6 months ago, GameStop was a struggling retailer trying to survive in the video game sector, which for the most part has, moved online. Over that same timeframe, it went from a mostly unknown stock, to the most talked about stonk in the entire world.

After years of losses, the GME stock was struggling. On July 28th 2020, the stock was trading just below $4, but January 28th 2021, the same GME stock reached a new all time high of $469.42 The reason for the meteoric rise in GME stock, a ‘short squeeze’.

What Is A Short Squeeze

When investors, including very large hedge funds, expect the value of a share to price, they can open what is known as a short position. They borrow shares from a broker then sells them.

If the value of the shares drops, they can buy them back at a lower price, and settle their debt (which is measured in shares, not $$). They can turn a profit because they are selling for more than they are buying..

Having said that, the same is true if the price goes up, they have to buy it back at a higher price, and now the difference in their sale and purchase price has become a loss. The catch is that to close their short, they have to buy stock therefore driving the price even higher. and making things worse for themselves. This is the ‘short squeeze’.

At times, professional traders create a short squeeze, by buying stock that another fund has short sold.. Basically it’s like a battle between those who think the price should go up, and those who think it should go down.

What makes this short squeeze unique, is that it doesn’t involve 2 or more hedge funds. This is a battle between hedge funds and retail investors.

While we may never know who exactly started it all, but the retail investors have united in an army on the reddit forum r/wallstreetbets. It has gotten to the point were the people are taking on the hedge funds.

What Is Wall Street Bets

Wall Street Bets, or WSB, is a ‘sub’ on the premier chat forum Reddit. The WSB sub has been on Reddit since 2012. But they’ve attracted 5 times more members in the last week, than they had in the previous 9 years.

One reason for the explosion in WSB members, is a tweet by Elon Musk. All he said was ‘Gamestonk!’. Elon is no stranger to these battle grounds, after all, stock in Tesla, has also been the prize in a recent short squeeze war.

If you’ve ever tried to read financial reports, it may feel like reading a different language. They use their own terms to make themselves seem more knowledgeable.

Well it turns out that the WSB members are also battling on this front, they have invented their own financial dialect:

Diamond Hands
Diamonds are tough, they are the hardest known natural substance. To have ‘Diamond Hands’, you have to be tough! You have to have the grit to buy your GME, or other stock (AMC, BB, NOK, etc), and hold.

The strategy Diamond hands strategy is as simple and identical to the old school ‘buy and hold’. The difference is that when the people are fighting a short squeeze, the more stock we hold, the less they can buy. It’s a simple strategy, but if enough of us do it, it’s a winning strategy.

Paper Hands
This is the WSB term for fear selling.. You know like being on a winning thing, but getting nervous and selling out before the real rewards come. Basically paper hands get nervous and panic sell. Paper hands are the antithesis of Diamond hands.

Tenders
If you read through the comments, you may notice frequent use of the term ‘tendrs’. This is WSB speak for ‘profit’. It’s a reference to chicken tenders, aka the best part..

Keeping It Fun
There’s something to be said about people who can poke fun at themselves. This group affectionately refer to each other as ‘retards’, and ‘auties’. While these terms may sound insulting… they are in fact poking fun at the hedge funds, and the way they see the every day person.

As you remain active in WSB, the lighthearted culture is ever present. Another example is the frequent use of pop culture quote ‘Apes Together Strong’.. This is a modern version of ‘united we stand'… and also a nod to the recent Planet of the Apes movies. Turns out that the joke is no monkey business, us monkeys are beating big business.

The War Is Mainstream

The WSB short squeeze against hedge funds, especially GME, is very real. The people are taking on the funds and even President Biden is paying attention, and is ‘monitoring the situation’.

On the other front, some more sinister activities. Several brokerages, including the popular peoples broker, Robinhood, implemented restrictions on these short squeeze stocks. Conspiracies aside, no matter what their motivation, restricted trading will only cause reputational damage to these brokers in the long run.

The behaviour of the brokers has gotten the attention of the regulators with reports the SEC will punish abusive brokers.

One theory is that certain brokers are trying to prevent people from buying stock in GME, AMC and other stocks popular with the /wallstreetbets crew. It is believed that they are trying to manipulate the market so that the hedge funds with short positions can survive longer before the inevitable squeeze forces them to close their losing positions.

We have found that there is unrestricted trading through Interactive Brokers, and were even able to open an account very quickly all the way from Australia.

The WSB Traders Can Win

While it may look like a difficult task. Just like the tale of David and Goliath, the big guys don’t always win. The WSB sub has the simple philosophy of buy and hold. If enough of them unite and hold strong, then they will cause a supply side shortage which in theory would keep the price of the stocks up.

Here at TFG we are watching the battle closely and have taken small holdings. We’d love to know what you think in the comments section below