Spencer Jakab on the Death of Meme Stocks

Fleecing of Small Investors. Spencer Jacob, Welcome to Bloomberg. Thank you so. First of all, I really enjoyed the book. I read it on the beach this summer and a couple of weekends. Uh. Really reads like a fascinating novel. Um. If it wasn't a work of nonfiction, it could never have been made into a work of fiction because it just wouldn't be believable with it. It's crazy, right It's it lends itself to a to a book, and I knew that right away. When the story began to unfold,

I sent an email. I had a three quarters written book proposal about something else, sitting at home during the pandemic, and I wrote an email to the acquisitions editor Penguin random House person. I don't even know. I didn't know then, and when I saw this story begin to unfold, I

had first article had not been written about it. One of my sons, let me stop you and and just say the book came about and please pardon my language, because your son's self describe themselves as degenerates, apes and retards. Can you explain why a group of people would self describe themselves that way. So I have three sons, and two of them are are very online. They're all online, but two of them are very online. They are on

read It all the time. And they were on this forum on Reddit called Wall Street Bets, which was at the epicenter of this story and the people on this forum. It's an investing forum, but not really an investing corn. There's a different investing forum on unreddit called r investing. This is our Wall Street Bets, which is an entirely different speculative lots of access to grind, lots of social issues come up. It's not a straight up investing group. Now.

It's like Jackass for finance, That's what it is. It's like, you know, you do crazy stuff on there, and you show off crazy stuff and you. I don't know if a lot of the crazy stuff actually ever happens because you can't tell people are using pseudonyms. But they were all over that. And my oldest boy, he's not twenty three, he was a college senior when this happened, came over and he said, Dad, are you going to write something about Game Stop? And you know, so game Stop they're

all into video games. I've driven them there lots of times. They were going there less and less over time, which is a problem with Game Stop as a business. It's you know, it's in a mall, it's it's old school, it's it's the block uster video games. Totally, totally, that's and that's the problem. That's why I had been losing money for years. That's why that's how it found itself at the center of the story. The book is not really about game Stop. And people always asked me about

don't you think this? Don't you think that about Game Stopped? Like I can talk to about game stuff, But that's not really the interesting thing here. The interesting thing is this unprecedented thing that made it the most traded security in the world for a while, the most search term in the world for a while, you know, and from just total obscurity, and um, I said no, why you know? And his friend of mine, this kid who I've known since he was you know, my as tall as my

knee had had bought it. And uh, I took a look and said, well, he's doubled his money in the last two days. Maybe he should sell. They're talking about it on Wall Street bets. And I've seen this dozens of times before, you know, it's a kind of a flash in the pan. And he I really wouldn't hang on too long. And and what kind of got my attention was he said, no, he's not going to sell. Ever, No he can't sell. So what I he can't sell?

And so the you know, I started reading the board and I was like, oh my god, they're they're executing a corner on this stock. So they all sort of agreed online to buy as much as they could and not sell and then buy options to which forces further buying buy options dealers. So it was this trap is this thing that you can't really do, as you know, Barry, like, you can't not legally legally right when I can't get together and do this. But a bunch of anonymous teenagers

and others. It wasn't just teenagers could talk about it in this venue without real fear of reprisal, because there are a bunch of little guys engaging in some speculative wishful thinking. That's right. And if you take at that point, there were about one point nine million people on the forum. By the end of the next month, there were eleven million people. So they quadrupled in in four days the

number of people on this forum. As it just became people got so excited by it and so there that those people individually may not have had a lot of money, but they did two things. First all their a lot of them, and they all rushed in in the same way into the same stocks, especially game Stop. And also people were telling them, hey, if you want to get real bank for your buck, don't even buy the stock by way out of the money, call options on the stock.

And then the options dealers will have to basically as it goes up, they'll have to buy, and they'll buy a lot more than the money that you put down. In professional terms, that's a gamma squeeze. Yes, it's a gama squeeze. And most of these these kids were very few of these kids knew what a Gama squeeze was, but it was all explained there. I was reading all about it on the board. I don't think they were breaking the law because they're talking about it openly, right, right,

This this was no dark conspiracy. So so let's talk a little bit about Wall Street bets. When it first started to erupt, I think the knee jerk response, and I'm as guilty as anybody was. How is this any different than the nine nineties and Yahoo message boards and raging bull But there was a slightly different factor what made this so different than what we saw thirty years

So you've heard it. It's a cliche by now, but it is true more or less that the four most dangerous words and investing are This time is different, right, And that's that's something I'm a real student of financial history. I was Templeton very famously said that totally, and I went into this with that echoing, and I had to go into everything with that echoing in my head. Whenever

there's a crash or mania or panic that people. Human psychology is basically unchanged since Paleolithic times, and so the way that that we react to something financially is never good, but it's always very similar. So history rhymes, doesn't repeat, but it rhymes that that's the reason it's it's the way that our our brains are wired. But this was different, and tell us, tell us what was different about it.

The difference is that private companies understand psychology too. They have psychologists who work for them, They have social psychologists who work for them, and the same people who Uh. You go into a Vegas casino and there are no fox on the wall, there are no windows. People are

bringing you drinks. The same people who designed sports gambling apps and things like that, designed social media and designed the the brokerage apps that that these young people were using to access this, and they induced all kinds of They just put these speculative tendencies on steroids, basically is what they did. Social media and the investing apps together on the same device on your smartphone being used by the same people al along with Wall Street, Bets and Reddit.

So the difference this time was different because uh, and to the fact that everybody stuck at home. Most of us got stimulus checks, so people have cash in their pocket and there's no gambling, there's no sports. Their usual entertainment is shut down. This really seems and you describe it in the book as a perfect storm that teed up to send this, to use their parlance, to the moon. Yeah. I mean it's so interesting because several things had to

happen really all at once for this to happen. Um. And so I trace that and explain the social forces, because I think that's I mean that that's how you tell the whole story. Uh, And it's very interesting, but it's also how you understand what it means going forward.

And I want there, you know, and I hope that there are lessons in the book for people who invest, people who invest their own money, people on Wall Street to take away from this, to understand how it happened, not that it's going to happen exactly this way again, because as I said, it was a perfect storm. But you have to go back to two thousand and eighteen when you had sports gambling legalized outside of Vegas in most of the US, and so you had all these young,

mainly men playing daily fantasy sports. They had the apps already, the Vanduel Draft Kings and what have you on their phones, and all of a sudden they were actually gambling there's a legal distinction between daily fantasy sports and gambling gambling. It's the only type of sports that that negatively correlates with with age is sports gambling. Uh then then totally everything else is the older you are, the more likely are to play slots and things like that, but not this.

Then you had um in late so you had a five year period when half of the new brokerage accounts opened in the US were opened by robin Hood, which is a tiny broker Even then in that data point, again, half of all new brokerage counts were robin Hood. Yeah, not in dollar value because they were tiny's The median value of those accounts was two forty one dollar, which is peanuts. But the number of accounts, that's that's something. And I would love to to go into how what

made robin Hood possible? Okay, because there's some changes there. So let's let's just blow that right now. Why was robin Hood and ps um? You know, I looked at robin Hood and in a seed round and I wait, you want to give free trade in two millennials. This is the single dumbest investing idea I've ever heard of, and I passed on it. What made that possible, robin Hood possible, where twenty years ago you couldn't have had

the sort of app on your phone like robin Hood. Well, our our mutual friend Howard Lind'son was one of the early investors in robin Hood. He's the one to pitch me on it. Literally, Howard, that's the dumbest blank idea I've ever Wait, the trades are free and you're giving it to the least wealthy people in the world. How are they ever going to make money? Howard will video.

He was kind of a dummy about it too, because he was smart enough to invest, but then he was dumb enough to say, guys, this is a great app.

You should charge like a dollar or two dollars for it, like people will pay that, which was totally wrong because the fact that and and so you still have to link it to a bank account, right, but you could download it for free, and once you went through the process of opening the account, that's when you found out they need this info, they need your phone number, they need that, they need your bank account, And before you know it, you've opened up your financial life completely to

robin Hood and your first brokerage account and it's it's cost seventy bucks to get out to sort of, you know, to move your account to somewhere somewhere else, so you don't you liquidated and move on exactly. Yeah, that's that would be the smarter thing to do. Not that their customers always did the smarter thing, but we'll get into

that later. But yeah, so they, I mean, in late every other broker said we'll screw this, you know, we're if you can't, you know, can't beat them, then join them and for a Schwab or fidelity that has much wealthier customers. They sell all kinds of services that Robin who doesn't. They're like, well, well, we're gonna lose some money on this, but we have to match them. And it shows you how dumb they were, because they all were wringing their hands about cutting their commissions to zero.

