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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm keeping it light and I'm jumping on to share a couple of quick thoughts on all of the news surrounding GameStop stock and Reddit.
And my guess is that most of you are up to speed with this story. It's pretty hard to avoid it these days. If not, the Wall Street Journal podcast published a great episode last week, breaking it all down in plain English, which is my favorite. So if you want to get caught up, you want to understand what's going on, go check out the Wall Street Journal podcast last week's episode. They also did a follow-up episode yesterday. So go check those out if you want to get caught up. But in short, last week, many,
millions of individual investors on Reddit, which is an online forum, millions of these individual investors band together to buy GameStop stock. GameStop is a video game retailer, physical retail stores you've probably seen in malls and strip malls. So these individual investors band together to buy this stock, sending the stock price through the roof. And by through the roof, I'm talking about a gain of more than 1500%.
The reason that they went after this stock was that they knew through publicly available data that large multi-billion dollar hedge funds were shorting the stock. In other words, these multi-billion dollar hedge funds were betting that this stock was going to go down and they had a lot of money on the table betting that it was going to go down. So by all these individual investors banding together and buying the stock all at once and driving the stock price up significantly,
Their hope was that these multi-billion dollar hedge funds that to them represent Wall Street would lose money. And some of these hedge funds did lose money. Some of them lost a lot of money. But this story is not over yet, I promise. And I think there's a lot of misconceptions and a lot of things about the system behind the scenes that not a lot of investors know about.
So we'll learn more as the days go on. I'll leave the background story there for now. If you want to listen to the Wall Street Journal episode and kind of get caught up to what's going on, go do that. For today, there are two things that I wanted to share with our listeners.
Number one, the alleged reason that these investors, these Reddit investors band together to do all this was to quote, take down the man, right? They feel like Wall Street and the associated corporations always win and the mom and pop investors like you and me always lose, that the system is rigged. And while these antics have caused significant financial harm to some of these very large organizations, they're
Christine Benz at Morningstar made a really good point today by saying, quote, let's not forget that the late Jack Bogle created an entire system for doing just that. It's called buying and holding low cost index funds. I realized that Jack didn't technically invent indexing, but he institutionalized the concept and made it accessible for everyone, which was a huge contribution.
I bring this up just to highlight that, yes, while much of Wall Street might be rigged to benefit Wall Street, there has been significant progress made in recent years and in recent decades that have helped turn the tables.
And if anyone here listening wants to do their part to quote, stick it to the man, a very easy first step is to stop giving your money to the man. Stop giving your money to publicly traded brokerage firms that are required to put shareholders' interests first and ahead of yours and stop investing in high cost products that tell a good story but fail to produce good results.
And it's not just individuals like you and me who can vote with our wallets. Large institutions like CalPERS, CalPERS is the California Public Employees Retirement System, large institutions like them are beginning to follow suit as well. For example, a few years ago, CalPERS sold out of about $4.5 billion worth of hedge funds that they owned in favor of lower cost investment solutions. And that trend seems to be continuing.
Anyhow, my point is that we don't necessarily need to participate in the Reddit antics that we experienced in last week in order to take a stand here. Many of us are already doing it in what I would argue is a more prudent and more impactful approach.
The second thing I wanted to comment on is that Robinhood, the free stock trading app that's getting all the headlines, prior to all of this mess, Robinhood was perceived as a trading app for the mom and pop investor. In short, a free trading app with no fees that gives an opportunity for the small investor to finally win.
Well, fast forward to last week when users were outraged when Robinhood and let's be fair, other brokerage platforms as well. But again, Robinhood is the firm that's making the headlines. Their users were outraged when Robinhood restricted trading on GameStop stock.
More than anything, this event, them restricting trading, finally brought to the surface Robinhood's core business model, which to the surprise of many of its users, isn't to benefit the small mom and pop investors at all. Quite the opposite.
What most people don't know or didn't know is that Robinhood's biggest clients are the large market makers and get this hedge funds. Their biggest clients are, are, are market makers and hedge funds. Robinhood doesn't charge you commissions to trade.
but they entice you to do it and that's because they make a lot of money selling their order flow to large hedge funds. In other words, they're taking order flow from mom and pop investors like you and me and they're selling it to the big wealthy hedge funds. Robinhood is just the middleman. So the more you trade, the more order flow they can sell, which is why they've designed this slick trading app that encourages trading.
Well, many people felt like GameStop, the GameStop trade was an effort to stick it to the man and they celebrated when the media ran headlines stating that hedge funds like Melvin Capital lost billions of dollars. Well, unfortunately, that's just not what happened.
My friend Colin Roche summed it up really nicely by saying, quote, all of this activity is in the aggregate hurting Robinhood's customers and benefiting all of the middlemen who make money from all of your irrational activity.
Oh, and if you think GameStop's biggest individual beneficiaries are Reddit traders, then you aren't familiar with the executive suite and board of directors at GameStop or the hundreds of billions of GameStop stock owned by other hedge funds and institutional investors. This was never David versus Goliath. Remember, if you're not paying for a product, you are the product. And that's exactly what many people are learning right now.
As mentioned at the top of the show, the story is far from over. The good news is this story shouldn't matter to you or your retirement. And even better news is that you have a lot of control over how you're impacted by this event as a retirement saver and an investor and how you spend your time reacting to it.
I'll be back here next week, getting back to our regular programming on financial planning, things that are in your control to actually move the needle. Next week, we're going to be talking about portfolio rebalancing, what it is and the top four benefits. So until then, have a great week and I will see you back here next Tuesday.
This podcast is not engaged in rendering legal, financial, or other professional services.