From David Einhorn’s Q1 2021 letter to investors. Much has been made of the short-squeezes in late January. In fact, Congress held hearings, where it called the leaders of Robinhood, Melvin Capital and Citadel and an individual investor who made a great call on GameStop (GME) to testify. We have a few thoughts about this […]
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This story originally appeared on ValueWalk
From David Einhorn’s Q1 2021 letter to investors.
Much has been made of the short-squeezes in late January. In fact, Congress held hearings, where
it called the leaders of Robinhood, Melvin Capital and Citadel and an individual investor who
made a great call on GameStop (GME) to testify. We have a few thoughts about this to share.
First, it is very healthy for market participants to discuss and debate stocks. This is true both
privately and publicly. There are rules about fraud and manipulation that need to be followed,
but investors discussing why they think GME (or any other stock) should go up or down ought
to be encouraged. There is no reason to drag anyone before Congress for making a stock pick.
Second, it is also fine to make bad stock picks. If a hedge fund takes a big position in a stock and
is wrong, it loses money. Isn’t this how it is supposed to work?
Third, payment for order flow is just disguised commissions. We are in a world where consumers,
especially young ones, expect internet services to be free, or at least free to them. A quote widely
attributed to Richard Serra about commercial TV in 1973 says it best: “You’re not the customer;
you’re the product.”4
If you want the broker to work for you, pay a commission.
Fourth, Robinhood suspended trading in certain stocks because it was undercapitalized. It is
possible that it wasn’t following the regulatory requirements. A regulatory sanction is probably
appropriate – but as we’ll discuss below, we won’t be holding our breath.
Finally, we note that the real jet fuel on the GME squeeze came from Chamath Palihapitiya and
Elon Musk, whose appearances on TV and Twitter, respectively, at a critical moment further
destabilized the situation. Mr. Palihapitiya controls SoFi, which competes with Robinhood, and
left us with the impression that by destabilizing GME he could harm a competitor. As for Mr.
Musk, we are going to defend him, half-heartedly. If regulators wanted Elon Musk to stop
manipulating stocks, they should have done so with more than a light slap on the wrist when they
accused him of manipulating Tesla’s shares in 2018. The laws don’t apply to him and he can do
whatever he wants.
Many who would never support defunding the police have supported – and for all intents and
purposes have succeeded – in almost completely defanging, if not defunding, the regulators. For
the most part, quasi-anarchy appears to rule in markets. Sure, Dr. Michael Burry, famed for his
role in The Big Short, reportedly received a visit from the SEC after tweeting warnings about
recent market trends – and decided to stop publicly speaking truth to power. But for the most
part, there is no cop on the beat. It’s as if there are no financial fraud prosecutors; companies and
managements that are emboldened enough to engage in malfeasance have little to fear.
See the full letter here