It was no longer the bulk of the money they made anyway, but it was still a pretty nice chunk of change for them, and they thought that it would cost them money, and it made them money because you had an explosion in trading activity as a result of everyone going to zero. And so that there's a psychological concept that's not appreciated. I mean, you have you learn all about e losticity of demand, and you learn that that when things get cheaper, people will desire more of it.

But it depends what kind of thing it is. There's only up to a point, only up to a point, but there's a special kind of product where people once you go from costing something doesn't matter how little to nothing, people will go crazy that it will explode. And that's specifically fun things. And so you don't think about buying a stock is a fun thing, but robin Hood made it fun the same dopamine hit as as gambling or getting on a roller coaster or just a smidge in

a heroine for the weekend. Totally, and it's the same thing as think about when you're you're a few years older, the means, so you remember like if you had to call somebody long distance. I mean, you know, my family, my parents are immigrants, and we had you know, relatives far away, and I remember, like, you know, the very

rare occasion they would spring for a phone call. Like everyone had to be lined up next to the phone and you got your you know, your one minute on the phone and then hand the phone to the next person. And then it was like, oh, they're tearing their hair out about how much it would cost. Now calling anyone in the world anywhere is free, and so people do it all the time. You know, they do it way way more than if it just cost a tiny amount

of money, because these there's no cost to it. There's no incremental cost to it, right And and as a note with Schwab, when they and they were the first major broker that seemed to have introduced um free trading,

and that all the other dominos fell after them. When you looked at their revenue the next quarter, I think something like fift of their pre free um revenue came from just float on cash and trading volume was really really you know, high single digits, low double digit and then eventually payment for order flow more than made that up. So and a lot of assets flowed into them. So old told this was a win win at least four established Wall Street farms, and they were like, why don't

we wait so long to do this? This is great? They were all, you know, just gushing about how smart they were to do this, even though they had held off on doing it for a while. And then that was late. Then what happened early is you had the pandemic, and the pandemic was just the perfect thing to kick

off the speculative excess. Of course, you you know, you'd had free money for many years, basically, you know, you'd had zero would real cause credit, but but literal free money showing up in the mail in the form of a check or a direct deposit that that kicked in um in the second quarter of If you were twenty three years old and you you know, had been let's say, working, maybe living with friends, all of a suddenly you're mom and Dad's basement. You get this check for bucks. Uh,

you might be getting extended unemployment benefits. Uh, you're not spending money going out every night. You know, you're at the age where you you spend money as soon as you make it. All of a sudden, you weren't your board. You're sitting there looking at your phone for twelve hours a day, and you're looking you're looking at social media. All of a sudden, all these new social media people

are popping up talking about stocks, the stock market. You know, there's this whole rise of of influencers, and so you go and you know, your buddy tells you to open up a robin Hood account, and you open up robin Hood account because he already has a robin Hood account, and he'll get he got a free shriff stock when he opened it, and he'll get another free shaff stock. Mystery, Like it's like a sweepstakes because it could be a two dollar stock, but it could possibly be a fifty

dollar stock. Right, you don't know, it's it's it's like you know, I mean, it's like, that's a cheap cost of acquisition for a brokerage firm. Right. All told, the average payback period was five months for that investment, so they didn't really need to add. They did have advertisements, and their advertisements were really kind of too kind of um, you know, make themselves look it. Basically, it wasn't to get new customers. Their their their ads. We're all touchy feely.

You were born an investor. I never thought I could do this. And the people they show in their ads are not the typical lucrative customers they had either. They were you know, um, mainly female, a few older people. It was young males primarily. And and the thing is they did most of their customers they don't make money on but there's a subset on which they make a lot of money, and so those are the people they're trying to get. It was young risk seeking, uh, you know,

kind of not maybe not two wise men. And as a father of three young men, I can I know what I'm talking about. Uh. And and you know, and so that that's when you had the explosion during the panemic, and you had all this volatility which was just just addictive. It was like crack cocaine, you know, you couldn't stop. And then in the year from the pandemic bear market bottom to a year after nine percent of American stocks rose,

which was crazy number. So so let's talk a little bit about the revolution that that wasn't by using game Stop as an example, as you did so well in the book. And and it has to begin with a guy whose name we now know as Keith gill Um. Since this is a family station, I can only use an acronym. He went by DFV on on Reddit and

on YouTube. He was Roaring Kitty and he basically takes all of his money, some fifty something thousand dollars buys leaps like a year or two oft in the future, way out of the money and this just looks like a wild So he buys calls betting the stock will go up on game stop, which is a couple of bucks a buck or two or three at the time, and he posts it um without a whole lot of commentary on game Wall street bets on Reddit, just to picture of his brokerage account with the options there in

his portfolio, apparently nothing else, and the word phrase I like the stock, yep, yolo. You only live once. So he is a really really fascinating character and unusual character. And one of the interesting things is, let me tell

you that. I mean, of course, his whole history is there to be seen, but for ninety percent of of this story, he's there in the background doing these these videos four hour five hour long, you know, videos, talking about the stock and talking about investing, making these posts, responding to people who mainly made fun of him on this message board, like a lot. He took a lot of heat, and you know, he was he was unusual in a lot of ways on this forum Wall street Bets.

One thing is he wrote in complete sentences. The other is like he was, I mean you I think can advocate people go out and buy it. He just said I like the stock that basically as much as as much influencing as he did was here's a picture of my account. I'm gonna live and die on it. You guys, go do what you want. You want a textbook example of not how not to influence people online and that

and that's it. Because he was cerebral, he was polite, uh you know he people would kind of make fun of him and said, well, that's not the way I think about it, because you know, behavioral finance dictates that blah blah blah, and uh, as I follow the teachings of as Watamurana and whatever like, you know, stuff like that, no one knows, yeah, exactly the valuation guru and n y u No, I think these kids know who that was or there you know, right, I mean, And so

he was just basically sort of you know, it's like a tree falling in the woods. I mean, some people were like, you know, sometimes he would make money and then I say hey, you should sell and like no, no, no, And then he'd lose half of it. And people were following and said, wow, what an idiot. You know, for the money that you lost, I could have done this and that you could have bought a Game Stop franchise. Yeah, so he invested fifty three dollar is of his money.

He's not a rich guy at all. He was working. He didn't say anything about himself, by the way, and he was and I think had he said this, he probably would have had less influence. He's a charter financial analyst, which was a difficult qualification. One, two, and three have each have like a fifty something percent fail rate. So he's in the industry. And then he being being smart and hard working is always good, but getting a little

lucky is better. And and not long afterwards, along comes Michael Burry of the Big Short fame and basically takes a position in Game Stop saying, hey, you know this is a classic cigar butt. Uh, there's some value here and and there's way too much negativity about it. What happens from there, Well, I'll tell you that this is interesting too, because I'll I won't say the entire name, but it's df V is deep effing value. So value

is part of his moniker And he was upset. He said, you know, thanks a lot Bury for jacking up my cost basis because most peopore Well, so now it's going to be more expensive to buy more, and he would build a position over a couple of years. The technical term is pyramiding. You keep adding to an existing position

as prices gradually rise. But they practically doubled overnight, right, And he and most people, I mean people on this board would be like I bought these options and like, now it doubled my money, you know, because because the stock went up because Michael Burry shows up, who was played by Christian Bale. That's why most people think of Christian picture of Christian Bale instead of the drum set in the Big Short. Yeah, totally. And so and people

are like, what what's wrong with you? Like you should sell? Like you know, he this is like a stroke of luck, and it's not how he viewed it at all, which is a very rare form of thinking. So he I think like he was surprisingly long time for someone buying options, totally. And I think I would not be surprised if this guy shows up one day, five years, ten years, not even that long, you know, managing some kind of you know, value fund just sort of like a kind of a

hip Warren Buffett or something. Because he really he has that way of thinking. First of all, obviously has analytical chops by having had a cf A not maybe not Buffett like, but he certainly knows what he's talking about. But he he just has that that kind of unusual way of of looking at things and inverting things that that you need for success. But at the same time,

