It seems like we have developed a tradition where  every year starts with a financial disaster.  

2020 started with a massive stock market crash.  2021 with retail investors pushing hedge funds  

to lose billions of dollars and  putting the entire financial system  

upside down. I am just curious  what 2022 is holding for us! 

The fed is going to announce that it's  going to launch its own crypto currency?  

I wouldn't be surprised.

GameStop's stock price surged more than 1,700%  instantly, driven by a group of amateur investors  

on Reddit who organized a revolt against  hedge funds that bet against the company.  

The best part is that these hedge funds that  seemed like no one can beat them at their game  

lost billions of dollars. A bunch of  Reddit users destroyed multi-billion  

dollar hedge funds that spend millions on  the latest softwares, best accountants,  

and analysts to predict the market. They even  caught the eye of the White House in the process.

Melvin Capital, one of the hedge funds that  shorted GameStop, lost 53%. It started the  

year with 12.5 billion dollars and ended  January with just 8 billion dollars.  

It's estimated that short-sellers lost nearly  $13 billion on GameStop alone so far this year.  

I guess these hedge funds will think  twice before shorting another stock.

However, most retail investors who purchased  the stock at 300 or 400 dollars or above  

ended up losing most of their money since  platforms like Robinhood restricted trading.

To understand what really happened with GameStop,  

we have to understand why hedge funds  shorted game stop in the first place?  

How is it possible to short more stocks than the  number of stocks that exist? Should you trust  

WallStreetBets? and how to avoid the biggest  financial mistake that most investors make?

We will answer all of these questions and many  more, but before we do that, here is a little  

disclaimer - this is not financial advice, and  everything that's said in this video is for  

educational purposes. In order to make the best  financial decision that suits your own needs,  

you must conduct your own research and seek  the advice of a licensed financial advisor. 

And now, give this video a thumbs up for the  youtube algorithm, and let's get right into it.


 1. shorting - a tool for the Ultra-Rich

You probably heard about hedge funds,  but you don't know for sure what they do  

because they are not allowed to market  themselves since they are not regulated.  

That's why very few people know how hedge work.  

Hedge funds are made by the rich for the  rich to make rich people richer and avoid  

taxes - that's all that you need to know. If you  have never invested through a hedge fund before,  

that's alright because you need a net worth  of a least a few hundred million dollars.  

Unlike ETFs, they take a percentage  of the profit besides a percentage  

of the total assets you invest in. That's why  they try to maximize profits for their clients.

The most common investing strategy you probably  heard is - buy low and sell high. That's how you  

and I invest, but the ultra-rich like hedge  funds invest by reversing this strategy.  

They buy high and sell low. That doesn't  make sense at first glance, but it's simple.

Let's say you expect a certain stock to  decline like Intel because you know that  

Apple who is their biggest client, will announce  next week that they will no longer buy Intel chips  

and make their chips in-house. So you  pick up your phone and call your broker.  

You borrow from him a single intel stock that  costs 100 dollars and instantly sell it in the  

open market for 100 dollars.  Congrats!  

Now you have 100 dollars in your pocket, but  you still owe your broker one intel stock.

Let's say you are right, and Next  week intel's stock price drops to  

70 dollars. You use that 100 dollars to buy  one intel stock for 70 dollars since the  

price dropped and return it to your  broker and pocket the difference. 

Congrats! You have made 30  dollars out of a fall of stock!

It sounds simple in theory, but it's  extremely difficult and risky in practice. 

What happens if you are wrong? What  if the price doubles overnight?  

You still have to return that  single intel stock to your broker?  

Now you have to buy that stock back for  200 dollars to return it to your broker.

When you buy a stock and try  to sell it when it rises,  

the maximum that you can lose is the amount you  invested in, but not in the case of shorting.  

If the price keeps rising, your losses  keep rising. Theoretically, you can make  

unlimited losses since, theoretically,  the stock price can rise indefinitely. 

So when hedge funds realized  that GameStop is struggling,  

they decided to play around with its stock and  bet against it, and shorted 114% of its stock.  

What? Wait a second!

How can you short more stocks than  the number of stocks that exist? 

It's complicated, but here  is the simplified version.

Let's say Elon owns 1 GameStop stock. His  broker lends his (Elon's) one share to a  

short seller Jeff. Jeff borrows that stock  and sells it in the open market to Warren.  

Warren doesn't know that Jeff actually borrowed  that stock, so Warren's broker lends his share  

to another short-seller Bill who then goes  and sells that share to another investor. The  

exact same share now has been shorted twice. This  scenario shouldn't have happened, but it happens. 

So the Reddit user who was investing in  GameStop since the fall of 2020 realized that  

all of these hedge funds shorted  over 100% of GameStop shares,  

which means if everyone starts buying GameStop,  the sock will keep rising, and hedge funds  

will have to buy these shares no matter how  expensive they get to exist their position.

But that will drive the price higher, which  will attract more investors, which will again  

drive the price higher to the point where  these hedge funds will either go bankrupt  

or at least buy back these shares at an  unbelievably high price. So GameStop's  

stock price surged more than 1,700% instantly. Theoretically, it made sense to buy GameStop  

because short-sellers had to pay  interest on the borrowed stocks.  

If everyone held their position and didn't sell,  hedge funds would have kept proposing higher and  

higher price. Gamestop could have easily crossed  a thousand dollars, but something went wrong.  

Platforms such as Robinhood and others restricted  retail investors from buying more GameStop shares.

That's insane!

Of course, they explained their actions by  saying that they were protecting their clients,  

but I don't personally buy that.  That could be the reason partly,  

but I think there is a lot more to this than we  know. Who knows, maybe one day we will find out. 

Trading - another form of gambling

Here is what I don't like about these  kinds of investments. First of all,  

it's not investing - it's trading. And  it's not based on any data or logic.  

The people who invested in GameStop and similar  companies are not investing because they did  

not do fundamental analysis and expect the  business to grow, it was pure Pump and dump.

The problem with that is that, no matter how high  the stock price will rise, it will crash and fall  

back to where it started because the company  didn't change or grow. At some point when the  

price reaches a certain point, early buyers  will sell which will drive the price down,  

which will force other investors to panic and  sell which will further drive the price down,  

which will force more investors to panic and  sell and so on until most people who purchased  

the stock after the hype will lose at  least some of their money if not all.

You could be lucky, you could be one of the  early buyers, but chances that you will lose  

money especially if you invested once it was  already all over the news are way higher.

When something like that happens,  when everyone is making money,  

when it's all over the news, it's  really difficult to control yourself.  

The feeling of missing out will push you to invest  even if its too late. I have had that feeling  

multiple times, but I try my best to control  myself because if I feel like I am missing out,  

chances that I have missed out are already 90  percent. So even if it's a great opportunity,  

I would rather miss it than lose the money  I have earned with my blood and sweat.

I am not saying you shouldn't take risks  or invest. Investing is great. I do invest  

myself. This channel is about investing. But when  investing is based on facts and data, Chances  

you will make money are way higher and most  importantly, you can sleep peacefully at night. 

If you have enjoyed this video, you will most  definitely enjoy this custom playlist that I  

have created specifically for you that  has our most popular videos on business,  

investing, and the stock market that  can potentially change your life. 

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