The X’s & O’s

You probably heard all about GameStop stock and buzzwords like short squeeze, Reddit’s WallStreetBets, and hedge funds the last week of January. But what really happened that had all of the financial media world stirred up and Alexandria Ocasio-Cortez and Ted Cruz actually agreeing about something? Brent, Matthew, and Joshua break down this multifaceted story and cover some key lessons that we can take away from these recent events.

The Hosts:

Brent Pasqua, Matthew Theal and Joshua Winterswyk

Transcript:

Brent Pasqua: Welcome to the Retirement Plan Playbook. The boys are back. We’re here. We’re ready to go. I’m your host, Brent Pasqua, founder of RPA Wealth Management here’s as always with Matthew Theal, certified financial planner and Joshua Winterswyk, certified financial planner. How’s it going, guys. Feels good to be back in here. How are you doing?

Matthew Theal: I’m doing great, Brent. I’m really excited for today’s show. I think this is going to be a doozy, and I have a lot to say.

Joshua Winterswyk: I’m excited too. I think all of the last, what, week and a half, two weeks, I’ve been waiting to report this podcast. So excited to start.

Brent Pasqua: Yeah. It’s been such a crazy couple of weeks with a lot of emotion surrounding the market, and we want to get into that. But to kind of kick this thing off as we are going to talk about what has happened and why it’s happened and so forth, I want to ask you guys a question. It seems like now that active stock picking has really had a resurgence. Do either of you trade individual stocks, and then if you do, what kind of capacity do you do that in?

Matthew Theal: I do. I’ve done it for a long time. So I started trading individual stocks when I was 15 years old. So I’ve been doing it now for almost 20 years, and I think it has its place in a financial plan. But I also manage my retirement passively using index funds. So the stock market, stock picking is more of my hobby. What I did to make it so I don’t actively trade in day trade is I started… I do it in a brokerage account. Because I’m cheap, I don’t want to pay taxes. So that forces me to not overtrade and be really specific when I traded.

Matthew Theal: So for instance, a long time ago, I had purchased Apple in like 2011, and I haven’t sold it, and I have such a large capital gain that I don’t think I’m ever really going to sell it, unless I needed the money or something drastically changes with Apple’s business, because I don’t want to pay the capital gains tax. So that’s the way I do it for myself.

Joshua Winterswyk: I don’t need to probably elaborate too much more. I think me and Matt have very similar strategies. Retirement’s very passive, and stock picking is more of a hobby. I think that learned about stocks and was always interested them since high school and started trading in college when I was studying finance and just always have had an interest in it about trading individual stocks, and I’ve just kept that again as a hobby. But my core investment strategy is still passive, but I do enjoy the buying and selling of those individual stocks.

Brent Pasqua: Yeah. I think the theme for me is the same. I mean, the majority of my assets and investing is built on that passive and that very smart investment philosophy. I do own individual stocks. But I think for us, first of all, we got trade for Cummins first. Second of all, you don’t always want to be trading. It’s like very time-consuming, and you know you’re going down a bad path if you’re just going to be spending a bunch of time trying to figure out trades. It’s probably not worth it. So I enjoy it. I hold them, just like you guys, I keep them, but I’m not there to day-trade things in and out.

Joshua Winterswyk: Yeah. That’s me too, and that was one thing that I miss is I do hold my position. There’s not too many that I’ve actually sold.

Brent Pasqua: Yeah. Completely agree.

Newspaper Boy: Extra, extra read all about it.

Brent Pasqua: Let’s hear the latest hot takes on some recent news items. So let’s get into the hot tech headlines. The last week of January, Reddit, day traders, hedge funds, AOC, Dave Portnoy, and Ted Cruz, all made headlines after Robinhood disabled buying in meme stocks. That’s all a lot of people we just talked about and mentioned, a lot of players. What happened here?

Matthew Theal: Yeah. It’s kind of crazy that all those people got caught up in an internet storm. I think it was on Thursday, January 20-something. But I’ll start kind of explaining it, and maybe Josh, when I get bored of talking, I’ll pass it to you or Brent. But all right. So back in 2019, there’s this trader named Keith Gill. He goes by Roaring Kitty and DeepF—ingValue online. So he’s got a YouTube channel, and then he was posting on this Reddit board. Reddit board’s just basically a message board, correct, online?

Joshua Winterswyk: Yeah. Reddit’s actually really cool if you haven’t used it. Quick side note on Reddit, it’s really good for finding information and reviews. So if I’m looking for a review on a product or something, I’ll actually search Reddit over Google.

Matthew Theal: Okay. So let’s go back to this Keith Gill guy. So in 2019, he does some analysis, fundamental analysis, and his analysis leads him to believe that GameStop is an undervalued stock. So to purchase GameStop, he uses what we call leaks, which are long dated stock options that give him the right to buy GameStop stock in the future. He started posting updates to this Reddit board on his trade, and he called it Yolo GME options trade. He would post a picture of his account. He did this, I believe every week. At the end of the week, he’d post a picture of his trade.