as we'll see later, he he's got that. You know, he's cool and young and use thirty three thirty four during this this this episode and the point at which he became really super influential that were the most followed people on the planet basically for a couple of weeks. Uh, he wasn't posting any kind of analysis, you know, he was like he became the hero briefly of this, this

whole movement. So so following Michael Burry not much longer than that, Ryan Cohen, who is the founder of Chewy, which essentially um is the most successful online and pet food and and good store essentially with pets dot Com couldn't do Chewy became and Ryan Cohen then says, hey, we think game stop can become an online purveyor of video games. Forget the brick and mortar that that's just where they were. Let's talk about the future. And now the stock takes another leg up from one and two

and three dollars to five and ten dollars. Tell us what happens next. Yeah, so he shows up, and then things start to get interesting. Um it starts going up to the point that it was at the point that that deep effing value would have sold. You know, he said, like I think you know this. He had made it up money. He was a millionaire, just a million, just one million, one million and two million, couple of million, not no big deal and life changing before to exactly

before taxes. But then a light bulb goes off. And even before this, a light bulb kind of went all from his head, uh, some months before because someone had pointed out on this this board, like hey, this this could be the greatest short squeeze of your life, the mother of all shorts, the mother of all short squeezes, you know, the kind of the saddam language. And and it briefly doubled uh and and then settled back down.

But that was a foretaste. And that's the first time you mentioned, like, hey, in addition to all the good stuff I think about game stop, there's this additional possibility. I'm not gonna really count on it that there could be a short squeeze, because you know, the thing that that game stopping the other they call the meme stocks, you know, had in common was that they're all kind

of losers. They weren't a MC, the big movie chain which was dying on the vine during the pandemic hurts, which had already declared bankruptcy and was waiting for the court to just doll out the assets, which is insane. What were some of the other ones in BlackBerry? Remember right? Nokia was another one that popped up like we Bath and Beyond. We used to call that dumpster diving when you're looking through the wreckage on Wall Street to find

that cigar stuff? What can I still smoke that someone else has thrown away in two two twenty was possibly the worst year ever for short sellers, or people who bet that stocks are going to decline, usually by borrowing the stock and and selling it. So basically they they opened themselves up to unlimited losses in theory and and limited gains. And so two thousand twenty was a terrible year. You've had all kinds of dumb stuff going up that

they were betting against. Nicola and you know, I can go on and on and on, so let's put let's put some flesh on those bones. And this is data from the book it in the We Saw Drop. And then beginning on March, markets rallied to finish up more than for the year. And during that year, short sellers lost collectively two hundred and forty five billion dollars, which

is pretty astounding. But then when you look at the three months leading into January one, when the MEME stocks really exploded, UM, a basket of the fifty most shorted stocks uh that had a market cap of at least a billion dollars, that basket doubled. Those are some insane stats if you're a short seller. Yeah, that that is just a world of pain if you're a short seller. And so think about it if you're I mean, there there are people out there, Jim chain Os and what

have you who are dedicated short sellers. Um, there are a lot more people out there who have short selling as part of their strategy. That that's the bulk of short selling. Some people are are just fine, bad companies a bit against them. Others run what's called like a

one thirty thirty along short portfolio. Where you're a hundred and thirty percent long and then thirty percent short, so net you're a hundred percent long, but you have a hedge if the market goes down on the bet that the worst stocks will for more than the best stops totally, and and that's that's usually a smart bet because you usually don't worry about something terrible happening to you being ruined, right, I mean, you don't think, what's the worst thing that's

gonna happen. You bet against game stop. And then let's say somebody shows the best boy shows up in bodies. Okay, you had a really bad box, right, you had a terrible day, But that's it. Not a terrible day. You had a bad day. It's probably some small part of

your your huge portfolio. And so what these meme stocks had in common was that they're all losers like that, they're all companies that have not made money in years, were headed for possible bankruptcy, were sort of just anachronisms, like like BlackBerry, the companies that, like in two thousand and one were sort of hot, not in two thousand and twenty one, right, And so they were in a horrible year for short selling. They felt safe betting against

these companies. But they felt too safe, And that was the kind of the dry kindling that started as fire, was that they felt so safe betting against some of these companies that their short positions left them no exit

if things really went wrong. But what's no one. As we said at the beginning of the show, it's not like you and I would be illegal for us to gang up and say, hey, I happen to know that x y Z hedge fund is very heavily short this thing, and we can ambush him by basically all colluding, putting all our money together and pushing it to the you know,

to the moon. But because then he would be forced to buy back then his money, he would pile his buying on top of ours to buy back the stock, and then there'll be a stampede for this sort of it's like shouting fire in a crowded theater. Short squeezes happened all the time, but you don't like those ambushes. They used to happen before there was an SEC Now you can't do that. So so again, more more data points.

You know, a normal stock, a billion dollar plus stock might have a short interest of ten or twent if that gets up to thirty forty, and that's called a crowded short. Hey, too many people are betting against it. Some of these um small cap and microcap stocks had shortest interests of game Stop had a short interest of a hundred and forty percent. This was a lot of dry kindling and people lighting sparks, wasn't it. It totally

was I mean to the float and people. And of course they're they're ongoing sort of you know, complaints and conspiracy theories like that's illegal. You can't you know, it is not illegal because there's a process called re hypothication where if you you know, if you go on the market today and you buy a stock, uh, and then it's in your account at Schwab or whatever. Schwab might lend that stock out. Even if you purchased that stock

from a short seller. They don't know where it came from, so hypothecate that and it could be lent twice or three times. It happens. There's no ceiling on the amount of short interest other than hey, at two or three, you know, it's financial suicide at a there's no room for you know, and and and as we clearly saw. So, so let's talk a little bit about short selling and

what's good and bad about it. But I gotta start by asking about a story you tell about the history of the paperwork crisis on Wall Street and how does that relate to what's going on with uh, with Reddit and game stop and the meme stocks tell us about the paperwork crisis? Sure, well, there's a great book by John Brooks called The Go Go Years where I think

I first heard about that. I've read about it other places too, But the paperwork crisis was something that happened during a previous speculative mania in the late nineties sixties, when you had just an explosion in trading activity. And

this was before things were computerized. There was so much paperwork, in fact, that the stock market had to be for a long long time closed on Wednesdays just in order to allow people to catch up, you know, settling all the trades and making This was the nifty if the era, and a lot of stocks, the postwar bull market was still running from you know, the late forties right up

to the mid sixties. Wall Street was hot. Wall Street was hot, and that was at a time that it was really expensive to trade, which is the That's the reason that I one reason that I brought it up because it wasn't until five that commissions were deregulated. So for years and years and years, this is a complaint saying that like brokers could charge fixed commissions and it was just really expensive for brokers to help themselves to

your money basically on Wall streets. So you know, all these these people who were involved in this never could have been involved because the hurdle financially to get into trading was just too high. And then you couldn't be hyperactive. And even then people were hyperactive. Then when you you brought commissions down and down and down, you know, you had the dot com and whatever, and then you know, then now you had this which was tradings down to

now to free down to free. That that kind of makes a little bit easy year for there to be a specular domania. And so that that was just kind of part of the kind of long arc of history on Wall Street that I tell. And yeah, and so making it free you really crossed a rubicon. But but even making it cheaper made made things easier. Of course, it may got made cheaper in the middle of the worst decade ever really except the nineteen thirties from Wall Street.

Nineteen seventy five was a terrible time. You know, if if you had gone to like, uh, these brokers with like you know, sideburns and wide ties and polyesters suits and stuff in nineteen seventy five were like having a terrible time financially in nineteen seventy five, and you're like, oh, this is the first step in you know, this kind of revolution that's gonna make you guys really rich. You know, you're gonna have this surge of people in the eighties coming in four oh one. Ks are going to be

invented and all the stuff. They would have thought you were crazy, like, you know, and then some guys gonna you know, go on this thing called the Internet. His name is Roaring Kitty, and he's gonna, you know, make a video game store, you know, be the most traded security on the planet from total obscurity. Like then they really think you're crazy. But that's that's you know, that was the beginning of it. That was a key step. So so that's how we ended up eventually getting to

the point where um trading became free. The short squeeze that that was orchestrated on Reddit has this underlying theme that short sellers are evil, that this is all a big conspiracy theory. Um. Even Elon Musk has weighed in on this. Why the animus towards short sellers. Yeah, if you look at the way that short sellers and I just think encourage readers to go to Google right now and type in short sellers are and tell me what you see. And it's not going to be a nice word.

