It can be very easy to get caught up in a new fad, fashion, or gadget only to see something equally new and shiny to replace it. It happens a lot with tech - your new smartphone, or smartwatch gets a reboot, and you’re left sad and out of date, whilst everyone else is talking about the fun new features they have on their swanky new devices.
But fads aren’t just for tech, they happen in investing too.
Recently we’ve been seeing - let’s say - “interesting” fads in the market, where previously heavily shorted companies are suddenly reaching unheard of prices and valuations. Take Hertz last year, and now GameStock and AMC Entertainment.
A “short” is selling a security you don’t own, with the expectation of buying it back cheaper to make a profit.
These previously heavily shorted securities have suddenly received a significant amount of interest, and the buying of these shares is resulting in short holders nursing large losses with the market chasing for shares driving up the price.
This is a “short squeeze”, as the short holders are being squeezed out of their positions as they become too painful and expensive to continue holding and risk further losses.
Look back to the days of October 2008 and you’ll find an example of this with Volkswagen. This was a month where short selling boomed, post the collapse of Lehman Brothers, but Volkswagen bucked the downward trend and for one brief day it became the biggest company in the world. Short sellers beware!
The majority of information surrounding these stocks (and others) appears to be driven by social media sites like Reddit, which in turn spreads quickly with buyers crowding into the market to get involved. You can only guess where the graphs peak and then (probably) retrace sharply back to a lower price range.
Historically, there have been plenty of fads in the markets. You can go all the way back to Tulip Mania between 1636-37, The Panic of 1863, the Wall Street Crash in 1929 and the Dot-com bubble between 1995 - 2001.
Is this trading? Too close to gambling? Following the herd? Here at Upside, we’re all about the long term game. Investing isn’t for the faint hearted or the impatient. We’ve built an ecosystem to develop the skills of the budding analyst or investor, as well as those seasoned pros out there, through analysis and feedback. It’s all in the data, not in the latest fad or hype.
Who can say it better than Public Enemy: “Don’t believe the hype”.
“Caught you lookin' for the same thing / It's a new thing.”
“They even had it on the news / Don't believe the hype.”
Upside is a marketplace for investment ideas, and a space for the development of skills through analysis and feedback. We believe there’s a science to being right, and it’s right here, at Upside.
Don’t Believe the Hype lyrics © Universal Music Publishing Group, BMG Rights Management