It’s been a crazy start to 2021 following a pretty crazy year last year. Interesting times to say the least.
The story of the last couple of weeks has been reddit armies swarming lord of the rings style at heavily shorted stocks. The narrative has been levelling up with the big boys (hedge funds), robinhood style (steal from the rich give to the poor). And the initial success was remarkable, with crazy moves higher on stocks like Gamestop, AMC etc: https://www.msn.com/en-gb/news/other/why-the-gamestop-affair-is-a-perfect-example-of-platform-populis/ar-BB1dlmKn
Yet, unsurprisingly, the wind has come out of the sails rather abruptly. Gamestop stock has fallen by around 85% in two days, yet it’s still much higher than at the start of the year, which just shows how incredible the pump was. Of course, those who recently joined the fray will be cradling some nasty losses, such is the nature of ‘pump and dumps’, pyramid schemes, whatever you want to call it.
One of my favourite quotes about markets is: ‘in the short term, the market is a voting mechanism, in the long term it is a weighing mechanism’. Sentiment matters in the short-term, but like gravity, it cannot prevail in the longer term. Great profits are made in markets knowing when sentiment has got too bearish (e.g. March 2020) or too bullish. Arguably, we have very quickly swung to a situation where things are getting quite hot.
I’d argue not at a general level, but certainly for pockets (e.g. EV stocks) and individual stocks. There could be a big fall back to earth for some of these names.
This isn’t a time where I’d be excited to deploy capital en masse. However, opportunities can still arise, be patient – don’t follow the crowd 😉