It's not going to be a nice description. So going back to the history of of stock markets, back to the sixteen thirties in the Netherlands, short sellers have been reviled because whereas most of us buy stock and then hope it will go up and keep paying us dividends, they're making the opposite bet. Making that opposite bet, though, is not predatory at all. As a matter of fact, the existence of short selling is very beneficial to to every one of the markets, but especially to a retail

investor that doesn't know a lot. And I'll explain why. One reason is that short sellers provide a lot of liquidity to the market that wouldn't otherwise shorts. But there if there were no short selling, then there are only two things you could do. You could say, I'm going to buy the stocker. I'm not going to buy the stock. You abstain or you vote. Yes you can't vote, and no, you can't say, you know what, the stock is too expensive, And so there's nobody to really to kind of correct

the value of a stock. It takes a much much longer time for the kind of scales to fall from our eyes, not just when there's a fraud like Enron, which was explor Jim chanos a lot, and he's Enron was but one of many frauds that he and other short sellers have identified. And in fact, short sellers seem to do a better job than the FTC or the SEC or whatever organization is in charge of instigating corporate fraud.

Then you know they they've done a really good job letting investors know this company is lying to you and if you put money into this, you're gonna lose it. As Jim says, you know, short sellers are financial detectives, and regulators are financial archaeologists, you know, after the fact, that come in and and do something hopefully good. Yeah, so they I mean, I'm not holding short sellers up as like a paragon of virtue there out there on

Wall Street. They're trying to make money. That's that's the free market. They're out there, They're playing a very dangerous game. They have to be really confident in selling something short because, as I said, the losses are theoretically unlimited, the gains are keppt. It's the it's the inverse of what you face as a normal investor. By the way, I'm not encouraging anyone out there to go and sell stock short.

It's a very dangerous and complicate anything. It's hard, and I don't think that people need to do it, but I think that that we're all better off if short sellers are kind of unmolested. I guess in the market that's you know, they're not. There have been times, especially bad times in the market, and research you show this again and again when you when you restrict short selling, then you wind up kind of delaying the normalization of

the market. Like in two thousand and eight and around the time of it was the first ones to step in and buy in a crash because they're covering and saying, all right, we've made enough money. And literally studies have shown they're the first buyers than the value guys come in and the technicals. There's like a whole arc of that.

You reference in the book a two thousand and four Harvard study by Professor Orton Lamont that said, when when you have companies complaining about short sellers in general, they do much worse than the average stock and much more frequently go bankrupt. So it's almost a red flag when

you hear management. Dick fald is a perfect example, got handed a copy of that someone in the book, you say, when he was complaining about it, someone literally handing him handed him a copy of the study, and I guess the implication was, Hey, Dick, maybe you should just not not go there. Yeah, well he did not take that advice,

unfortunately went bankrupt. So they fit the study perfectly. So so short selling isn't necessarily um inherently evil, And yet that seems to be the guestult on on Wall Street bets. And that's a really interesting point at which I kind of understand where the people who mainly were involved in this came from. So it's like young people between the ages of eighteen and thirty five primarily who participated in this, mostly male. As I said, but gender doesn't doesn't matter

in this case. But their former to financial experience before they ever could invest, was the Global Financial Crisis, and so and there's this lingering anger that like, we never really got our pound of flesh. My parents lost their home, my parents friends lost their house, or I have these student loans that are really hard to pay back. I can't earn enough and I can't buy a house, and these guys are getting rich and and and the decades since the GFC, you know, you've you've had a further

kind of spread. You know, the rich have gotten richer and the poor have not gotten much wealthier. And so you know, you you really do have polarization in terms of wealth and income and access to all kinds of things in this country. It see, it's not a you know, a very egalitarian society that we live in, much less so than the past. And so they focus that animus on not on rich people, because they like Elon Musk and they like other rich people. They like Silicon Valley

rich guys. The exactly he's cool, but they they if you wear a suit and work on Wall Street, you're like a cartoon villain to them. And then specifically if you're a hedge phone manager, hedgehohn managers to them are

are evil personified. And then if your hedgehump manager who sell stock short where there's already this bias against betting against something, there's this kind of sense that like they want to ruin a company, which is not what they want to do, because that's not what happens when you it's too hard to do that. So so there was something you reference in the book off of Off of Reddit that cracked me up. A lot of the memes,

you know, this was really amusing and entertaining. So so the intersection of the social side of it, the political economic warrior side of it, and the investing side. It's

a weird group. I love this bankrupting institutional investors for dummies, Like they photoshopped the investing for dummies and we're gonna go after the hedge funds, who, by the way, had nothing whatsoever to do with a great financial crisis, but seemed to have garnered a lot of criticism that they were somehow involved when they of all the people to blame, not them, right, they There's lots of stuff. If you want to go someone like that, there's a million people

to blame. But of of all the folks, hedge funds really were not involved in the financial crisis, so it seems weird that there's this sort of undirected general smoldering rage and it's just looking for an outlet. And then they told them on the board, Hey, there's this hedgehow manager who like could otherwise a low profile guy. His firm is believe it or not, called Melvin Capital. What did we and how did the name Melvin Capital come about?

Gabe Plotkin, who's one of the one of the big, one of the few big loues, which is a dweed be enough name to begin with. He's like, no, no, Gabe Plotkin isn't nebishy enough. Let's call it Melvin. It was his grandfather's name. His grandfather was a communist store owner who we really admired, and so he named his lovely sentiment. Well people people laughed at it like they were like some of the commentary when he set up the fund, because he came from S. A. C. H.

Which was Cohen's fund and point seventy two. But he he was seated by Steve Cohen and he four years had huge tess. He was a very good fun. People were laughing. He personally double digit returns totally. He personally this this is like the just incredible to me this number. I've mentioned that. People said, now you must be you must be, must be wrong about that. He you know, people not not from Wall Street or like really like he earned personally eight forty six million dollars the year

before this whole episode went down. He was a billionaire multiple times, owner over not even counting what he still had, like a big chunk of of UH. Melvin was his own capital as well. At that point it was so and and and seven billion dollars of it went poof

in a few days because of this. Yes, so, but he was and and there are other hedge funds that were short um game stop, but he was especially short and because he had a fund that that specialized UH in retailers and things like that and consumer discuss dead center of his target of companies that either were overvalued or over prias or should be bankrupt. And he testified that in two thousand and fourteen when he set up his fund. That was one of the first positions he

put on. It was a good good bet too. In two thousand and fourteen because it went down a lot between that. Where was he initially short from gee? I think it was probably uhs at that time, So you wrote it down to sixty I think, which the question really, what are you hanging around for the last buck or two? Well? And and it crowded short? You know that? Is it just not wanting to pay the taxes? I don't. That was one of the things that you don't answer in the book, and I don't I have yet to read

that answer. But you short something at forty it drops to a dollar or two? Who cares about that? Last book? What are you waiting for? Yeah? And I mean obviously you know in reporting a book, there people you speak with who are on the record, people are off the record. I did try to kind of suss that out and never really to my satisfaction. Didn't. I just think it was because it was still there was just nothing else too short. I guess two dollars us to zero is

still another hundred so um. Yeah. And then the reason that they became aware of him because the way that short selling works is you can see how much short interest there is in a stock, but you can't see who is shorting it. But if you buy derivatives for your fund that have the same effect, and he did, and that was turned out to be a fatal mistake because because these weren't coal options where you're deciding in advance how much you're risking, when there are certain derivatives

where you have full exposure in both directions. There there are, although he owned puts which are which do have a limited loss, you can only lose the premium. But that and that's what showed up. And then he and then

he was being talked about on this forum. Uh you know when when Ryan the same time that Ryan Cohen came in and then he opted and even when he was being talked about and I mean there, I don't want to kind of get into you let me say things that you don't want to say, because I get away with him where maybe you are uncomfortable saying that.

Here's a guy who's incredibly successful, he's a Wall Street professional, he's a billionaire, and he sees a bunch of wise asses and kids on a message board mocking him, and he's like, really, let me show you how it's done, because this pos is going to zero. Like it's easy to see. Yeah, there's a lack of humility there. But it's not you know, Foldy and Jubris, it's just show the kids how it's done and didn't work out. That's that's I think that's a pretty good guess at what happened.

