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What Can We Learn from the Gamestop Short-Selling Drama? Hedge Funds Are Alternative Broker and Then Sell the Shares

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What Can We Learn from the Gamestop Short-Selling Drama? Hedge Funds Are Alternative Broker and Then Sell the Shares WINTER 2021 THE Wealth Management Strategies from Jentner Wealth Management What Can We Learn from the GameStop Short-Selling Drama? Hedge funds are alternative broker and then sell the shares. Then investments using pooled funds to they wait until the stock drops in employ different strategies to earn price, buy the shares back, return the active returns, or alpha, for their shares to the broker with interest, investors. Some of those strategies and keep the profit. Essentially, they are to sell stock short, use leveraged inverse the winning formula for and structured investments, and use stock picking: sell high and buy low. derivatives. There are stories of great success but also some spectacular Here’s the risk. If the speculators implosions. The recent controversy cannot buy the shares back at a INSIDE THIS ISSUE surrounding a retail video-game lower price, they are forced to store adds several more hedge funds buy the shares for more than they to the list of those who have lost sold the borrowed shares for. This billions of dollars. For the long-term is called a short squeeze. Enter a investor, this situation shows how little-known chat room on a blog What Can We Learn quickly information gets priced into site called Reddit. Here, millennial from the GameStop stocks and how the active stock investors grew angry that hedge picker can be taken by surprise. funds were targeting GameStop and Short-Selling collaborated to buy the stock in Drama? . 1-2 Around August of 2019, GameStop mass. They used a favorite trading announced its plan to restructure app among younger investors its organization. It would close called Robinhood to begin buying numerous locations and lay off up GameStop stock. This drove Is This Time 120 employees to regain solvency the price significantly higher and Different? . 3 and return to a profitable business squeezed hedge funds out of their model. Investors cheered, and the positions for losses. It began a stock rose in price. However, several few months ago, but the squeeze large hedge-fund managers were crescendo peaked in late January. New Standards of skeptical of the struggling retailer Some hedge-fund managers lost Conduct for Certified being able to turn things around, and billions and were forced to turn to Financial Planners . 4 they began to short the stock. This banks and other investment houses is essentially when stock speculators for loans. borrow shares of a stock from a continued on page 2 The Jentner Report is published periodically by Jentner Wealth Management. 3677 Embassy Parkway, Akron, Ohio 44333 | 330-668-1000 | 1-866-JENTNER THE WINTER 2021 What Can We Learn from the GameStop Short-Selling Drama? (continued from page 1) What makes the story notable is appeared brokerage firms were in limits for buying GameStop stock, the David versus Goliath aspect: cahoots with hedge-fund managers. the price crashed. When they the little guy seeking to save the In its defense, Robinhood said announced the restriction had retailer and punish the wealthy it created the limit to protect been lifted, the price exploded hedge-fund investors. In a stunning investors from taking on significant upwards. While not to these and surreal moment, hedge- losses in GameStop once the extremes, this happens to all fund managers went on national frenzy died down and the stock stocks every day. Information about media outlets and decried these returned to a more normal price. stocks is quickly priced in, often millennials for manipulating stock It will be up to the SEC to sort at breathtaking speed. This is why prices without any self-awareness it out; lawsuits have already been most mutual-fund managers, even of their own manipulation through filed. hedge funds, don’t outperform shorting. Brokerage firms heard their index. The lesson here is to the cries and began to limit how In our opinion, the take-away from avoid the drama, hold stocks for much GameStop stock small the whole ordeal is understanding long-term growth, and stay out of retail investors could buy. The how fast information gets priced the frothy world of day traders. Robinhood app set the limit at one into a stock position. Once share. This infuriated traders. It brokerage firms announced the What is Short Selling? Short seller borrows 10 Short seller sells 10 shares shares of ABC stock. of ABC stock for $500. 1 2 SHORT 3 BROKER SELLER MARKET Stock loses value. 