book Recommendation

How To Start Investing: Book Recommendation

The Beginner Investor

Book Recommendation

From time to time I will post recommended reading material for investors/traders. These are books I have read that I feel helped me understand the market, a strategy, terms, psychology, and tips for becoming a better trader.

NOTE: I have no affiliation with any of these book authors or publishers. These recommendations are my own opinions and I do not benefit from recommending them in any way. 

Book Recommendation: A Beginner's Guide To The Stock Market

A Beginner’s Guide To The Stock Market by Matthew R. Kratter

I don’t remember exactly how I discovered Matthew Kratter books, but I have grown to like them a lot. They are especially useful for beginners IMO, as he does a solid job of explaining general overviews without getting bogged down in the details that would often confuse or frustrate someone who is new to investing and the stock market. 

You won’t learn everything you need to know from any one of his books (or any book for that matter) but this book will give you a solid foundation from which to then explore more ideas in depth. This book is a great jumping off point.

In this book, you will learn:

  • How to grow your money the smart and easy way.
  • The best place to open up a brokerage account.
  • How to buy your first stock.
  • How to generate passive income in the stock market.
  • How to spot a stock that is about to explode higher.
  • How to trade momentum stocks.
  • Insider tricks used by professional traders.
  • The one thing you should never do when buying value stocks (don’t start investing until you hear this).
  • How to pick stocks like Warren Buffett.
  • How to create a secure financial future for you and your family.
  • And much, much more…