We have been hearing a lot about things like “short sells” and “short squeezes” along with news from Reddit, WallStreetBets, GameStop, AMC and Macy’s!
Team 3 Professional Carl Carlson with Carlson Financial is helping us understand what’s going on.
He said it has been the story of David being the Reddit gang of WallStreetBets versus Goliath being Wallstreet and large Hedge Funds.
Carlson’s analogy was this, “Let’s say that you just bought a 2021 Ford Explorer for $50,000 and now you don’t need it for three months and I ask you if I can borrow it. You say ‘yes’ you will loan it to me for $2,000 but you need it back in three months or less. Then I borrow it and immediately sell it for $50,000. Now I know that there is a small problem with the 2021 Ford Explorer, so I get on the news and get my buddies to get on the news and really make the Explorer sound like it’s not any good and a month later the price on the Explorer has dropped to $35,000 and I am getting ready to buy it back when it gets to $30,000 and return it to you and make $20,000, less the $2,000 you charged me to borrow it.”
Many people may be thinking, this doesn’t sound right to do. Carlson said that suddenly the group of Ford Explorer Fans get on their Facebook and start talking about what’s going on and decide to start buying more Explorer’s while they are cheap and suddenly the price starts going up, way up, and now it’s over $60,000 and they have to have it back to you in less than a month.
Carlson said the question is, do you keep waiting and possibly lose more money or do you take the losses and buy it back at $60,000 and lose $10,000 plus the $2,000 you paid? You also have to weigh, “What if I had done this on a 100,000 Ford Explorer or maybe even just did it with Ford stock?”
This is not where the story ends either, Carlson said not all the Hedge Fund managers have decided what to do yet. Some have given up and taken the loss while others are still waiting.