I think it also it's a it's it's an organization of thirty or forty people that may not have gotten to his level yet. I think I was just the person one or two levels below him just didn't take it seriously. They were like, why would you? Why would before this all happened, why would anyone take degenerates and apes seriously? I mean the whole thing about Reddit, and and I love Reddit. I've been playing on Reddit for years. They're all these reddit you know, slash ours, all these

subcategories that their rabbit holes. And yeah, I read it has issues with all sorts of of like every social media, all sorts of problems. Um, that's a whole another conversation. But if you want to do a deep dive into anything, um there's a reddit for it, and some of them are just mind blowingly astonishing. But if you're a professional hedge fund manager, how seriously are you going to take people? And it's not even in the main investing channel. It's

in like a sub sub channel that's a bunch of goofballs. Yeah, and and and of what they post is just rude jokes and memes and things like that, So there's not a lot of the thing is that the memes were the message. The memes, you know, they used like hieroglyphs or that they used to to communicate. And so which is why we call them meme stocks today. And uh, I mean, they did not take it seriously. They do today.

As a matter of fact, there was a study done that showed that today of hedge funds either themselves or they pay a service to monitor social media for their positions. So you know, they take it very seriously today, are using AI to make sure that this doesn't happen again. And there's a data point from the book that I have to share. So Goldman Sachs keeps a basket of unprofitable stocks, that's literally what the basket is called. And in when the Dow was up about seven, this gained.

Stop and think about how insane that is the worst of the worst are just destroying everything else. Yeah, I mean, and that that tells you what why a quarter of a trillion dollars almost was was lost by short sellers in two thousand and twenty. It's because the dumber it was, the better it did. And that's and that that really

formed the attitude of this. You know, there are people who were participated in the seam stock because who had three months, six months, nine months, maybe a year of of investing experience, all of it in these crazy markets everything that's some serious guy like Barry Ritholts, you know, goes on TV and talks about and says this, I would not touch this. Those are the things that went up right. So, I mean I went up a lot

and went up a lot. So and you know, Warren Buffett, the greatest investor of all time, got out of airline stocks, which he he wasn't right, but he very well could have been right. I mean, things looked pretty hairy. We didn't know there's gonna be a vaccine. We didn't know how bad the you know, COVID pandemic would be. It certainly looked really bad in in March and April, and

he sold out of his airline stocks at a big loss. Uh. Not typically Buffetty behavior, But you make the best decision you can with the information you have at the hand at the time, time, and as often as not, you're right or wrong. And in that case, Buffett was wrong. That doesn't seem to be what the redditors were doing. These folks were just you know, we weren't democratizing finance. We were democratizing risk taking and speculation. So throughout the

book we hear the phrase democratizing finance. Were we democratizing finance or democratizing risk taking and speculation? You know, it's it's a phrase that drives me crazy. Democratizing finance, you know, to me is basically bringing uh investing to a level that anyone can participate, and basically that has been accomplished through years of competition and technological progress. You know, I give the example, Uh we're talking earlier about the paperwork crisis.

It was very expensive to trade that if you had a little bit of money that they wouldn't bother giving the time of Dane Walster, you had to have a lot and then and then you really got got fleeced, you know, because of big charges. Even just to you know, you look, people talk about these long term charts were like, oh, if you had invested in there was no index fund then,

and it costs you money to reinvest your dividends. And like if you had a little bit of money, if you had invested a dollar where you couldn't invest a dollar then, so it's totally there was no partial share purchases. Well no, no, And so today you can you can do that and rob at robin Hood and others. You can buy a fractional share, You can buy an exchange traded fund that cost zero points zero three percent a year.

You can do all these things. So the door is open for people with very little money today, and it was you know, prior to robin Hood a though the robin Hood in fact did kind of accelerate things very very cheaply, very easily to get on that ladder, which I urge anyone especially in their like their teens or twenties, getting started out with lots of decades to compound their wealth, to do it is a smart thing to do to get on the ladder, but not in an active crazy way,

in a kind of you know, put your money and let it grow and don't check it a lot way, and and and save as much as you can weigh and that that really has been democratized. But then when you talk to Robin Hood and say, hey, you guys are just encouraging you're you've gamified this thing and you're inducing fomo. You know, you open up your app and you're the first thing you show is what everyone else is doing and buying. What's up? What that, what's down?

That's not useful information. That's information that makes you feel like you're missing out, makes you feel like you need to be active. And they're active customers, the people who use the app. We're using it in two thousand and twenty, on average over seven times a day, opening it seven times a day. They have customers who were trading eleven

thousand times over a six month period. There's just absolutely no reason for anybody to trade eleven thousand times, or even a thousand times, or even a hundred times, you know, a time span like that. It's it's study after study, by the way has shown that that is uh inversely correlated with your performance. The more you trade, the worst you do. That's it's a very very well understood effect. And even just checking your account frequently, it's called myopic

loss of version. It's well understood that if you look at your account. Least you'll do better because you're less likely to see a loss which pains you more than again pleases you. And so you know that that is not the formula for success. They understood that. And you note in the book the average Schwab account trades forty five times less than the average robin Hood account. Those numbers per per dollar in the account. It's just mind

blod and and options are trading even more. And only of robin Hood's customers traded options, but options were the most lucrative product for them because and that's you know, you've heard a lot about payment for order flow. Paying for order flow. I don't think it's it's just a mechanical way of paying for trades. I don't have such

a big problem with it. But it is uh a practice where you basically you sell your orders to a market maker that's off a stock exchange, that pays you to execute it, and then keep a little bit of the money. Basically, he was very efficient at matching it up payment for order flow. The only problem I have with it is that it enables this behavior by making trading free. Otherwise, I don't think there's anything really insidious about it. Which is a controversial view now, I know.

But so so let's look at the aftermath of this. So, so Keith gil took fifty three thousand dollars buys deep out of the money calls, and by the time the calls peak a year and change later, it's what forty seven million dollars. Yeah, I think intra day he probably

had sixty or seventy million dollars. But yeah, but I think, uh about forty nine or fifty uh like at the end of day at he would have had more had he not, because he cashed in somebody he had He had perfect timing almost he cashed them in during the week. That was the real menia. So what did he end up netting when everything was said and done, because I

was kind of surprised that he bought more stock. So so from what I recall in the book, he cashes out about three million dollars worth of options and then later sells a bunch of the options and exercises them and ends up with thirty million dollars worth of stock something crazy game stop, Yeah, which is a pretty even then you know, he's real money. He was because he was called to this congressional hearing. That's the only time we've ever heard his voice or seeing him. I mean,

he was interviewed by two YouTube exactly. Sorry yeah, but um yeah, but he was like not a total unknown then and he stopped doing those videos and uh yeah exactly. So people were very curious. It was probably one of the more watched regressional hearings, you know, because because of him,

really and he got asked the fewest questions. Um, we're almost the fewest questions, but I mean, you know, it was what were they gonna They didn't want to antagonize him, and you know, and he was you know, it's strange because he was the only retail investor there and it was really all about retail investors. They kind of asked him some some pretty good juicy questions. Had they been curious about it, but I think they were. They were outraged that trading was halted and that that's a key

part of it. So let's talk about that. But we will circle back to gil So right in the height of this where the short squeeze is having maximum effect, um Robin Hood is adding incredible numbers of new accounts, offering incredible amount of margin to these new account holders and a lot of option trading. Why did they halt the most shorted squeeze stocks. They did because they did too good of a job. That's basically that's they didn't have the capital to meet their custodial agreements. They got

a call. And now we have more detail. By the ways, the recently a report came out from this Congressional committee very recently, very recently, good and a good report worth reading that has a lot of detail that it was actually much worse than than what we knew. They were very close to going under. Not only that we knew they were very close to going under, we didn't know was how close they got to taking other people under.

Oh really, yes, who were they going to drag with them? Well, Apex Clearing, you know, got into Trum, which was the clear the clearing broker for lots of brokers and the market makers who were processing the trades, and we're not gonna, we're gonna stop processing these trades because you're gonna you're going to create a problem for us. A Citadel which was the biggest processor of their trades, and they got they got into a conflict with Citadel Riff Shop in Chicago.

