Tulips, Game Stop and Bubbles


Markets sometimes contain pockets of madness. Tulipmania was a period in 1637 when tulip prices reached extraordinarily high levels and then dramatically collapsed. Game Stop, a money-losing mall-based retailer, has also reached extraordinarily high levels due to a massive short squeeze. Here is a quick example for those who don't know what it means to short a stock. Let's say your friend bought a sweater for $100, and you ask her if you can borrow the sweater for a week, and you promise to give it back. You return the sweater to the store and collect $100 in cash because you know it's going on sale at a competitor store. You take your $100 cash, and you purchase the same sweater but for $50 and return the sweater to your friend. You make $50! What happened at Game Stop is that instead of the (sweater) stock going on sale, the competitor discounter knew many people had to purchase the (sweater) stock. Instead of lowering the price, these competitors instead increased the (sweater) stock price to $300! So if you wanted to keep your friend and return the (sweater) stock you borrowed, you would have to come up with another $200 to purchase the (sweater) stock for $300. Ok, when things are wonky in the stock market like with what is doing on with a lot of consensus shorts, risk managers tell their portfolio managers to take down risk, meaning they have to sell stocks that they are long and cover shorts. Many years ago I managed a long-short book at a hedge fund and made money, but it is tough. Advice for today's market is to keep it simple, just like the New York Times says... it's better to be dull and invest in a well-diversified stock and bond portfolio.