Brent Pasqua: He’s posting his bets.

Matthew Theal: Essentially, yeah. During this time, COVID hit and day trading became really popular. A lot of people started opening up these Robinhood accounts, and there’s this Reddit board called WallStreetBets that was extremely popular, and they made a couple big trades on Microsoft, and then the space shuttle company, Virgin Galactic, and then Tesla.

Matthew Theal: In 2020, September 2020, this guy who goes by the name of Jeff Amazon posted this Reddit thread or Reddit post, I guess about this GME short squeeze trade, and it was really detailed and really, really smart. He basically laid out this thesis. I guess what happened after that was the Chewy found… Have you used Chewy, Josh?

Joshua Winterswyk: I haven’t. But I’m familiar with Chewy. Chewy is the online pet supply, ships to you. It’s like the Amazon for pet owners.

Matthew Theal: Yeah. So this was in January of this year. This guy gets added to the board of GameStop, and people really like him. I guess he’s really intelligent and business thought leader. So I go there. He’s going to help turn GameStop around.

Joshua Winterswyk: Yeah. Chewy’s done very well.

Matthew Theal: Yeah, it has.

Joshua Winterswyk: Especially because of the pandemic.

Matthew Theal: It’s been a great performance stock. So that creates a short squeeze because so many people were betting against GameStop. So they had to cover their shares. When that happened, the Reddit board started going crazy because some of the people are on their own GameStop. So then they all started saying, “Hey, buy GameStop shares. Let’s keep squeezing these shorts, these people who are betting against the company.”

Brent Pasqua: Around what date was this?

Matthew Theal: This was probably the second week of January, I think, or the third week.

Brent Pasqua: Right. So now we’ve moved on from the September timeframe onto the end of the year and into January now.

Matthew Theal: Yep. So we’re there.

Joshua Winterswyk: I think it’s important to know that it just didn’t happen right away either. So-

Matthew Theal: No, it took a long time. I mean, this guy, Keith Gill started this trade in 2019. The guy made the short squeeze post on Reddit in September of 2020, and now here we are in January 2021, that Chewy guy comes in, and the short squeeze starts. From there, a lot of these people start using Robinhood to buy the stock. Right? That’s kind of like the millennial brokerage firm?

Joshua Winterswyk: Yeah, it’s an app. So you can download it on your phone. You can be up and trading in 15 minutes with this app.

Matthew Theal: Yeah. I’m not a meme guy. But maybe you could explain memes to everybody, Josh. I know you’re big on memes.

Joshua Winterswyk: Memes make me laugh. I do like memes. But memes are just basically pictures and people comment words over them, and it’s like a comedy sketch and a picture.

Matthew Theal: So Jimmy kind of became like the poster child meme stocks, the motherboard is just a bunch of memes essentially. Then there’s a few other ones, AMC, Nokia, Blackberry. Am I missing any brands? I don’t know.

Brent Pasqua: I think there was a few more on the list. I think there was a total like 12, I think, but-

Joshua Winterswyk: Those are the main ones.

Brent Pasqua: Those are the main players.

Matthew Theal: So what happens now is where the GameStop, let’s say it’s at a hundred bucks a share, and news breaks, so this hedge fund, Melvin Capital is massively short GameStop and can’t get out. This is when the Reddit board goes crazy, and the memes just really, really start piling on, and essentially the whole theme of the board is everyone needs to buy as much GameStop as they can to squeeze out. We’re going to beat this hedge fund. It’s kind of like their version of occupy Wall Street that-

Joshua Winterswyk: Taking it to the man.

Matthew Theal: Yeah. That protest that happened in 2012, I think. Then another hedge fund that I guess invested in this hedge fund or hedge fund manager, Steve Cohen came in, and he essentially gave Melvin Capital the money needed. So they were fine and able to get out of their short, but the momentum had carried, and GameStop started really shooting up into the high 300s. What happened then was Robinhood had to suspend trading in GameStop. This is when the internet completely lost its mind.

Joshua Winterswyk: Yes, it did.

Matthew Theal: The reason they had to suspend it wasn’t because they were trying to work with Melvin Capital, Steve Cohen, or Citadel, which is what a lot of people thought that Robinhood was being, I guess, biased in a way.

Brent Pasqua: They still believe it.

Matthew Theal: Yeah. Some people still believe it. But what actually happened was Robinhood was severely under-capitalized and didn’t have enough money on its balance sheet to settle their trades.

Joshua Winterswyk: They had to stop the bleeding.

Matthew Theal: They had to stop the bleeding, essentially.

Brent Pasqua: I mean, and what that basically means is that, in simple form, there was such a rush of customers coming into Robinhood was such demand buy stuff. They didn’t have the backing to support financially that quick of a demand.

