Victor Hugo Flores
Country Manager
Startup Contributor

GME Shares and Yolo Trades: Great Opportunities for Wealthtechs

By Victor Hugo Flores | Tue, 03/23/2021 - 14:50

Main street beating Wall Street, David against Goliath, a Financial Vendetta! All these were headlines about GameStop (NYSE: GME) shares in January. Retail investors had caused huge losses for all-powerful hedge funds while seeing their own investments go sky-high.

For those who were having a media or digital detox during these weeks, or simply were more interested in the football playoffs, here is a brief summary: 

Retail investors organized through Reddit (a popular social network) recognized that some small companies that were in trouble had been targeted by hedge funds that were “going short,” that is, betting that the share price of these companies would fall and making money when it happened. However, these bets against GME shares were so massive that the number of bets was in fact larger than the number of shares available. If many of these shares were to be bought, hedge funds would be forced to close their bets and buy these shares in advance, boosting GME’s price.  So, these Reddit users spread the word on social networks and a lot of retail investors bought shares of GME, which pushed up its prices. Hedge funds like Melvin Capital had to close their position, losing a lot of money and sending GME prices skyrocketing.

Thus, GME prices went from $10 in November to $483 in January. This caused huge losses to Hedge funds but many retail investors saw their money multiply by 10x or 15x. A revolution!

All this frenzy caught the attention of many amateur investors who joined the party, but suddenly, the music stopped. Robinhood, the commission-free trading platform, restricted the purchase of GME shares because transactions with high-volatility stock need a lot of cash up front that they didn’t have (as much as US$3 billion). GME prices collapsed. Robinhood was not necessarily the culprit, but they restricted the purchase of GME shares by the same moment that institutional investors had restructured their positions.

The whole thing looked very fishy. Hedge funds, Robinhood, and some Reddit leaders — everyone was under scrutiny. Congress called for hearings to investigate the matter. The new secretary of the Treasury met with the SEC, FED, and CME heads to understand what really happened. GME was in the eye of the storm. Regulators were looking for potential moral hazard activities or any regulatory violation. 

Production companies hadn’t even signed a single contract for a movie based on this story when we were already watching the sequel live. GME share prices skyrocketed again in late February, triggered by the maturity of option. GME’s price is an authentic roller coaster.

  • Use YOLO for Traveling Not Trading

Let’s focus on retail investors. Most of them bought GME shares on the back of this frenzy, looking for huge short-term returns or because of their desire to hurt greedy hedge funds. Many retail investors feel that the system is against them; no matter what, Wall Street always wins. These retail investors were motivated by a desire to beat Wall Street. 

Among retail investors, there emerged a new style of trading: Yolo. Yolo stands for You Only Live Once. This trade is an all-in bet, hoping to make a huge profit in the short term, Las Vegas-style. The goal is to make easy money. 

Wrapped within a commune of investors, they felt protected. However, retail investors were exposed to high-risk volatile valuations. Many of them never understood the game's rules, it was only a blind bet. On this roller coaster, some investors made a lot of money, but there were many who lost their savings.

Certainly, You Only Live Once, but this is not Las Vegas and your wealth-building needs more methodology. Probably, you can take these high-risk bets with 5 percent or 10 percent of your wealth, and where you may increase this by many times your investment, but you should understand that you could lose a large amount of your investment. It’s all about probabilities.

Real life is not a casino. You shouldn't bet your pension fund in a blackjack game. That sounds exuberant, but that is exactly what you do when you invest your core investment portfolio in strategies as random as GME shares or in Yolo trades. It’s up to you: How much of your future are you willing to bet?

  • How Can We Build Real Wealth?

If you really want to build wealth that can support your long-term life plans, you need more methodology and discipline. Financial advisers are expensive and seem untrustworthy, so retail investors are running away from them. However, there is a real necessity to build wealth. This is a fact for any investor in America, Europe, Asia or Latam. Retail investors need alternatives to Yolo trades and much help to build their wealth.

Wealthtechs are enterprises that mix high tech with financial solutions for wealth management.  Betterment, Wealthfront and Fintual are good examples of these kinds of fintechs. 

Wealth-techs provide 3 main value-added services for investors:

  1. Technology to reduce costs.  Wealthtech’s core business is to develop technology that improves all processes and, therefore, decreases costs. At Fintual, almost one-third of our team knows how to code or understands the logic of programming (not all are developers, but they have a deep understanding of coding), so we are continually automating processes across the entire company. Our goal is to lower costs to the benefit of our customers so they can pay cheaper fees. 
  1. Disrupting the traditional financial landscape. When we talk about finance, we can see that its application has not been so different from bank to bank. Wealthtechs are changing the rules. Why not offer the best-in-class funds to anybody, no matter how much money they have? Why not stop charging hidden fees? Now, we do what we understand will help transform the financial industry for the better.  Wealthtechs are pushing traditional banking to move closer to people. 
  1. Financial education. Almost every wealthtech company has      educational tools at the disposal of their users.  Fintual has two financial education platforms: Fintual Discovery and Fintualist. Also, we have our blog and podcast with a variety of content, such as recorded classes, articles, and reflections from personal experience. We love sharing with our investors our views of events such as the high volatility in GME shares. We enjoy having open forums and discussions where retail investors make their own decisions supported by a deep understanding of their options. 

GME exposed how retail investors have been empowered by platforms and social networks. Retail investors showed they can hurt Wall Street, but in this battle, many of them could also be seriously wounded. On the other hand, Yolo trades should be well understood by retail investors before they take these positions in their portfolios.

In the midst of this market frenzy, there is a great opportunity for wealthtechs such as Fintual. We offer not only unbiased education but also robust alternatives for building wealth, from emergency funds to retirement plans. Likewise, this is a great time for retail investors too. Professional asset management is, for the first time, offered on a low-cost basis for millions of them.

Photo by:   Victor Flores