Now Miami. Yeah, Ken Griffin is a Hetgelow manager who all his his holding company plays a role in this because it it injected money into Cape Plotkin's fund after he lost a bunch of money. But it also plays a role in this because he is the major shareholder in the securities from also called Citadel. That caused lots of confusion and lots of conspiracy thinking that was a

really big beneficiary of this. But what people don't understand is that this was a burden to them too, because this this was a dangerous level of speculation in a very narrow set of stocks. And you open a new account on robin Hood, you put a thousand dollars in, you buy two thousand dollars worth of stock, and if it drops in half, somebody's gonna come up with that money. And if you don't, someone else is on the hook. Now they're adding like half a million accounts a week,

some crazy number. They added almost a million in a day during this that's unbelievable. And yet all this is algo driven, All this is automated. There is no real adults saying we don't have the capital to extend. They basically just it wasn't until they got the uh, the founder of robin Hood what's name to rev ten of its three in the morning, he gets a phone call, we need three billion dollars in three hours or you're out of business. Right three in the morning, West coast time,

West coast West Market's gonna open three hours. You need three billion dollars or you're done. Yeah, even as hot as things were in early one, you don't people don't drop three billion dollars on you in three hours when they're all asleep. Right, but he managed to actually get just this, get this done between lines of credit and in cash and then restricting all these meme stocks. Right, they had about a seven million dollar line of credit

they drew down. They had already had seven million on deposit at dt c C and then they said, how about if we don't allow our customers to buy anymore, these will only let them sell. And even then they really bent the rules to keep them in business. And so what people these if they blew up this Most

of this stuff wasn't systemic. But at that point, if Robin blows up, maybe it's not the Great financial crisis, but there are waves that are gonna gonna really have negative effect, and their their customers were so angry at not being able to buy these stocks. And what they don't realize is had they been allowed to buy them, not only they would have got not only were they got lost a lot of money, because they would have their money would have been locked up for weeks, by

which point it would have lost its value. But you everything would have been frozen, you know, for weeks or even months in robin hood, right, So they they would have been wiped out, their vast majority. So let's bring this back to Keith gil who when I are you're going through the book and when you when you look at the boards, he is described at separate times the Reddit boards as he's a genius visionary. He's just a guy who got lucky. He's an idiot who left generational

wealth changing amounts of money um on the table. What was he really? So he was a very unusual person to be in this group at all, Right, But the fact that so people when they started getting excited about game stop in the postile his short squeeze. Then he was discovered. Then he became he went from being this kind of laughing stock to being a celebrity. And his post changed then to his posts were they were built posts of memes and things like that. He was talking

about Ryan Cohen on his on his YouTube channel. People still didn't know his identity, they didn't know his that dead until um to Wall Street. Yeah, I know other people could figure it out, I mean, like but until

two Wall Street. UH. Journal reporters interviewed him and published the interview on the twenty nine, which is the day after trading was was halted, twenty nine January, and it was a great interview with him, iconic picture pictures of my book, uh, the headband, the whole thing, and and literally in the basement. In the basement, I spoke with the photographer who was there taking the shots of him, and I spoke with them of course, and there's a lot of you know, things that fell to the cutting

room floor. So really fascinating story, all the kind of this is the layer where he operated that you saw on the YouTube videos and he became a hero. And basically what he did, what was at that point, what he was doing every day was just once a day after the market closed, he posted a screenshot of his v trade account, obviously not with his account number or his name. UH and just the value of the options he had in game stuff, and just the fact that

he hadn't sold. And people are like, if he's not selling, I'm not selling. If he's in it, if he's and I'm still in And when this this went from fifty to a hundred back to sixty, people gave him grief. And then it went to a million, and then down to five hundred, and people gave him and then it went to two four million, and suddenly we were off to the races. Yeah, and it's called that's a concept

called social proof. You know, someone is making money doing something, and you know, unfortunately they are like a lot of people on the internet who have claimed to have or actually have made money doing something, uh because they got lucky,

you know. But the fact that someone you know, it's like when you turn on if you ever can't sleep, and you turn on an infomercial and you see some guy with like two blondes under each other in front of an audience, in front of an audience, and a bentley and his big house and it's probably not really his bentley or his house, but whatever, right or right, you know, but but that's you know that that is a very well understood concept like somebody and someone just

like you, by the way, someone he an ordinary guy who now doesn't have to work, and gee, we used to have to worry about bills, Bob. But tell him we bought Joe's system and now you know, flip real estate and you got we're making fifty a week, you know, and you know. And so that's that's what really hooks people, is this sort of if they did it, that I can do it too. The logic of that always annoys me because I always want to say to the people, if this was so lucrative, why aren't you doing it?

And why are you selling the how to? You know, I get those when newsletters, Hey, why don't you just raise some capital from friends and family and and manage money this way if it's so lucrative. But it turns out the value is in selling it to suckers, not actually the underlying Although that said, Gil ended up three million dollars ain't nothing. It's a reasonable amount of money even before taxes. And he still has what's the latest filing um in terms of games stop stock? What does

he own? It's around a hundred plus boxes. We're recording this down from four sixty, but still he's got five or ten million dollars worth the stock, maybe more than that. No, really in the tens, in the tens of millions, I think, you know, because it was thirty million as of April one when it had fallen quite a bit, so I'd have to look it up, but I mean it's it's in the tens of millions. So he's he's a rich man.

I don't know if he sold or not, you know he And by the way, just to say, like you know, they're there are people who sort of are out there. You're using social proof for manipulation. I don't think that he ever manipulated anyone. You know, he was actually investigated personally, the only people investigated in this whole thing, and totally cleared. And and did you know he's not only a c f A. He worked for a brokerage firm and insurance

company in his career, I think so. So he understood compliance, he understood what he could and couldn't say. If you look at all of his postings, he just showed his hey, here's where this is today. There was no let's stick it to the man, let's execute a squeeze, let's do. It was just basically I love the phrase, I like the stock. And you know, if he had wanted so, you you had Elon Musk come into this, and and other people and a lot of opportunitists come into this.

If he had said on that Monday or Tuesday or Wednesday or any point thereafter, shown up and had a screenshot of his trade account and said now I own deep out of the money options in x y Z company, everyone would have jumped into x y Z company and he would have made a hundred times his money. He although that would have been investigated. Maybe that would have been investigated, but it probably would have been okay because he's not saying hey boy, he's just he's just legitimately

showing said, oh yeah, I actually did own it. All I did was tell people that I owned it, and and he would have been able, which we see on TV every day. People go on Bloomberg and CNBC and they say, this is why we own the stock. There's nothing illegal about that. Nope. And I don't think it would have been illegal in his case either. Maybe he would have faced some slap on the wrist, but he could have made hundreds of millions dollars he could have made.

He could have been one of the you know, maybe not the wealthiest people in America, but he could have been, you know, close to a billionaire. I think just by doing it a few times, just think about it, right, I mean, just think to pick some option in some obscure company and what X of your money? He already had fifty million dollars in you know, in value. You know, if if you had made multiply that get too hard, right, right,

even twenty x gets to a billion. The only issue would be does the SEC step in and halt the stock and prevent this from But it wouldn't. It just would have been the truth I own the stock and then just just the reaction alone. And you know that's the you know, it's the less successfully is that what people are doing every day on on TikTok, you know, is that I bought the stock. And I think they're still doing it on TikTok. I kind of got the sense that the finance influencers on TikTok I love the

couple we only buy stocks that go up. If you know, it's the old Will Rogers joke. If they don't go up, don't buy them. That's that's how we support a lifestyle. I kind of have got given the sense that here at the end of the first half of two, with the market down twenty plus percent, Uh, those influencers aren't

quite as influential as they previously were. Yeah, I think the shine has come off a little bit, uh from the bad financial advice, but you know, it just never goes out of style and it comes back again and again. But yeah, they definitely have um have become less influential, of course, like anytime like I put something even if it has nothing to do with crypto, and if you have this, like you put something on Twitter and then like somebody replies to you. It says, oh, I'm investing

with it just looks some normal looking person's picture. I'm investing with so and so, my crypto coach. Like, you know, there's just so much spot spam, right, and I you know you should if you don't report and block those you're you're doing. I do every time. I constantly do that. Before we get to our favorite questions, my last question, so the meme stocks, they're down about fifty six since

the peak, some even worse. Are we done with meme stocks or is this just gonna be yet another one of those things that sort of cycle in and out of favor. So I think the meme stocks have chewed up a lot of people's wealth and enthusiasm for the market, So I think it's just gonna be you're having kind of,