Matthew Theal: Yeah, absolutely. Correct. That’s exactly what happened. Then from there, this is when the internet mob took off though that day. AOC and Ted Cruz were in agreeance. A bunch of different senators were calling for Robinhood to go to Capitol Hall and testify, because it did in a way look like they were taking orders from hedge fund managers to stop trading GME because they were hurting so bad.

Joshua Winterswyk: Yeah. Robinhood was protecting big Wall Street against the retail investor.

Matthew Theal: Right. But again, we’ve learned that wasn’t the case at all from conspiracy theory, but really they just didn’t have enough money. So where we are today is we now have found out there was actually another hedge fund on the other side of the Melvin Capital trade. It’s pretty naive to think that a bunch of Reddit traders are going to move GameStop enough to where it’s going to shoot up to 350 or whatever it’ high was. I don’t know the exact high.

Joshua Winterswyk: Yeah. I think it was around 350.

Matthew Theal: So there’s this other fund that comes out, made 700 million on this trade. They were along GameStop. They owned 5% of the common. They purchased it in September 2020. They sold that position, I believe in the 300s. They exited.

Brent Pasqua: They knew when to get out.

Matthew Theal: They knew when to get out. So now where we are today as of recording is just like anything, buying a stock is supply and demand, right? There’s really no more big buyers left for this GameStop share, and it’s down as of recording 81% from its high. So all of these retail investors are sadly kind of left holding the bag and quite a few of them lost out. The main guy we’ll go back to at the start, Keith Gill, the Roaring Kitty, he posted screenshots online of his account. I think this highest I saw was 45 million, and then the last before he stopped, because he’s under investigation now was 5 million.

Brent Pasqua: Did he get to cash any of that out?

Matthew Theal: He did cash some of it out. Most of it that I saw was left was like 5 million in cash, essentially.

Brent Pasqua: So he went from really, really rich really fast and then lost a lot of money really fast.

Matthew Theal: Yeah, pretty much.

Joshua Winterswyk: Really rich on paper. He wasn’t quite the predicament though because promoting everyone to buy the stock looked pretty bad than if his next post was that he sold it all and cashed out. What does that do to the stock and everyone else who’s holding it?

Brent Pasqua: And his reputation.

Joshua Winterswyk: And his reputation. I mean, he was the leader of this pack and this revolt against this big hedge fund or hedge funds, and then now he’s selling, cashing out, and he leaves to an island, never returns.

Brent Pasqua: I don’t think the story really ends here, right? Because there’s so much that you just unpacked, and then there’s all the ripple effects that will continue to happen from what just unfolded over the last couple of weeks.

Matthew Theal: Yeah. This story is definitely not over. I mean, it’s quite possible GameStop goes back up. I mean, you never know. It could happen, right? That said, it does kind of seem like at the end of the day, Wall Street, one… I mean, Melbourne Capital got an infusion of a couple of billion dollars from Steve Cohen, SAC Capital. They most likely reloaded their GME short near the top. There’s another hedge fund that we talked about, the mid 700 million on this trade.

Matthew Theal: It looks like there’s a bunch of people who were a little bit inexperienced at investing who ended up purchasing GameStop in the high 300s who are now holding big losing shares. That’s unfortunate.

Joshua Winterswyk: Yeah, it is. It is unfortunate. The big guy does look like they won, and pretty amazing story. I think there’s so many layers to this story as well when you’re talking about the retail investor, hedge funds, just the clearing of it. It’s the regulation. You have senators involved, celebrity personalities. There’s just so many layers to what had happened in so many of… A lot inaccurate takes on it as well about what actually happened.

Matthew Theal: Really bad takes.

Joshua Winterswyk: So I think that we’ll be kind of decompressing from this story for a while, and like you said, it’s not over. GameStop stock didn’t disappear. So we’ll see what even more repercussions happen in the future, but great job on summarizing kind of the craziness of this week and a half.

Brent Pasqua: When we get into the retirement planning quarter, one of the things that… I had a lot of thoughts and feelings as this was taking place, and I had clients reach out, and there was a better understanding of what they were thinking and what they had sort of assumed what was happening. I think that kind of plays into a lot of the emotional part of investing in retirees, and I want to get to that.

Brent Pasqua: Before I do though, we know that Roaring Kitty and DeepF—ingValue, online nickname for Keith Gill, we obviously know that he did this yellow trade of Game stock, his screenshot show that he was up 40 million, and that had soon gone down. But now he’s being investigated in the State of Massachusetts. To come to find out, he’s actually a licensed securities broker. What’s happening here, what you’re taking, he’s probably in trouble.

Matthew Theal: Yeah, yeah. I mean, he’s in big trouble. There’s a lot of laws around professional investors. We know them, the three of us are professional investors. If he essentially didn’t have a license, he really didn’t do much wrong. He was just posting on the message board. But I mean, there’s going to be some gray areas since he does have a license. I’m sure this ends up with him losing her license and having to pay away most of his Yolo options trading profits in legal fees.

Joshua Winterswyk: Yeah. I think he was like a financial wellness coach or something like that.

Matthew Theal: He was.

