Sunday, January 31, 2021

Robber Barons Return

Robber barons flourished in the late 1800s and acquired the label because of practices that mimicked those of organized crime – such as corruption, intimidation, conspiracies and, on occasion, violence. They amassed great wealth though monopolies and manipulation.

Many think of today's hedge funds in the same terms. It appears that nobody really likes them, except those reaping the profits of their activities. We have witnessed this week something we hardly ever see in America: an almost universal condemnation of efforts by stock market elites to protect the hedge funds that held short positions in Game Stop. I was dumbstruck to see AOC, Elizabeth Warren and Ted Cruz singing off the same page.

This whole dust up has little to do with the intrinsic value of the stock or the corporation itself. As with much of the market, it is more driven by the perception of the investors. Logically, the funds were right in expecting the stock price to fall as the Game Stop stores are facing increased pressure from online competition.

A Brief Explanation

Photo by BP Miller on Unsplash
For those not familiar with the process, I will give a very brief outline. To sell a stock short, means that you borrow shares from someone who doesn't share your belief or who, at least, takes your “rental fee” as a hedge against falling prices. To maintain this position in the presence of rising prices means being certain the brokerage has sufficient funds to buy the shares to cover the ones you borrowed. Because of this the fund managers were meeting calls for more and more cash.

This is the reason for the panic on Wall St. when the short sellers were faced with calls for funds to cover stocks they thought were going to $4 a share when they went to $300 and $400. It cost them billions. Some sold other stocks to cover themselves. Nobody really felt that sorry for them except some brokerage houses halted trading in Game Stop and a few other stocks. Prices began to fall, but public and public official pressure made them open trading again.

Many public figures proclaimed, this halt in trading was proof that the system was rigged in favor of the major investors and when the “little guys” figured out a way to win and beat the hedge fund operators at their own game, they had to be stopped.

Application For Real Estate

Hedge funds, Zillow and others have been moving in on our territory for years. Hmmmm... even that terminology smacks of organized crime. I understand that many of us who have been at this for a while have made connections with private investors, etc. that we have access to funds for our deals. However, often it takes more than just purchase and rehab money.

There will always be people who would rather deal with an individual or small business man or woman than a corporate entity. However, the economics of the corporate buyers are different than individual investors. The kung flu has already created a shake up in the real estate business, and these new players have added to it. Many who don't adapt will be gone.

The Defense

Personalized service is an advantage we have over the formula driven competition. We can listen and adapt our approach more easily than corporate types even though most of out pockets aren't quite as deep as theirs. Will that be enough? I don't know. Big money almost always finds a way to squeeze out the “little guy”. That's the way the robber barons of the past have done.

The events of the past week should give us hope. I am not proposing a particular strategy for two reasons. First, until it is ready to be implemented it is best to keep it under wraps and, second, I really don't have one at this point.

I am suggesting that we begin to look for one that, similar to the Game Stop crowd, uses their massive resources against them as martial arts practitioners often do. We need to keep a watchful eye on their activities – and keep thinking. There are flaws in their systems and we need to find them, just as the gang on Reddit used the public knowledge of the short position to burn the hedge funds.


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