you know, echoes of what you had originally. I don't think that you could have what you had originally, but you've had You've had some really dumb stuff go up, Like you had red Box Entertainment that people who have those, right, it was being bought for the equivalent of sixty four cents and it went up to fifteen dollars just because I don't know why, you know, right, I mean, and stuff like that, Well they someone else would come along and pay more, right, right, It's the greater full theory

to some extent. But it's also like L O L this thing is going up. I'm gonna buy it, and this serious person on TV said I shouldn't buy it because it's worth a fraction of it, So I'm gonna show him. I'm gonna buy more. And and another one you mentioned, Revel, and that's a kind of crazy story because they were was this before or after they filed for back after after like like Hurts. That's oh, so all the equity holders are known as zero? How do I get me some of that? Right? I mean, it

just it just boggles the mind. Right, So you know, there's no I mean, I think the only way to explain it. I mean, obviously are people are not well informed. But I think there are people who are just nihilistic who are like, ha ha, look what I'm doing. I'm burning up my money or I'm doing this thing where I should I think so, I think psychologically that's like that's also one outgrowth of the pandemic because people are just saying, look at me, I'm doing this totally dangerous thing,

and maybe some of them are getting out. So a lot of the people I spoke with who were involved in this were more sort of the savvy playing the greater fool. I see this thing going up, and I think I'm gonna be able to hop and they mainly just succeed. So I was looking at this entire reddit wool Street bats Saga from from Game Stop to AMC two, Hurts and now Revlon as just a massive combination of board millennials suck at home with free trading and a

giant Dunning Krueger overlay. Meaning people are unaware of their own lack of skills. And what you're suggesting is there's a different dimension to this that burn the whole thing down. What the hell this this isn't working, This experiment isn't working out here in America. Just let it all burn. Is that what you're suggesting that is part of it? That definitely is part of it for some of the people involved, for sure, and they they don't mind making

money in the process. It's like the George Costanza like, just do the opposite of what right I mean? And that's what like, oh, the smart person on TV, the Spencer Jacob at the Wall Street Journal said, don't do that. I mean, I'll write an article like pointing out for example, I wrote an article about crypto and memestock saying like, there's some people have a five thousand dollar price target for a m C or I don't know how like a million dollar price start for a bitcoin, and I

wrote about it's right there, it's not unthinkable. Well yeah, and that's harder from is from twenty but still yeah, um. But the thing that you have to realize that Victor are going to give credit to uh Victor Hagani of ELM Wealth who pointed this out. I mean it's kind of common sense, but he actually studied, you know, and kind of ran the numbers and and did scenarios, and he said, if you are really sure, like you really have a high degree of confidence. Uh, Like I just

went back to the Kelly betting criteria. That's something a sports betting right exactly, it's study. I love this part of the book. Yeah. And so if you if you really really pretty confident in something happening, like you know, you might be wrong, but let's say you really are confident, you have reason to think you're confident, you don't bet

all your wealth. These people are going all in. People are like I mortgage my house, I'm out on the street, but I still am keeping my AMC because it's going to five k. Like, if it's going to five hundred k, how many what do you need? Two shares? Two shares of AMC for twenty six bucks. And then if you're right, then you're rich. And if you're wrong and there's not a chance that you're right, then you know you didn't lose a lot of money, and so it's like it's

bet uh. People end up going even knowing it's a loaded coin, and I don't know if this is the same STA. So even though it's a loaded coin, I think if I don't lose money, my college math recollection is that you should never bet more than like four percent of your steak because you could have a run of even with weighted coin of like eight ten in a row, and then you're busted. Even with a sixty forty coin, you would think, how can I lose money?

The vast majority of people completely go broke with that. Yeah, it's which is crazy. Yeah, and there's been a lot of studies showing that. But and this specifically, that's why I wrote that, you know, which I thought was like a kind of a smart thing to point out to two readers is a common common sense. Then you get the hate I get that, get the hate mail, screw you. I'm still holding. I'm all in, like, Okay, I just

gave you I love. You don't have to. But by the way, over the years, I have learned that the more vociferous the hate mail, the more correct I am, because the reason people are so upset is you're challenging a fundamental belief system that they haven't thought through. And you're essentially, I don't want to say, challenging their manhood, but you're putting a fundamental principle that they adhere to um at risk and it's confusing and their own cognitive

dissonance causes them to lash out. Maybe cognitive dissonance is the wrong word, but the anger they get it means you're you're getting closer and closer to totally identifying a truth that is very uncomfortable to them. And I get these like and you're a shill. Well, you know what, I gave up a very lucrative job on Wall We started out at Credit Swiss. You're an analyst. At one point you were ahead of em research, right, So for you to do be a reporter at the walls Ree Journal,

you're taking a pay cut. Yeah, that's try not to think about that whenever, Like the kids need braces, and it's not just it's not just that your chill. You're just a bad chill, right, Exactly what kind of what kind of a dummy makes a financial decision like that? You're not gonna So let's let's um before we jump to our favorite questions. It was one other study you mentioned that I have to talk about because I just

love this. So this sports gambling. When people tweet their sports forecasts about what's going to happen, the more specific they are, and the more wrong they are, the more followers they seem to get. The more specific, even if they're wrong, they generate more Twitter followers. But people who put out these thoughtful, nuanced forecasts that turn out to be right, it doesn't generate that buzz that that the

certitude generates even if we're wrong. And that's a really important thing to understand about finance and life general and social media and social media. And then I'll just go one step further on that because um, yeah, So basically the study shows that people who are less accurate but more confident, uh just a lot of certitude, get a lot more followers than the people who wound up being right. But in this algorithmically charge social media, you're not seeing

both of those posts anymore. Right, So you go on on Reddit, which has a human algorithm, people upboat and downboad things. Okay, so let's say Barry that you go on on Wall Street bets and you have a very measured, long, cerebral post about something with some good information and inside. And then I go on there and you say, and I put five percent of my portfolio into the stock.

And I go on there and I say, I put a percent of my portfolio into the stock, all into out of the money, call options, mortgage, my house, did all this crazy stuff to the moon, you know, rocket ships, I'm gonna get a lot more at tension. So now a third person goes onto there and says, well, I'm a young person who just to open up their first brokerage kind of hear Wall Street pets is a place to go for advice. Not only they It's not like they're going to see your advice and my advice. They're

only going to see my advice. They're not going to see your advice because yours is not going to get uploted. Yours is boring and mine is exciting, And so mine gets upvoted. Mine is funny and gets uploded in Yours is invisible. And so this that that is different about social media today. That's what you know people compared to yeah, who finance message bar was usually did and this is different that You're absolutely right, it's it's not just that

we're manipulated by algorithms. The algorithms are manipulating our own biology and psychology, and so we were built for a different era, not not this era. So on that cheerful note, let's jump to our fine favor read questions that we ask all of our guests, starting with tell us, what you've been streaming these days? What's keeping you entertained? So I have never been a big TV watcher, and then during the pandemic, I guess I started more kind of

became more of like a family. Yeah, family social activity. But I'll only except for I'll watch a football game by myself. But I don't really watch things about myself. So I always trying to, like, if I can get three sons, if I can get at least one of my sons and my wife to watch something with me, then I'll watch it. It's like a matter of negotiations. So the thing we just finished watching was Inventing Anna Um, which I really liked and I'm I'm always just fascinated

by She's kind of the high in grifter, the socialite. Yeah, she's the Anna delvi As was her name, and she is her name. She's still alive, and she basically convinced all these wealthy people to sort of finance her luxurious lifestyle, and you know, and and she just she was a fake heiress, you know. And and she almost got a bunch of money from some investment firms to buy a building and start foundation and all this crazy stuff. And it's just it's just the kind of I'm really always

been interested in common. I want to watch UM, I want to watch Super Pumped. I want to watch We Crashed. I'm trying started. It's fascinating and I love the book Super Pumped by your colleague, So that's definitely on my list to see. And then on the podcast, I'm more of a pod go for a walk, listen to podcast. I listen to your podcast a lot. You're You're. I'm a big fan of of yours. UM. I like Shane Parrish,