5 4 Short seller returns 10 shares Short seller buys 10 shares of ABC stock, keeping $100. of ABC stock for $400. THE WINTER 2021 Is This Time Different? Is the current crisis all that different from the other crises of the last century? How should we respond? With 2020 ending, we wanted story. It shows us that people also see significant breakthroughs to take time to review an have rallied to better their lives. in medicine and technology. We unprecedented year. We were In the last century, the world do not have a crystal ball to tell hopeful going into 2020 with has weathered two World Wars, you who the next Steve Jobs will significant equity-market gains, the Spanish-flu pandemic, a cold be or what the next hot tech and the U.S. economic outlook war, the 9-11 terror attacks, and stock is. We will not be able to was bright. Unemployment had the subsequent war on terror. predict the next crisis. Instead, hit lows not seen since the great Despite it all, humans have sought what we do is provide our clients recovery on the heels of WWII. to recover and rebuild. That same with sound investment advice Wages were up, and consumer tenacity resides in us today. It is using diversification to capture confidence saw record highs. the human condition. market gains during good times and provide downside protection Unfortunately, shortly into 2020, History also demonstrates that for when markets fall. The reason the COVID-19 pandemic spread free people making financial we have such confidence is globally. The social and economic decisions create significant wealth. because despite what the media impact drove investment markets Henry Ford’s decision to take may tell you, this time is not all lower and brought unprecedented a fledgling idea of gas-powered that different. governmental action to contain buggies to the masses created the virus. Due in part to the quick the assembly line and changed passage of an economic stimulus manufacturing forever. The idea bill to the tune of several trillion of placing a computer in every dollars, the markets recovered at home drove International Business such a rapid pace that many were Machine (IBM) to create the caught flat footed. In addition to personal computer, and technology the chaotic economic year, the never looked back. Today, we have Presidential campaign drove an more computing power in our already-divided country further cell phones than the engineers at into the trenches. IBM could have imagined possible. While these inventions created Despite the uncertainty, stock significant wealth for some, they markets continued to hit all-time also destroyed the livelihoods highs. Growth stocks like Amazon, of others as Kodak and the Apple, and Google rebounded manufacturers of buggy whips can quickly from March’s lows to soar attest. It is the ebb and flow of to record highs. free-market economies. We are often asked how stocks As we move into the next decade, could recover so quickly. The the possibilities are boundless. temptation during a crisis is to Yes, we will see significant market think, “This time, it’s different.” disruptions, political rancor, and However, history tells another unexpected events. But we will Seth Jentner, CFP® Vice President and COO Jentner Wealth Management 3677 Embassy Parkway, Akron, Ohio 44333 330-668-1000 1-866-JENTNER ADDRESS SERVICE REQUESTED WINTER 2021 THE Wealth Management Strategies from Jentner Wealth Management New Standards of Conduct for CERTIFIED FINANCIAL PLANNERS™ Jentner Wealth Management has other professional service advisors; acted as a fiduciary for 100% of its and exercising discretionary author- clients 100% of the time for decades; ity over a client’s assets. There are however, this has not been true for specific disclosure requirements all financial advisors. We are pleased under the new Code and Standards that the CFP® Board has released a that dictate the information a CFP® new Code of Ethics and Standards professional must communicate to a of Conduct that all CERTIFIED FI- client when providing either financial THE JENTNER REPORT NANCIAL PLANNER™ profession- advice or financial planning. als must comply with. The revised The Jentner Report is published quarterly by Code and Standards require CFP® Under the new requirements, there Jentner Wealth Management, 3677 Embassy professionals to act as a fiduciary at are 15 duties fiduciary advisors owe Parkway, Akron, Ohio 44333, 330-668-1000. © 2021 Jentner Wealth Management. All rights all times when providing financial ad- to their clients. A CFP® profes- reserved. Information has been obtained from vice to a client. The prior standards sional’s fiduciary obligation includes sources believed to be reliable, but its accuracy required CFP® professionals to act acting in the best interests of the and completeness and the opinions based there- as fiduciaries only when they were client by putting client interests first on are not guaranteed, and no responsibility is assumed for errors and omissions. Nothing in providing financial-planning services, (duty of loyalty); acting with the this publication should be deemed as individual not when they were selling invest- professional skill, care, prudence, investment advice. Call Jentner Wealth Manage- ment products without providing and diligence a prudent professional ment for consultation before making an invest- ment decision.
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