Swatinem Blog Resume


My take on current Events

— 12 min

It is only January, but the 2021 bullshit bingo is in full flow already.

So apparently an Internet flashmob is buying tons of stock and thereby bankrupting big funds that have allegedly been manipulating markets for a long time.

Bear in mind, I’m just an average person who happens to own some stock. I have no idea how the financial markets really work. And this is also a key point that I want to make here.

So the market is basically open to anyone, with some hurdles, more on which later. But not every player is created equal. There is a lot of people like me, who have a regular job, and some leftover money that they want to invest for one reason or another. Like me, I would argue these investors do not want to spend too much time on this, and rarely make any transaction. Unlike me, I might sadly say that most people are way too gullible and will follow unsound advice, some of the time from financial advisors or their bank, which might not be in their best self interest.

And then there is people who live and breathe financial instruments, who not only day-trade, but for which every second counts, who have a lot more instruments to chose from.

The whole problem in my opinion is that the financial system is built in a way to benefit those who know how to play the game, in favor of the average person, like me.

# Ideal Market

The ideal stock market is actually super simple, and everyone can understand it. Imagine a room full of people, divided in two groups. One group wants to sell stock and asking a certain price for it. The other group want to buy the stock and bids a price for it. Usually, there is a gap in between.

Now we are at an impasse. One of the two has to move in order to actually form a transaction. Or maybe another one comes along that says I buy at any price, and gets the share at 20€. Or the other way around, such as I sell at any price.

Tip of the day: Always set a limit (explicit price)! The default for lots of trading platforms is set to buy/sell at any price, which is not what you want!

# Shorting and other instruments

The above is super simple. I would argue that anyone can understand it. This is also what the average person wants to do when they think about stock market trading.

There is a lot more financial products, and possibilities out there. Some are being sold to the uninformed average person, which in my opinion is by itself fraud, but more on that later.

One of those instruments is called “short”, no idea why really, or “Leerverkauf” in german.

There are two variants, and I’m not even sure if the second is something completely different?

In one variant, I get someone to lend me a share, which I have to give back tomorrow. I sell that share immediately for 10€, in the hopes that I can buy it back at 5€ tomorrow before I return it. And I pocket the difference as my profit.

The problem now is, what if the price at which people are willing to sell actually increases? Well, I have to return the stock that I borrowed, so I might be forced to buy at any price, so I lose money.

In the other variant, I sign a contract with you to sell you a share tomorrow for 10€. I don’t own that share yet. No problem, I can just buy it myself tomorrow for 5€ and pocket the difference. Except when the price tomorrow is higher than we agreed on, in which case I lose. (BTW, is this what is called a future in financial circles? I don’t know, really)

So, with this play, one can actually make a profit by betting on a falling price. I would argue that this is something that the average person would not want to do, for one. And also, me as an average person who owns shares, I wouldn’t even know how to do that. Thus, I just assume this is an instrument reserved for the expert players.

# Valuation

There is another interesting thing to note here. There is no fixed price for a share. It is not something you buy in a supermarket that has the same price tag today as it had yesterday. The real price, or value only exists for a split second at the moment of a completed transaction. Because at that moment, it was worth that amount of money to the buyer.

Lets take real estate as an example. Prices right now are crazy, ranging from 400 to 700k for an average sized apartment. But are they actually worth that much? This is really up to the buyer. Either someone comes along that is willing to pay that much. Or the seller adjusts the price. Or simply waits long enough.

And here comes a bit of a problem. Real estate companies can build an apartment for, lets say, 50k€, and put a price tag of 500k€ on it. And then they just sit there, waiting for a potential buyer to come bye. They are under no pressure at all to sell this apartment now, for cheaper. They are willing to wait 10 years, with the apartment just standing there, empty, until finally a buyer comes by.

Anyway, I digress. The point is, usually the value of something is determined by a transaction. But maybe you don’t even want to sell the real estate you own, because you use it yourself. So what is its current market value? How would you know, if actually selling it is the only way to know?

Well, you can get a hopefully independent and neutral third party to look at the apartment and make an assessment, which is basically a good guess at the price someone would be willing to pay for it, considering the quality and demand and so on.

So, how neutral are these people that make assessments? There is a joke about that:

Billionaire wants to avoid paying X€ in taxes.

Billionaire has an artist friend, asks them to paint a picture.

Billionaire has a friend who assesses artworks. The picture has a value in the ballpark of X€.

Billionaire donates that piece of art to charity in a tax deductable way.

Problem solved.

Anyhow, this was a small digression just to highlight that maybe some things are not really worth whatever people say that they are. Just to keep in mind.