Joshua Winterswyk: Did you see that? Yeah.

Matthew Theal: Yeah.

Joshua Winterswyk: I think that was just kind of funny because yeah, I mean, when you take your license test and when you become a professional investor, when you’re on that process, a lot of what you’re learning is what you can and can’t do. It’s just kind of funny that he thought that this was all okay about posting on these message boards, and he didn’t think that any repercussions were going to happen. But that investigation came very, very quickly.

Brent Pasqua: Yeah. In this industry, I mean, everything you do marketing-wise needs to go through compliance and is heavily scrutinized by your firm. He’s been working for MassMutual doing this without letting them know, not only is he in trouble for that, but MassMutual is going to be in big trouble also because clearly they weren’t monitoring his work the way that they should have, because at this point, they basically said, we didn’t know he was doing any of this.

Joshua Winterswyk: Yeah. Like Matt said, I mean, it’s been going on since 2019. So it’s not like it just happened yesterday or just happened when the news broke on this stock being short squeezed.

Matthew Theal: It’s going to be an interesting case for our industry since he was anonymous online. Then we only found out his name because he actually… I don’t know why he did this, but he gave an interview to the Wall Street Journal and told them his real name.

Joshua Winterswyk: So that’s how he came out.

Matthew Theal: Yeah. Yeah.

Joshua Winterswyk: I wonder what the motivation to come out would be if you know your license and you know you can get in trouble. Fame?

Matthew Theal: Fame, fame. Fame, man. I mean, for most advisors or licensed people, there’s probably only one or two times the Wall Street Journal is knocking on your door for an interview.

Brent Pasqua: Yeah. Well, see Martin Sorrell for that. Now that we’ve warmed up with some hot tips, let’s go to the retirement planning corner and see what’s on the docket for today. All right. So let’s get into the retirement planning corner. We’re going to do some of the frequently asked questions on the saga. Really try to make it easier to understand what actually happened here, and we’re going to be going into and discussing how this might impact retirees. Last week, we really finally got a break from all the COVID news though and all the politicians fighting over everything.

Brent Pasqua: But this time really that news focused on all of this market drama. The story really had people talking from mainstream media to social media, to every platform you could think of was really talking about what was going on here, and it ranged from everything from speculation to conspiracy theories. For several days, it really captivated the nation, and everyone really seemed to have an opinion. I’m sure our listeners want to know, how does this really impact them as potential retirees? Because I mean, does it make you more concerned about market efficiency?

Matthew Theal: Oh, well, I’ll take a stab at this first and pass it on to Josh. The way you saw direct impact, and this is even for the people who were buying GameStop stock is because there is a few hedge funds under pressure. The market started de-grossing. What that means is they had to sell their winners to cover their short losses. So it drove the overall market down that week. So even if you bought GME at 200, you bought 10 shares, you probably lost more money in your 401(k) on the week, then you made on your GME 10 shares.

Matthew Theal: So I thought, I thought that was an interesting angle of where kind of be careful what you wish for. You’re knocking the hedge funds. Well, then they’re going to most likely knock all the stocks in your 401(k) or the funds in your 401(k) that are doing good.

Joshua Winterswyk: Yeah. It goes against, if you do have that philosophy in your 401(k) to be long or have a longer time horizon, and you’re looking for the home run, which has, excuse me, a little chance of being a home run and a lot of risks, you could have exited this event negative, and that’s not good for retirees. But one thing that stuck out to me for retirees about this stock too is that it was a small stock. If you are practicing good philosophy and you are diversifying, how big of that impact did it have to you over the long run by having just this one stock or just a handful of stocks go up in the short term. If you’re sticking to that longer plan and you have that diversification in your portfolio, you probably didn’t see too much movement just because of the GameStop trades.

Matthew Theal: Yes, Brent. To answer your question, this fully proves the market’s efficient, because when the game stop was going up, the only reason it was going up is because there was more buyers than sellers. So that’s supply and demand kind of one-on-one, right? The hedge funds were the buyers, and so were the Reddit guys. So everyone wanted to buy the stock. Now that the stock has started dropping, the reason it’s dropping is because there’s more sellers than buyers. Everyone wants out.

Brent Pasqua: My concern when this was going on was that it was giving the optics to people who have their life savings or retirement invested in the market that the market for that period of time wasn’t efficient and that in the future, it could potentially not be efficient if we had some of these market manipulation with more of this modern day online being able to group people together and have movement. How would that actually impact the market, and would that create a panic sell?

Matthew Theal: Yeah, it could. But I mean, it’s all temporary. So the hedge fund de-grossing lasted a couple of days. Since then the markets got back to where it was and been rallying so far in the month of February. But like Josh mentioned, GameStop was a pretty small stock at the time of the squeeze. So it was what we considered a small cap. It’s pretty tough to move even a small cap, like GameStop. It took a lot for it to get there. The trade only really started working once that Chewy founder was… that news was there. It wasn’t working prior to that.

