If you’re up-to-date on the news cycle, you’ve no doubt heard about the chaos ensuing on Wall Street. Now, we don’t usually talk stocks here, but there are valuable lessons we can take away from the frenzy of the past few weeks.
What Happened on Wall Street?
The central focus of this unfolding drama is the subreddit r/WallStreetBets, a community on Reddit, struggling video game retailer GameStop, and Wall Street hedge funds. Founder of the subreddit in question, Jamie Rogozinski, told the Wall Street Journal that it was a “train wreck happening in real-time.”
Here’s the short of what happened:
For years now, hedge fund investors (that is, a limited partnership of investors who employ high-risk strategies, like using borrowed capital to invest, in hopes of profit) have expected GameStop to fail. Those most impacted by the Reddit-fueled frenzy are short sellers. In stock, short sellers essentially bet against the economy. They sell borrowed securities on the market with the expectation that their value will drop. Once it does, the short seller buys the stock back at a profit from their original sale.
If you’re unfamiliar with this high-risk investment strategy, Investopedia has a more thorough explanation.
r/WallStreetBets, a group consisting primarily of young, amateur day-traders, targeted GameStop to create a “short squeeze.” A short squeeze happens when investors bid against a stock but it begins to rise in value. Banding together, these rebel investors began to buy and inflate investor optimism.
Since the beginning of the year, GameStop’s stock has jumped by as much as 1,800% — closing at a high of $492.02 per share at one point.
Short sellers must buy more shares to cover their losing position. This pushes the stock’s short interest up, decreases the number of stocks being sold short, and skews the supply-and-demand relationship: exacerbating the losses of hedge funds and short sellers.
As a result, they’ve lost billions.
It gets complicated…
The legality of this subreddit’s actions falls into a grey area. Some call it a Ponzi scheme and declare its illegality, saying that it has broken the stock system, while others see it as a grassroots effort of the “little guys” to tip the scales of the financial world away from the elite. Of course, the Redditors may have to face their own millions in losses when GameStop stock inevitably crashes back down. (One Reddit user already claims to have lost $13 million in one day.)
Then again, they seem more concerned with the chaos and sending a message than making a profit.
In the aftermath, we saw investment app Robinhood rush to place restrictions on the trading of GameStop and other targeted stocks — a move that drew a class action lawsuit and ire from both sides of the political aisle.
Now it appears that r/WallStreetBets investors are turning their attention to silver rather than floundering companies like GameStop and AMC. Time will tell what true impact — or change — will come from the actions of these rebel investors.
The Big Advantage in Investing in Real Estate
The GameStop stock circus has only highlighted the risky pitfalls seen in certain investment methods. Sure, hedge funds and short sellers always knew that they were engaging in high-risk trading. At the same time, these investors and funds tend to be highly researched. In a high-risk method, due diligence is that much more important.
But no one could have predicted what was coming.
For us, that highlights one of the most significant differences between investing in real estate and investing in the stock market or REITs.
An Investor’s Agency
When you invest in rental properties in a turnkey model or otherwise, you have much more agency and control over your outcomes than you would by investing in stocks or through a REIT. The same goes for any sort of micro-investing platform.
In some methods of real estate investing, you invest more like a stockholder than a hands-on investor with full ownership over your properties. While real estate is impacted by many different factors, you never have to worry that a fellow real estate investor can blindside or sabotage your passive income.
Another owner doesn’t control anything about your property or profit. Your outcomes aren’t determined by the machinations of big companies. You don’t have to hope the chips fall in your favor.
So much of the time, these kinds of investments feel more like gambling. That’s not the case when you invest in real estate. Time has demonstrated the reliability of this kind of investment. Real estate is a hedge against inflation and you, the investor, have full control to steer the ship and build your portfolio to your precise specifications.
When we see ruckus on Wall Street, we can breathe easy as real estate investors — knowing that no big company, no subreddit, and no whim of market big-wigs, can change the lasting and reliable nature of our strategy.
You own the physical property. You have a rock-solid strategy. There is no question that you, the owner and investor, direct your outcomes. If that’s not empowering, we don’t know what is!
Avoid the chaotic unknowns of Wall Street. Instead, invest in real estate — a time-tested and reliable strategy for building wealth.