# Virtual goods

Coming back to the concept of selling shares that you don’t own. One of the scams that has blown up now is that apparently more shares have been lent out than exist in the first place. I have no idea how that would be even possible, or legal for that matter.

When I lend you my car, I am unable to use it myself until you return it. Also, I will notice if you return a different car to me. This concept of the physical world apparently does not apply to shares, which only exist as digital things on a computer.

# Money creation

This is also a really big misconception that average people have about money. It is still a widely believed myth that debt is actually one person lending another person some money for a time, and expecting some interest payments in return. There is no other person that loses physical access to their money when you borrow it in the form of a loan. It is a bank that just creates this money as a number on the computer out of thin air.

# Banksters

Speaking of lending, usually you would expect some form of compensation. Like an interest payment, or some fee. Well, according to things that I recently read, lending some shares comes with some hefty fees. I do own shares, but I haven’t knowingly lend them to anyone, and I certainly haven’t collected any fees. And I also didn’t agree to this.

So how come there is more shares being lend out than even exist? Maybe the bank that is managing my shares is just doing this behind my back without telling me, and without sharing some of those fees with me.

Maybe this is stated in the terms and conditions of my depot that I certainly did not read, like I expect no one ever does.

Speaking of fees. I was really surprised that a certain trading app, which has gained a lot of notoriety by simply restricting its customers from buying select stock, allows you to trade with extremely low, or even without any fees at all.

I hate fees as much as the next person, and I pay a minimum of ~11€ per transaction. And that btw is the lowest fees I have found after researching this intensively. Last time I checked, I have by far the best conditions of any stock market depot in the german speaking area.

And yes, those fees buy me a certain service. I am listed somewhere in a shareholder directory. I receive regular invites to shareholder meetings that I don’t care about. And notifications that a foreign government has looked at my data in the shareholder directory which is super annoying.

The point is, I am fairly certain that I have some kind of guarantees that I really do own those shares.

Being told that there are trading platforms out there that allow you to buy shares without any kind of fees makes me speculate as to how they can pull that off. Also considering the news that they are bleeding money makes me speculate that maybe they are not actually trading real shares for each order, but rather batch those up and buy in bulk, hoping to make a profit for themselves while doing so.

Say, person A buys one share at 12€, person B buys one share at 13€, but the broker actually merges these two together, buys two shares at 11€ at some later point in time and pockets the difference.

Is it possible that the broker itself does short selling in the background without the customers even knowing?

How is any of this even legal?

# Hodl

Coming full circle to the beginning. I believe that the average person who knows little about complex financial instruments just wants to buy shares and hold them for a long time, usually years, possibly even decades.

Speaking of my own experience, I do own a lot of different shares. But I only buy and hold. In the 11 years since I own shares, I only ever sold two times. Both times, I sold about 10% of some very lucky shares that grew by 10x, to at least get my initial investment back. In hindsight, I shouldn’t have sold, because those shares went on to grow to 30x and 20x respectively.

Oh well. It really is all about gambling; like a casino.

Tip of the day:

You can’t take a loss if you never sell. Similarly, you can’t make a profit if you never sell either.

Coming back to something that I wrote about earlier, the value of your shares only exists for the instant that you trade them for money, otherwise its just pretty numbers on the screen, that can change in either direction all the time.

# Why now?

So, why is this exploding like this right now?

The answer is simple. Since half a year, international travel is so heavily restricted as to being almost impossible. There is no way to spend any money on restaurants or entertainment because everything is closed down. So those of us who are lucky enough to still have a job get a salary that they have no way to spend except on the bare necessities.

Also the financial policies of recent years have made sure that savings accounts have become a joke that is effectively losing you money due to inflation.

So the average person is sitting on a pile of money they have no idea what to do with except to invest in something. And the average person is likely to buy and hold.

A small digression: I do think that out current situation is actually a conspiracy. For the simple reason that I just can’t believe that governments are acting with the goal of protecting the health and lives of citizens.

That would be a first. Its a lot more plausible that media propaganda and governments are protecting and furthering some other interests. I just haven’t figured out yet who is profiting and pulling the strings.

# The game is rigged

Again, this turned into a super long opinion piece already.

Long story short, I think the whole financial market is rigged to disadvantage small average everyday people.

Maybe another time I will write more about why I think that having a publicly traded company is the worst idea one would have. Related, I think its no coincidence that a certain chinese company which is not being traded publicly is being specifically targeted by the US government with the clear goal of destroying them. Yes; I do like conspiracy theories. :-D