Stocks (Gamestop) Can Stay Irrational Longer Than You Can Stay Solvent

Take a look below. After more than doubling to $43, Gamestop shot to $160 yesterday (Tuesday) and I am sure lots of body bags were ordered for hedge fund traders and portfolio managers. Can you imagine betting against a stock somewhere in the teens and then seeing it literally go vertical against you to $160?

That’s what happens in commodities not stocks. I know because once upon a time in the 1990s I was short an ag commodity that went limit up three days in a row, meaning it was up the max day after day after day and I could not get out. My losses were potentially limitless.

(Click on image to enlarge)

So this week, I asked on Twitter what risk management process these hedge funds were using to be short a stock that was acting like a Dotcom. Remember the old adage? Stocks can stay irrational longer than investors can stay solvent? You don’t have to be a genius to know when price action tells you that something is wrong. However, when ego and pride get in the way, you can blow up your fund get carried out in a body bag.

Go Google Amaranth 2006. This was a large hedge fund with a complex and massive trade on in natural gas. Like betting against Gamestop, it did not go Amaranth’s way and the fund blew up and closed. However, the trader responsible for more than $6 billion in losses, Brian Hunter, was only unemployed briefly. Other funds could not wait to hire him.

And as I finish this update, Gamestop is trading at almost $400 in the pre-market! $400 from $20 in less than a month. Sure, there is no greed or euphoria in the market…

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