Joshua Winterswyk: I think that’s a question that we all got to was like, could this happen to some of the bigger positions? Well, in my eyes, when I look at this situation, it was the perfect storm. This stock was shorted at such a high percentage, like 140%. Right? You had the Chewy founder, then you had the Reddit. All of this stuff happened to this perfect stock to create this perfect storm and create this demand and move it the way it moved it.

Joshua Winterswyk: So could this happen all the time? I mean, anything can happen. Right? But as far as that volume and being that perfect storm to move it that much, it caught everybody off guard.

Brent Pasqua: I think one thing that you said was critical to that is coming out now is that it probably wasn’t all the Reddit group that moved it or the movement that happened. It was that hedge fund was heavily long in these positions.

Matthew Theal: Yeah. Whenever you get volatility in a stock, like you saw in GameStop that’s Wall Street’s dream. Every hedge fund most likely was in on this training one way or the other and made a killing, the big banks, Goldman Sachs, Morgan Stanley, JP Morgan. They most likely made a killing that that week. They want volatility. They want to see stocks go up and down like that. It’s just so good for their business models.

Brent Pasqua: Does this mean that the market for a short period of time or long period of time was broken?

Joshua Winterswyk: No. I just think that it’s a testament to also how fast the market actually processes information. Because it was all happening so fast. Yes, we knew that Melvin Capital was shorting the stock. Yes, we knew there was a movement behind it, but how fast the market was reacting both up and now when it came down. So I think that is a testament to seeing how efficient the market is of processing that information and adjusting to back to normal. I mean, because we’re not talking about a long period of time here. I mean, days that this adjustment has happened already.

Matthew Theal: The market doesn’t break, so to say. I mean, could we see an event future where there’s some massive hacking or something? Yeah. Maybe sure. Well, brakes is the banking system, the money markets, kind of like what we saw in 2008. But since then we’ve had a lot of restrictions put in place, be it the Dodd-Frank bill that kind of put training wheels on banks in the money market system and how all that worked behind the scenes, which is again why Robinhood got hit with the capital call. They just didn’t have enough money.

Joshua Winterswyk: Yeah. Is that just a regulation issue?

Matthew Theal: Yeah. It’s more regulation, not really things breaking,

Joshua Winterswyk: Whether lack of or wrong regulation and proper regulation. But I think with chaos, also comes change. Right? So we can become better from that situation, especially for retail investors.

Matthew Theal: I agree.

Brent Pasqua: Yeah. No. I think with the amount of mainstream media that it got all the way up down to social media, I’d have to assume that there’s going to be some kind of regulations that are either looked at or possibly put into place, and what could that be?

Matthew Theal: I don’t know. I would assume that maybe there’s some more restrictions on smaller brokerage firms, like Robinhood. That’s probably where this goes, being that maybe they can’t open so many accounts, or you have to let money actually come into the account before you allowed the margin trading that they were allowing and then maybe even some kind of test to be able to trade stocks individually for retail investors that they have to take.

Joshua Winterswyk: Yeah. Just to go back on that on margin just so the listener understands too is if you open up a brokerage account, you deposit money into the account. The money hasn’t necessarily cleared yet, but you’re able to actually trade those funds. So the actual brokerage firm is taking that risk from when the money gets actually transferred into the account and the purchasing of the stock. So just to kind of clear that up, and I think, yeah, there’s going to be a lot going to be a lot of look into regulation about that because I think that that’s one of the core issues in this whole situation.

Brent Pasqua: Yeah. I think we now we see what actually happened. But I think who still really comes out looking really bad through all of this is Robinhood.

Joshua Winterswyk: Absolutely.

Brent Pasqua: I mean, they left so many unanswered questions just based on the interview that he did. He wasn’t clear, the CEO of lad came out. I don’t know if everyone saw, but he was on some of the mainstream. I think he was on CNN and CNBC and a few other places. He was doing these interviews, and he wasn’t clear and concise about what was happening.

Joshua Winterswyk: He wasn’t. The only thing I do feel a little bad for him is that he did give the capability to these Reddit investors to do this. His platform that he built and where everyone’s trading is Robinhood for the most part because of the ease and no costs and all of the stuff that involves Robinhood. But I agree with you he didn’t handle it appropriately. He could have been more transparent, been more ahead of this story and been proactive instead of kind of reactive, which left a bad taste in the mouths of a lot of the consumers of Robinhood.

Matthew Theal: The problem with Robinhood is it’s a brokerage firm with a nice-looking app that gamifies the stock market, and they’re running it like a startup, not like a brokerage firm.

Joshua Winterswyk: Like an app.

Matthew Theal: Yeah. Like it’s a hot app. But it’s not that. It’s a brokerage firm that needs to be run like one.

Brent Pasqua: Yeah. Let’s tell the listeners what Robinhood is. I mean, again, Robinhood’s just a platform that looks nice that allows people to place trades. What’s nice about it versus some of the big custodians is that you can buy fractional shares. You don’t have certain requirements on there. You could open an account, and if you wanted to buy, let’s just say, Tesla stock, you can buy a fraction of Tesla stock.

