Last week was a reminder investors need to understand and accept the game we’re playing.
In other words, are you a long-term investor or a day trader? Do you buy growth stocks or value? Are you seeking out amazing businesses or gamma squeezes?
If you weren’t aware (and I envy you if you aren’t), Keith Gill, aka Roaring Kitty, of $GameStop(GME)$ fame returned this week. On Friday, he did his first live stream in almost three years after causing the 100x increase in Gamestop in late 2020 and early 2021.
The pop in the stock during the pandemic was caused by a gamma squeeze, essentially a short squeeze on steroids.
Traders buy short-dated call options (going long the stock)
This makes market makers selling the options are now short the stock
The stock price rises, forcing market makers to buy the stock to hedge out risk
Traders buy more call options
And repeat…
He had recently built a multi-hundred million dollar position in Gamestop (according to social media posts) and was trying to gamma squeeze again. For a while…it worked.
For a day or two this week Gill was up $1 billion on his GameStop stock and options position. The gamma squeeze was working again.
How did he do it? Are there more opportunities like GameStop out there?
Unless your name is Roaring Kitty, it doesn’t matter. If your game is long-term investing, gamma squeezes are noise. Unless you pump and dump on CNBC, you can ignore trading this week.
Eventually, the squeeze cycle ends and as we saw in Gamestop, the stock loses 90% of its value in a matter of days (early February 2021).
What you’re left with is the business. And GameStop is a crappy business.
The difference this time around is GameStop was ready with a massive stock offering to take advantage of the higher stock price. Investors and traders didn’t like that and shares dropped as 2.3 million people watched live on YouTube.
I was happy to say, I had no position.
Know Your Game
This is one of the smartest things Morgan Housel has said:
Keith Gill and I are not on the same time horizon.
I’m not buying stocks or options hoping for a gamma squeeze.
There are frameworks behind Asymmetric Investing that outline the time horizons I will write about and buy stocks based on.
I’m a long-term buy-and-hold investor, not a day trader
I want to own stocks that can compound for decades
Business fundamentals will ultimately drive returns
I try to avoid hype.
I try to be contrarian when it makes sense.
I want to buy stocks at a value and error on the side of never selling a great business.
That’s the game I’m playing. You can play the same game or a different one. But don’t think missing out on the latest hotness in the market is a bad thing.
Sometimes, missing hot stocks is a good thing because stocks like GameStop eventually become duds.
https://asymmetric-investing.beehiiv.com/p/gamestop-strikes-again
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