Robert Leonard (03:26):
Do you remember what happened with the Big Short? To simplify a rather complex situation Michael Burry discovered a piece of data that he expected to unravel the financial markets, providing him a trading opportunity. If his thesis was correct, he’d profit handsomely, which is exactly what happened. While on a smaller scale, a similar situation happened with GameStop. Interestingly Burry has also been involved in the GameStop stock. Keith Gill, a financial advisor from Massachusetts, found a piece of data similar to Burry that he knew didn’t make sense. Like Burry’s case, there was no way the situation Gill saw in the data was sustainable. What did Gill see? He saw the GameStop had more share shorted than existed and not just a few percentage points, 40% more. If we think back to the definition of shorting, we’re borrowing shares other investors own, how can you borrow shares that don’t exist? Well, you can’t, or at least you shouldn’t be able to. Gill saw this and knew it wasn’t sustainable. So he invested long in the company knowing that if his thesis proved true, the stock price had nowhere to go but up providing him with a hefty profit and well, the rest is history. Gill’s thesis went viral on Reddit as more readers understood it, investors piled into the stock under the same notion, Wall Street hedge funds got short squeezed, and we saw the stock price of GameStop skyrocket from the mid tens to nearly $350.

Robert Leonard (04:58):
You, me, and millions of others could debate back and forth about whether or not what happened next is right or wrong. But all of that debate would go to waste because it won’t change what happened. If we step out of the bubble that is news headlines, think a bit more critically about why it happened and how we can be better investors because of it going forward that’s where the real value lies. The financial news wants you to believe brokerages chose to stop trading GameStop stock and others because they had an alternative agenda. Maybe they did. Maybe they didn’t. I personally tend to believe some did and others didn’t. But we will have to wait and see what the investigations uncover. These types of punching and polarizing headlines garner a lot of attention and that’s exactly what the financial media wants.

Robert Leonard (05:44):
Let’s go back to margin the concept I mentioned earlier, as one that is important to understand. When you borrow money, the lender is on the hook for that money until you pay it back. Of course, you, as the borrower are obligated to repay it but we all know that doesn’t always happen. If you don’t pay it back, the lender loses. It’s the same with margin. Brokers had massive margin risk from the GameStop situation, the severity of that margin risk isn’t fully clear yet. Some speculate it could have made Robinhood insolvent, which is why they raised additional capital, but no one outside the company knows for certain. Should Robinhood managed its margin risk better? Sure. You can argue that as I probably would. They received arguably the most hate for the situation, but they weren’t the only ones who halted the trading in GameStop stock, nearly every brokerage did because the clearing houses who actually clears the trades did, leaving the brokerages with nothing to do. Again, whether this is right or wrong is up to you to decide, but I challenge you to take it a step further than that. Think deeper than others are. Think more critically. You can’t change what has happened.

Robert Leonard (06:52):
So what can you learn from this situation that can help you become a better investor and more wealthy in the future? For me personally, I’m continuing to avoid the above situations and looking for great businesses to buy that are trading at a discount to their intrinsic value. In our most recent intrinsic value assessment, I provide an analysis for a company that might just fit that description Square Inc. Back in our October six, 2020 newsletter Stig wrote and I quote, “Today and in the future, competitiveness is measured by the amount of data you have available.” This quote, couldn’t be more true for a company like Square with one of its five competitive advantage as being the data it has access to.

Robert Leonard (07:35):
In the intrinsic value assessment I wrote, “It is said that data is the new gold and well Square has a lot it. Whether it’s two sided network, Square has data from the businesses, as well as the consumers, which is the dynamic that arguably no other company has. This is extremely valuable and provides a competitive advantage because it gives Square massive optionality.” If you’re looking at the stock chart for Square and thinking to yourself, I missed the opportunity, please allow me to leave you with this quote from the article, “Square is a stock that is highly volatile and can provide great buying opportunities if given enough time to do so. I have email alerts set up in our TIP finance tool to let me know when the momentum has changed in Square stock. After a decline in price the TIP momentum tool will notify me when Square’s momentum has turned a corner and is heading in a positive direction again. At which point I will highly consider stopping my DCA and start adding heavily to my position in Square again.”

Robert Leonard (08:35):
All right. That pretty much wraps up this week’s bonus episode. If you’re interested in reading more about Square, you can check back to last Friday’s bonus episode. I did a deep dive. I read the intrinsic value assessment. I provided the audio version of the intrinsic value assessment as an episode. If you want to read the article itself, you can go to theinvestorspodcast.com, go to resources and then find the intrinsic value index and look for the Square assessment. You can also follow me on social media and I can send you the link. I’ll put a link to it below in the show notes as well for anybody that’s interested. Thanks so much for checking out this bonus episode, I hope you guys enjoyed it.

Outro (09:14):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses go to theinvestorspodcast.com. This show is for entertainment purposes only before making any decision consult a professional. This show is copyrighted by The Investor’s Podcast Network written permission must be granted before syndication or rebroadcasting.