Brent Pasqua: People love that because it got… Anybody who had any money, if you wanted to put $10, you could essentially be opening an account at Robinhood and be able to trade. Then all of this mass customers just flooded them all at that one moment so quickly. They have those federal requirements that they have to go by, where they have to have a certain amount of money to cover those costs, and they couldn’t get it that quickly. Literally, all it took them was what, not even 24 hours. By the next morning, they had secured enough capital to be able to support it. But by that time, literally, it was a PR nightmare.

Matthew Theal: Handled really poorly by them. That’s for sure.

Brent Pasqua: Yeah. I mean, my first thought after I heard him do one interview, it was like, “You need a PR company to come out here and speak for you because you’re clearly not telling people exactly what happened because we all…” By that time when he was already talking, we were already starting to figure it out because we’re in the industry. We started piecing it together, started to all make sense. But there was that period where he didn’t just give the other people the ability to understand what was taking place, and they asked him, is it a liquidity issue?

Brent Pasqua: Well, he’s probably thinking it’s not a liquidity issue if we don’t have this high of a demand. But now we’re getting this rush of demand. Now we’re having a liquidity issue, and we’ve got to secure it, and that’s all he had to say.

Joshua Winterswyk: He skidded around the question. Who was he speaking to? He was speaking to his consumer, and he didn’t make it very clear to understand what was going on to his consumer, which is the retail investor on the other side of that app. That’s going to leave a bad taste, but what’s kind of crazy to see is that they’ve had an increase in downloads of their app since then, and I think maybe no publicity is bad publicity.

Matthew Theal: Yeah. I mean, again, pointing to, “Oh, we’re number one on the app store,” that’s a startup game. You’re you’re a brokerage firm. Act like one.

Joshua Winterswyk: Yeah. Maybe that’s where it got a little bit above his head.

Brent Pasqua: I don’t know if people realize also that there’s not that many brokerage firms out there.

Matthew Theal: No, not anymore. Yeah.

Brent Pasqua: Now, when we say brokerage firms, I mean, we can name a couple of the big ones like Charles Schwab, Fidelity, TD Ameritrade, that maybe our listeners are more familiar with, but they haven’t heard Robinhood. Just to kind of give some insight on that.

Joshua Winterswyk: They didn’t have these problems, right?

Matthew Theal: No, no. They’re well-capitalized. Absolutely not. What they did was they raised margin requirements, meaning it was more expensive if you wanted to trade the stocks on margin.

Brent Pasqua: Yeah. So they just changed the requirement where Robin had to shut it down, because they literally had to secure funding first.

Joshua Winterswyk: Yeah. There was a couple of other smaller firms. I think interactive brokers did limit trading through that same period. But they’re again, a smaller brokerage firm, not the bigger ones that we have just mentioned.

Brent Pasqua: I think that what Robinhood was probably facing that one morning was either we have to pause trading, or we’re literally going to get shut down, or we’re going to be in some really big trouble, and they had to make a quick decision.

Joshua Winterswyk: Yeah. Who’s going to lose the money, the business, or the consumer, and they chose the consumer.

Brent Pasqua: Yeah. All of this, I think we’re always trying to figure out, what side was right, and what side was wrong? Sort of what’s your take on who was right and who was wrong here?

Matthew Theal: I don’t think anybody was truly right or wrong. I mean, I think we’ve pretty much done a good job of explaining that Robinhood did a really awful job of managing their PR. If anything, it’s another fault of these keyboard warriors who are on the internet and rushing to judgment. If anything, maybe it’d be nice if we can get that to stop. But other than that, no, nobody was right. Nobody was wrong. That’s it?

Joshua Winterswyk: Yeah. I don’t think so. I think besides, like Matt had said, the PR issue and just the way Robin had handled the situation made the situation even worse. But I don’t know if there’s right or wrong. There are winners and losers. Definitely, you can see, based off of which side of the bet you were playing, because that’s basically what this was. But as far as right or wrong, I agree with Matt.

Brent Pasqua: So I think one thing that a lot of people still want to know regarding all of this is like, who financially came out ahead? Who won? Who really made out in all of this? Was it the hedge funds? Is Robinhood going to make out in the end? Is it the Reddit traders? Is it Roaring kitty? Who won out of all of this?

Matthew Theal: Well, so far, it’s that one hedge fund. They made 700 million on the trade. They’re a top performing hedge fund this year, and they’re going to have some really nice fees and really good for their investors who are limited partners in their firm. I’d be curious to see what happens with the Melvin Capital. My guess is they were able to reload their short with the capital they got from Steve Cohen. So they’re probably going to come out pretty well since GameStop’s down so much.

Joshua Winterswyk: Steve Cohen is the owner of the Mets now, right?

Matthew Theal: Yeah. So Steve Cohen, in a way, he’s kind of like the most ruthless character on Wall Street. Do either of you guys watch Billions?

