By now you’ve probably heard all about social media putting one over on the big hedge funds by purposefully jacking up the stock price of companies like GameStop.
The members of an internet-based Reddit group (known as a subreddit on the popular social media site) decided to act in concert and use the free-to-trade stock app Robinhood, to buy up shares of struggling companies like game retailer GameStop and movie theater chain AMC. One of the stated reasons for taking this action was to punishing large hedge funds which held significant short positions in these stocks.
In a nutshell, short sellers are betting that a stock’s price will decline. Basically, they hold a position as though they had sold shares at a certain price. For the trade to be profitable, they must close their position by buying shares below the price where they are “short” the stock. To do so, they must borrow and “pay rent” on the stock to hold their short position, incurring costs over time. Of course, if the short sellers bet wrong, they can lose significant money if the stock price goes up.
With both movies and video games going to online distribution, it seemed a sure bet that businesses that distribute these via physical locations would see their market share decline. Unless thousands and thousands of Redditors collectively decide to buy their stock in a short period of time.
The press has hailed this as the democratization of Wall Street. Previously, small investors have not had the ability to affect prices. But according to CBS News, despite this moment of crowd power, many small investors have sustained huge losses as the pumped-up stocks quickly plummeted in price.1
But even if an investor is successful at picking winning stocks some of the time, active trading works against him in the long-term.
According to Dr. Shlomo Benartzi, co-head of the behavioral decision-making group at UCLA Anderson School of Management, research has shown that this kind of strategy increases risk.2
He writes that although active investors are trying to minimize volatility by market timing (dumping losers and trying to pick winners), they end up doing the exact opposite. According to the research, “the volatility of the actual investor experience is nearly 50% higher than the corresponding volatility of stock returns.”
In other words, even if there were no transaction costs, you’re statistically still better off buying and holding.
Of course, the prudent investor would avoid assuming the highly speculative risk of concentrating long-term capital in a few individual stocks. Disciplined investing requires staying committed to a broadly diverse portfolio that’s engineered to meet your risk profile and time horizon. Yes, that’s true even when the news headlines are touting 10x gains in an individual stock.
Anecdotal evidence about a skyrocketing stock is usually about as meaningful as last week’s lottery numbers. They’re not hard to identify in the rearview mirror. We can help you understand your long-term strategy and stay disciplined when “the crowd” is chasing short-term winners.
Have a wonderful weekend!
Source: Efficient Advisors
Golf Tip of the Week
Master the Southpaw Swing
It happens—a tree, bush or frankly any kind of obstacle blocking you from addressing the ball. In this case, my ball is up against a tree. When faced with this predicament, before you take an unplayable lie penalty and get relief, first consider if you can at least move the ball forward or into the fairway for a shorter approach than you would have with a penalty drop. Take your pitching wedge, and set up as you would a left-handed shot, only invert the club head so the toe is pointed down.
To hit this shot, make an abbreviated swing and expect the ball to sharply roll to your right, hopefully back toward the fairway. If that shot sounds too daunting, try the backhanded chip. Turn facing away from the target and with your right hand, swat at the club in a straight up and down manner. Even if the ball moves just a few yards, you’re at least one club length closer than you would have been had you taken a penalty drop. Keep the head steady and know that the key is to move the ball back into the fairway, not to hit the green.
Tip adapted from GolfTipsMag.comi
Recipe of the Week
Chocolate Covered Strawberries
- 5 ounces semisweet chocolate, broken into smaller blocks or chopped
- 5 ounces milk chocolate, broken into smaller blocks or chopped
- 2 teaspoons coconut oil
- 2 pounds strawberries with stems, (about 20 strawberries)
- Line a sheet pan with parchment or wax paper. Set aside.
- Wash strawberries and thoroughly pat dry with paper towel. (The chocolate will not stick if the strawberries are not dried well).
- In a microwave-safe bowl, combine chocolate and coconut oil. Microwave in 30-second intervals, stirring in between, until completely melted.
- Pierce the stem-end of a strawberry with a fork and dip strawberry into the melted chocolate. Lift strawberry just above the bowl and twist around a couple of times to let excess chocolate drip off. Place strawberry on lined pan and repeat with remaining strawberries.
- Chill until the chocolate sets, about 15-30 minutes.
- To drizzle strawberry with extra chocolate for effect: Melt remaining leftover chocolate, if needed. Dip the tip of a fork into the chocolate and drizzle in a zig-zag pattern over the dipped strawberries. Let set in the refrigerator for a further 30 minutes, or until set.
Recipe adapted from Cafedelites.comii
Health Tip of the Week
Home Remedies that Work
Honey for a cough. A Pennsylvania study found that honey can help reduce coughing in children and adults.
Liquid dish soap for poison ivy. If you run into poison ivy, washing the affected area with dish soap within two hours may help prevent the itchy rash.
Ginger for upset stomach and motion sickness. Some studies have shown that small doses of fresh or powdered ginger can help relieve symptoms of nausea.
Tip adapted from AARPiii
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