Jimmy Van: I lost on “MEME” Stocks – Until I Didn’t (Patreon)

SRS Note: Something a little different, but a lot of you are asking for more Jimmy Van content, so here ya go!

By Jimmy Van

I consider myself a novice stock trader at best.  I’ll go through spurts where I’m really engaged and keeping an eye on numbers throughout the day.  But then life will get in the way and between running my company and dealing with two little kids at home, I’ll neglect my stock positions for weeks or even months.  When the COVID lockdown began in the Spring of 2020, I recognized an opportunity and was able to get in early on companies that I felt would benefit from lockdowns – Zoom, Salesforce, etc. – plus I “bought the dip” as they say and got in on other stocks that were down due to COVID but were certain to bounce back like certain airlines and movie theatres.  I ended up having a strong year as a novice trader, and then my attentions turned elsewhere as the holidays approached.

Heading into 2021, the stock market wasn’t something I was paying attention to.  I heard on the news about GameStop (GME) and how its stock was on the rise, but I didn’t bother looking up the details as to why it was spiking.  Then, my friend and Managing Editor for Fightful.com Sean Ross Sapp told me about how he’d made money on “MEME” stocks.  I didn’t know what that was so I looked into it.  I found out about a group on the social media site Reddit.com called Wall Street Bets led by an individual calling himself Roaring Kitty (aka Keith Gill) who had discovered that GME had been very heavily shorted by hedge funds (I’ll explain in a minute).  These Reddit users became vigilantes, wanting to pump the GME stock in honor of “the little guy” and at the expense of the big suits.

There are basically two ways you can trade stocks.  You can buy long which is the traditional method we’re all familiar with – you buy a stock low, hope the price goes up, then sell it high for a profit.  But you can also buy short meaning you basically borrow the money from your broker at the current price, then hope the stock drops so that you can then buy it and the margin is your profit.  Hedge funds specialize in buying short and GME became one of their big targets.

Keith Gill claims he first purchased GME stock at $5 per share long before the story became international news.  He would then post regular updates on YouTube and Reddit talking about the stock and the short positions, showing the continual price increase and encouraging his viewers to buy in.  As time went on that’s exactly what they did, turning the Wall Street Bets group and its millions of subscribers into an unofficial brokerage.  Between the first and the end of January, the stock rose from about $17 per share to just under $500 per share, turning Gill and many of his followers who had gotten in early into multi-millionaires.  It also inspired a wave of novice investors to buy into GME, as well as other stocks (becoming known as MEME stocks) that the group had targeted due to similar short positions such as AMC, Blackberry and Nokia.  These individual novice traders, also called retail traders, were all in, with many sharing stories on Reddit about how they’d taken out bank loans, withdrawn their life savings or taken out second mortgages to fund this supposed goldmine.

After I found out about this story, I did some research on these stocks and discovered that it was true that there were massive short positions on those stocks.  The way it works is, if you buy a stock short meaning you borrow money at a certain price but then don’t actually buy the stock within a specified period of time because it didn’t drop to your liking, the exchange implements a margin call in which you have to settle up your debt.  Margin call dates began to approach forcing large hedge fund firms to either bite the bullet and buy the stock at a massive loss or find a way to raise money in order to keep their positions going.  Two firms – Melvin Capital and Citron Research - did exit GME at a significant loss.  But many others kept going.

So I bought in and bought in pretty heavily on GME, and also added smaller positions on other MEME stocks like AMC, NOK and BB.  Very quickly I learned a cardinal lesson about stock trading that I will keep with me forever – don’t get greedy.  Within a matter of hours I was up on all of these stocks and could have sold at a significant margin.  But I made the mistake of buying into the hype and believing the prices would only soar higher, so I held.  Then I learned a second lesson, a lesson I frankly should have already known given my background in business – the establishment will always do whatever they can to prevent the “little guy” from winning.

Discount brokerages are the websites and apps that every day individual investors use to buy and sell stock including Questrade, Webull, Etrade and others.  Many offer low commissions or even zero commissions, because rather than execute a stock order on their own, they actually sell it to a larger high-volume firm.  One of the brokerages that came to prominence during this time is called Robinhood.  An ironic name given what happened.  Steal from the rich and give to the poor?  What transpired ended up being just the opposite.

After Melvin Capital exited their short positions on GME and took a massive loss, they announced that they had received investment funding of $2.75 billion from two other firms, Citadel and Point72.  It also came out that Citadel also had a big short position on GME.  And then came the big play.  Several discount brokerages including Robinhood – the one that supposedly represents the little guy - decided to restrict trade on GME among other stocks.  Robinhood claimed they had to do it due to stock volatility and the fact that the volume could have given them liquidity issues had it continued.  By not allowing their customers to buy the stock, these discount brokerages essentially tanked the stock price.  That meant that a novice trader like me who had bought GME at a high price, was now left with a big loss.