Joshua Winterswyk: I haven’t yet.

Matthew Theal: You guys are in the industry, and you’re not watching Billions. So the main character in Billions, Axe is loosely based on Steve Cohen. Essentially, he was this ruthless trader that would do whatever it took to essentially make money, and he had one of the top-performing hedge funds for really, I believe, most of the early two thousands till he got in some legal trouble at the SEC, and he had to close them down and basically turn it into a family office, which is Point72, where he manages his own billions, and yes he did just by the Mets.

Brent Pasqua: I mean, that’s pretty remarkable. One thing that I was thinking about it, and I spent a lot of time thinking about probably who gets hurt out of all of this. We’ll probably find out who won, but who probably gets hurt out of all of this is the investor experience from a generation who’s younger than us that was probably for some of them buying their first stock ever. I have to imagine that a lot of them bought their stock on the way up when it was to the moon, 200, 300. I think it went over to $405 a share. When that stock got to that price, I have to imagine this younger generation was buying these shares.

Brent Pasqua: Now when you’ve seen such a massive decline data age, probably I think that the game is rigged or not interested in investing, or they’re just not going to want to invest because the experience wasn’t great. I would have to assume that this young generation is actually kind of hurt by this, not helped.

Joshua Winterswyk: I have a couple of thoughts on that. I think that you’re right in the fact that it could hurt a young investor. But I think that learning that the stock market has consequences as well is better to learn when you’re young, and it just builds a better investor. I also just think that right now is the best time to be a young investor, because we’ve never had these types of tools before. So the Robinhood apps and all of the trading tools and all of what the internet offers to a young investor to go do your own research, to develop your own strategy. There’s a real red flag there, go develop a strategy while you’re doing this, or you’re interested in investing, but just never been a better time. I’m excited for the young investor as well, because to be able to go buy $10 worth of a stock in an app in 15 minutes, it’s pretty amazing. So don’t let this one time discourage you. Take it as a learning lesson.

Matthew Theal: That’s so well put, Josh. I mean, my first trades all lost money. So it taught me a lot of valuable lessons. As long as they stick with it and kind of learn from their mistakes, this will be a lesson, and they’ll be able to start picking winners in the future.

Brent Pasqua: Yeah. I agree. I mean, the account is open now. Your account’s open, and you’ve already had money in it. What I hope that it does though is I hope it garners interest to a lot of them. I hope that they don’t get into thinking that they’re going to make a living doing short-term stock trading, but that it garners enough interest in them, where they are interested in learning like, “Hey, what’s a proper investment philosophy.” We’ve talked about in the past investment philosophy. Go buy some Vanguard funds and build a few stocks around if you want it, but not get down this path where you think you can short-term trade so much that you can make a career out of it. If you want it, go get educated, go get your education and your degrees in these fields and then become licensed and work your way up. But sitting behind a computer thinking it’s going to work, it’s pretty challenging thing to do.

Joshua Winterswyk: Absolutely.

Matthew Theal: Yeah, I agree. You’re not going to make a career as a day trader picking pennies up in front of the steam roller, as we saw with the Melvin Capital thing, they basically pulled a billion dollars out of nowhere. Wall Street’s much bigger than you. You kind of have to learn how to skate within their lane if you want to win and not skate outside of their lane, essentially.

Brent Pasqua: Yeah. There’s so many smart, young people out there that might… I would like to see them not criticize and say, “Well, the hedge funds are the big, bad wolf.” Go out there. Get your degrees and go work for them and see how that actually works because there’s so much to learn in that field.

Joshua Winterswyk: Yeah, and they do serve a purpose.

Brent Pasqua: Absolutely.

Joshua Winterswyk: We can make an argument about hedge funds. I’m sure we could talk a whole show about hedge funds and bad, good, and everything in between. But I agree with you. Go do that research. There is a way out there for a young investor to make money and do it without such a big risk either but staying in your lane, but have a foundation, have a core belief, a strategy to helping you maximize those returns instead of looking for the home run every time.

Matthew Theal: The hedge funds do actually provide a lot of good. So in 2008 or 2007, right, the mortgage trade, that was all done by a bunch of hedge funds that, sure, a lot of people got hurt. But how hurt would they be if that fraud I guess was never really found out. Then go back to Enron. Right? Enron was found out by a bunch of short sellers, Jim Chanos, famous hedge fund manager who made a killing on that trade, again, a fraudulent company. So hedge fund funds do provide a purpose.

Brent Pasqua: Yeah. What clients were asking, is this going to take down the market? I mean, my response was, if a pandemic didn’t do, almost a war with Iran or North Korea or the housing crisis or 9/11 or dot-com crash. I mean, you can go back to critical-

Matthew Theal: World War II, nuclear bombs.

Brent Pasqua: Critical event after critical event. I don’t think a few Reddit posts are going to be what takes down the market, so-

Joshua Winterswyk: GameStop’s not going to do it.