Dmitri Cofinis, Tim Ferris. UM. There's a guy actually I heard on maybe just a few months back on Tim Ferris who I'm really into listening town Rich Role who's into like doing ultra endurance sports. I've just read his book after I heard the podcast UM called Finding Ultra was just this fascinating story about how he uh you know, went from being uh in alcohol we still is an alcoholic, but recover in culture marathon or is that who? Yeah, like he did he did five iron Man's in seven days,

you know, yeah, in his forties. So he's one of the fittest men in America. And so I listened to a bunch of his podcasts. Now, so yeah, that's that's the kind of thing that I listened to. And then I like hardcore history a lot. Dan Carlin, that's an interesting definitely an interesting pot. Let's talk about some of your mentors who helped to shape your career. I feel like I should mention, uh, somebody at the Financial Times of the Wall Street Journal. And I've had a lot

of great editors. I have a great editor now great boss, I should say, who runs the money in investing section. But I'm gonna mention somebody who at the when I spent a decade in finance and my boss for the longest period of that time. Um, there's a guy who really influenced me, taught me a lot. I think I've worked harder for him. His name is John Conlin then anyone I've ever worked for so hard. Yeah, he was he became CEO of Robertson Stevens later, and uh yeah,

and he's just a really good guy. And just because now I manage people, I manage a global team of of columnists that hurt on the street, and you know, I think, I think about the good bosses that I've had, and then you know very much about him, about like what they were like with me, and how to be how to be decent to people, how to get people excited, how to get make people really love coming into work. I mean I loved working for him, and you know, I just always felt like he had my back and

I learned a lot from him. But I mean, you know, they're not that He's not smart. They were smarter people I I encountered in my time in finance. But I just just loved, you know, kind of being you know, under under his wing. I was really sad, you know, when he left and then he went to go work for you know, Ron Roberts and Stevens, and was tempted to go there really just because of him. So uh so, he he had a big influence on me, really really interesting.

Everybody's favorite question, tell us what some of your favorite books are and what are you reading right now? So I just recently finished Bill Routers book, the second second book, Freezing Freezing Order and the Red Notice was his first book. Um. And actually because I was I worked in emerging markets, I knew Bill a very little bit when he was he's a little older than me, but so he got started a few years before me. And this wild east of eastern Europe. He was this before he founded his

firm A Mertage. But he his book is very important book to read now, very entertaining book, both of those books, but especially Freezing Order. You don't have to read the first one if you read the second one about the torture and murder of his lawyer, uh second Magnitsky, the Mcgnitsky laws that he's passed, just sort of sees you'll gotten gains from human rights abusers around the world, not just in Russia. And this guy is he is such a brave man. Um. You know, people have been been

murdered by Vladimir Putin for lesson. He's an outspoken advocate for for justice in in Russia. And basically he just shows you what Vladimir Putin's Russia is, which is a it's a mafia state at the thugocracy with nuclear weapons and poison and acts with impunity around the world. I highly recommend that if Red Notice wasn't a nonfiction book, it wouldn't get published as just too, if it was a novel, would be this is too ridiculous. Yeah, I

don't think you've had him on She's coming up. We haven't. Okay, I'm plowing through the new book, which is you know, horrifying. It is. It is horrifying. It's he is. He is a brave, brave guy to say, say the least, and any other books you want to mention. Um, So I read Blood well, bad Blood is great, great book. I mean another book that I read a I read a book, um recently one of your recent guests about Peter Teal The Contrarian by Max Chaff enjoyed that. Also highly recommend

that book. Um, you know, interesting character, totally uh and and such a complicated character. Yeah yeah, um, so yeah, I read a lot of the I have a lot of you know, friends and colleagues that that that write books, and so I wounded up reading you know, I feel like I have to read them, and so I read a lot of those. But I read a lot of history and biography to you know that that sounds really interesting. Um. What sort of advice would you give to a recent

college grad interested in a career in either finance or journalism. Well, I'll give you finance. Um. The way that I got into finance was totally by accident. I was gonna, um, you know, my I got an application to a program at Columbia University that was not a finance program. Um, and I got it by accident. Mentioned it to my undergraduate advisory was still she's she's still she teaches Carol Savits, she's still is on faculty at M I T. And she told me like, oh, yeah, I went there and

you should do that. She kind of saw that I probably shouldn't be an academic because I was planning on being I didn't really have any the kind of temperament for it. And uh, first or second day at this program at Columbia University, UM, I met a kid who's now fifty six year old kid who told me he had been an investment banker. And I was like, you know, I just didn't. My parents were immigrants here and there their twenties. Nobody we knew was on Roall Street, and

I was like, excuse my ignorance, what's an investment bank? Like, you know, I have heard the word, but I just can you just explain to me, like a dummy what it is? And but I was also very anxious about money. You know, if you if your parents come here with nothing, you that tends to be the case. And he's the first thing he told me is how much he made, which was all that got me right away. Yeah, I popping in the eighties, you know, if working for bankers trust.

And I said, how do I do that? And he said, well, you know you're I was bilingual and Hungarian and I had studied German and Russia. And he said, they're going to privatize everything. You Eastern Europe. The Iron curtain has fallen. You know, you're you're there, they'll hire you. They're gonna privatize everything. So just take as many finance classes as you can at Columbia Business School you're allowed to in accounting, and then you'll get hired. And he was right. And

I liked the finance classes. I like finance. I find finance interesting. I never thought that I would, and I really was. I'm fast. I'm still fascinated by it. I think it's the most fascinating thing. It's it's like a it's like my sports, you know, like just watching what happens all these people sort of day a year struggle over money and and people computing power and brains and

all this stuff. And so I liked it. But the entire time that I worked in investment bank and I was I think I was the youngest managing director and the equity department in my my bank, Eventually, you know, I felt like I'm just pinching myself. This can't this is the amount of money that they're paying. They're paying me like four or five times what my professors, you know, who are much smarter than me. We're earning like this.

And I always like like, okay, I'll be maybe one more year and so and then I in the end, I I quit to become a writer. And you know which is I'm glad that I that I did it that way, because I think people, here's the lesson. Okay, So that's that's the attitude you should have, is like this is just totally unrealistic the amount the money you're

being paid. If you're a young person in finance, if you want to need to make money or want to make money, or want to have that cushion treated like a cushion, don't go out and you know, bee frugal treated like a stupid, stupid thing that you're being paid so much, because it is stupid you're being paid so much.

And and don't get your ego wrapped up in it, because I saw so many people I used to work with eventually, you know, just have to go to a less proceigious, less lucrative job, and it kind of really really hurt them their egos. And don't ever think that you deserve that amount of of money, you know, and little humility goes a long way. And and just and that that money gives you freedom, you know, so so use it. I use the freedom to do this dumb which I've been doing for almost twenty years now. And

I'm glad I did it worked out. I'm glad it was in that order, you know what I mean. And our final question, what do you know about the world of finance and investing today? You wish you knew thirty years or so ago when you were first getting started. You know, I wish that I had just agonized over things a bit less in term to invest in my

own money. Um, you have a colleague, but Julie, who wrote a great book, Just keep buying, Just keep buying, and that that is really the mantra, especially when you're in your twenties and thirties and stuff like that. It's when you're that age. And by the way, Nick is barely thirty. I don't even think he's thirty yet, which is astonishing how how much wisdom that book has for someone as young as him. I wish that I had had that wisdom at you know, because I've done fine.

But if I had just basically just done like literally those three or it's just keep buying, don't worry about it, don't keep checking, don't worry. You know, there have been what forebear markets since I've been in like old enough to have any money to invest. And if if you're counting, this is the fourth one. Yeah, absolutely, two thousand oh

w O nine and yeah, and then the yeah. And they had a couple of pullbacks in the nineties, but nothing to I mean, I was always like, you know, trying to handicap things and worry about things I just really shouldn't have, you know, I mean that's take decades totally. So that's that's very good advice, h really really good stuff.

We have been speaking with Spencer Jacob Wall Street Journal reporter and editor and author of the book Which I Have To Get Signs, The Revolution that Wasn't GameStop, Reddit, and the fleecing of small investors. If you enjoy this conversation, well, you can check out any of the previous four hundred or so we've done over the past eight years. You can find those at iTunes, Spotify, or wherever you get

your favorite podcasts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Sign up from my daily reading list at rid Halts dot com. Follow me on Twitter at rid Halts. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Sarah Livney is my audio engineer, Attica val Bron is my project manager. Sean Russo is my head of research. Riswald

is my producer. I'm Batty Hults. You've been listening to a Masters and Business on a Bloomboat Radio