David Faber caught me in the act this morning. Perhaps because I’m so excited that my partner is hosting “Jeopardy” all week, I found myself participating in an even more than usual upbeat show.
So when Robinhood’s (HOOD) stock was shut down due to volatility – too many buyers, not enough sellers – I was happy with double where it was listed just a week ago.
He cut me to the limit and asked if I’m so excited to lose caution and give the wrong impression of the situation. My other partner, Carl Quintanella, was quick to remind me of my latest book, Get Rich Gently, and how Robinhood’s stock seems to be the opposite.
So immediately after the advice of both my colleagues I realized that I was encouraging caution and I am not. Maybe it was me at the old hedge fund where I used to be wildly concentrated, but now it certainly isn’t me.
I suggested that people should not be pig-like. A lot of Robinhoodies got shares on the deal and I urged them to sell something, maybe half the position, because then you could play with the money on the house, the most enviable position to be in if you owns a share.
Or, I said, at least take something off the table, perhaps as much as it took to buy the legendary cashmere sweater, fabulous because when my mother gambled and won, she would leave the casino or the racetrack with her winnings intact. and she wouldn’t give back.
Needless to say the forum we have is huge and the stock quickly dropped 20 points. That’s good too, especially if you bought more when the stock broke the pressure, as I wholeheartedly advised you to do so on Monday.
Why do I like Robinhood’s stock so much? Because people keep counting CEO Vlad Tenev. They think he’s just a techie with a solid app. He’s truly an apostle of saving money, and it’s something the 22 million people who have opened accounts with Robinhood — many after the GameStop (GME) debacle, when sales were restricted because he didn’t have the had proper control. The revolutionaries had no time for negativity. They love the convenience of the app and they love free commissions and that’s all they need to know.
I got a lot of heat last week as I kept urging people to buy the stock, suggesting that it could become a “meme” favorite, a short term for a beloved-beyond-traditional-reason stock where money can be made just by buying and buy and buy. A meme stock is often one that has a huge short position and the goal is not only to make money, but also to make money by breaking the short position. It seems that even as an inexperienced stock, this one had already pulled in a significant short position, so it was game-on for the memesters.
What do you do when you own a meme stock? First, you can bask in it, because it’s easy money. But then part of your job requires you to call the cash register, because your conviction should never let your discipline crush you. That is the case regardless of stock.
This is why we peeled off some of Cramer’s favorite advanced microdevices (AMD) this week when it officially became a meme stock. What happened here? AMD tries to buy Xilinx (XLNX), with stock. The deal should close soon.
If you’re an arbitrageur, you may be selling AMD’s shares and buying Xilinx’s shares one-to-one to “make” the deal at closing as it will smooth out trading. Shares of Xilinx should rise as the deal closes and you will have made a new profit on one or both of the shares.
But there is a problem. Many arbitrageurs are reluctant to buy high-value stocks such as the $140-priced Xilinx because if the deal fails, they will be crushed. So they sell Xilinx and buy AMD back. The meme folks like to crush the hedge funds with their purchases because they get a twofer price higher and beat hedge funds. I just hope they don’t forget to buy that cashmere sweater.
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