Brent Pasqua: No, it’s not. It’s time for RPA recommends. All right. Let’s wrap it up here. Let’s go on to RPA recommends, one of our favorite times of the show. Josh, why don’t you kick it off? What do you have for us?

Joshua Winterswyk: Okay. My recommends today is a show on Netflix or it was a documentary called Night Soccer. It was about the night soccer killer in LA back in, I think it was like mid ’80s. Watch that. Pretty scary. So viewer discretion is advised. But real story and about serial killer in LA. What I liked about it is after I watched it and was talking to my parents and the older generation about that time, because we’re around here in LA, where our family lived, and they all remembered it like it was yesterday and all had a story about the Night Soccer and all of that.

Joshua Winterswyk: It’s a really sad story. Absolutely. But a really good documentary and just interesting to hear all of the personal stories about that time when he was around back in the ’80s.

Matthew Theal: It sounds like it’s going to give me nightmares.

Joshua Winterswyk: It definitely could. It was funny because after we watched the show, I went to take my dogs outside to use the restroom and my wife was like, “No, don’t leave.”

Matthew Theal: Make sure you bolt the door real good.

Joshua Winterswyk: Exactly.

Matthew Theal: All right. I have another recommendation. This one’s really cheap. You could pick it up at a Home Depot or Lowe’s, or probably get on amazon.com.

Joshua Winterswyk: Are you going home again?

Matthew Theal: Yeah. I’m a homeowner now, Josh. I’m learning a bunch of new stuff, a box cutter. I don’t know how I live my whole life without a box cutter. So obviously, we get lots of packages in the mail, because my wife’s always oriented stuff, like most people. So there’s a new box every day. You could use the box cutter to open it instead of scissors. It works much better. Then you could also use it to cut the box up, to put it in your recycling bin so your recycling bin is not over filled with cardboard boxes or your garage.

Matthew Theal: The other thing that’s actually good for is you know when you have something that has that kind of like really tight plastic on it? It’s really hard to open with scissors. It’s really good just slicing right through that. So I know I’m really late to this box cutter game. Sure. Like 90% of the listeners are like, “What is wrong with Matt?” But if you’re in the 10% like me, get a box cutter.

Joshua Winterswyk: I want to go to your house and see your box cutter clipped onto your belt just walking around.

Matthew Theal: Yeah, no. I do now, especially on Saturdays when I’m doing stuff around the house.

Joshua Winterswyk: I don’t know anybody who really enjoys taking down boxes, but anything to make that process faster would seem super helpful.

Brent Pasqua: It is, and you could throw a podcast on while you do it. You could throw this podcast on.

Joshua Winterswyk: Yeah, there you go.

Brent Pasqua: My RPA recommend is something that also provides some content. I think content is amazing these days, whether it’s whatever platform that you can find it. I mean, there’s really good content. I mean, there’s bad content obviously also. But I’m going to recommend another podcast, one that we’ve been talking about for the last couple of weeks and that’s The All In Podcast. It’s another podcast that talks about investing in business, and it’s talking about what’s going on in the State of California. It talked about politics. It’s just another good platform to listen to and to get really good, educated advice on different topics. I think it rose right up from the bottom all the way up. So there’s so much content out there now. I think that’s another good podcast to checkout.

Joshua Winterswyk: Now that you give them a shout out, should we reach out to them to see if they want to sponsor ours?

Brent Pasqua: We keep trying with Flave and All In and all these.

Joshua Winterswyk: Great podcasts though. Just to piggyback on your content thing, great point. There’s so much good content. There’s too much almost. I can’t even listen to it all as far as podcasts and YouTube videos and everything else, so-

Brent Pasqua: What I think is amazing about content is no matter what topic it is that you want to learn about, you can be right listening to experts in whatever that field is very easily. You have access to some of the greatest minds in the world on whatever topic you want to be a part of. That to me in this time is amazing.

Joshua Winterswyk: I agree.

Matthew Theal: I think you undersold The All In podcast. Just let me give one more point is I believe everybody on that podcast is an actual billionaire, and if not, they’re very, very close. So it’s a bunch of high-tech entrepreneurs who are essentially giving their views on the world, and that’s just really interesting to see how they think.

Brent Pasqua: It’s a balanced take. I mean, they all come from different political beliefs. They come from different cultures. They come from different six ways of success, and I think that’s what’s really interesting.

Joshua Winterswyk: That’s a great point.

Matthew Theal: Yeah, I agree.

Brent Pasqua: All right. So as we kind of wrap this up, just want to thank the listeners. This is why we do what we do, and we love helping people. No matter how emotional this time was over the last couple of weeks, it just brings even more gratification that we’re able to help people during these times when things don’t feel naturally right, and we don’t know what the outcome’s going to be. But if you’d like to schedule an appointment with any of us, please go to rpawealth.com and schedule a complimentary consultation. You can always download our e-book on the website. If you’d like the show notes, please go to retirementplanplaybook.com. As always, thank you for listening.