There’s more.  It was discovered that Robinhood’s largest client wasn’t its individual traders, but surprise, surprise – it was Citadel by way of a division of the firm called Citadel Execution Services.  Robinhood sells their order flow to Citadel which allows them to offer their investors commission-free trades.  Obviously a major price reduction on GME was beneficial to anyone who had shorted the stock, whereas the continued increase in stock price would have meant that the shorts would have taken a massive bath.  And so it appeared on the surface that trade wasn’t restricted by these brokerages for any reason other than to protect their largest hedge fund clientele.  Robinhood CEO Vladimir Tenev of course went on record to say that trade wasn’t restricted to protect Citadel but of course under the circumstances, that’s the only thing he could have said publicly without facing severe repercussions.

So time went on, and the stock prices slowly came back down to earth with GME eventually dropping under $40 while a stock like AMC that had reached a peak of over $20, dropped back down as low as $5.40.  And the individual investor was left holding the bag.  Many sold out of panic or necessity and took the loss.  I was fortunate that I could hold because I’d only invested an amount that I was willing to lose.  I also implemented the “buy the dip” strategy meaning whenever the stock price hit a low ,I would buy more to average out the stock price so that I could sell to break even at a lower rate.  I did that regularly with all of my MEME stocks, and waited.

On February 24, 2021 I had just finished up my weekly Wednesday podcast for Fightful.com when I decided to check out my stock portfolio.  To my surprise, GME had spiked that day followed by other MEME stocks like AMC.  No one was entirely sure why.  Maybe it was because GameStop CFO Jim Bell had been pushed out.  Maybe it was because board member Ryan Cohen had posted a picture of a McDonald’s ice cream cone on social media which amateur sleuths tried to decode as being a sign of big things to come.  Whatever it was, the MEME stocks were back.

By then I had managed to get my average price down to about $90 and so when I discovered that it was at $113, I sold.  I did something similar with my AMC positions.  I then basked in the glow of knowing that I had finally rid myself of those stocks and overcome those big losses.  But then – the prices kept spiking.  GME ended up going to just under $200 in the after-market that day while AMC went to $11.  Had I held on for even fifteen more minutes, I would have made considerably more than I did.  I made the mistake of selling without doing research first because it was late in the day and I was startled by the sudden increase after having not paid attention for a few hours.  So I kicked myself for a minute and then accepted the fact that at least the day had ended with those losses cleared.

The Aftermath

I’m not a financial advisor and will never give stock advice.  However I came out of this experience a much better albeit still novice stock trader because my time just won’t allow me to devote enough attention to this to become great at it.  The best day traders probably devote 12 hours a day to their craft and I just don’t have that time.  But I’ve had a pretty good stock run in 2021 so far after having a pretty decent 2020.  And while I won’t give stock advice, I thought I would at least share some lessons that I’ve deemed invaluable.

1. Only invest an amount of money that you’re willing to lose.  I already understood this, as I have other investments outside the stock world.  Never, ever overextend yourself by allowing your dreams of finding that pot of gold at the end of the rainbow to cloud your judgment.  If you can only spare $100, then start there and work towards turning it into $200. Then work towards turning that $200 into $400.  Don’t put yourself in a situation where a bad stock pick could leave you in financial despair.
2. Patience.  Don’t panic sell.  You don’t lose money unless you sell at a loss.  When GME tanked, I held.  Of course, I should have held fifteen minutes longer than I did in the case of GME.  But I waited for a rebound to avoid taking a big loss.  And because I’d only invested an amount of money that I was willing to lose, I could afford to hold.  I was also fortunate that I could afford to “buy the dips” to bring down my average price, making it easier for me to profit in the end.
3. Don’t get greedy.  The million dollar question that everybody always wants to know is, when is the best time to sell?  My desire to maximize my investment in GME caused me to experience the big decline in the first place.  Had I not been so greedy and been happy with the margin I was at (which ended up being better than what I ultimately sold for) I would have sold earlier and avoided the hassle of having to buy dips.  I once asked my accountant, what’s a good return year after year regardless of the state of the economy?  Without hesitation he said 5%.  But here I was expecting 100% return or more on GME.  So now I take it case-by-case.
4. Do some research before you buy.  There are dozens of people all over social media who will recommend a stock for you to buy.  But you have to remember – they recommend those stocks because they have a position in them and so it’s to their benefit that others buy in to try to increase the price.  So while I do listen to recommendations from some people, I try to dig in a little.  I look at volume, I look at the prices of open bids, and if I have time I look into the company to see if there’s any reason to wait for a spike whether it be a pending merger or acquisition or new executive hire or whatever.
5. Don’t take things personally. I beat myself up a little when I didn’t sell GME the first time, and then when I sold it too early the second time.  But overall I’m up a decent amount on the year overall.  And it’s not like I can take those decisions back.  So I try to just park them and move forward.