Thread by @maxolson

More on the $GME/short-squeeze saga using this framework.

The investment thesis here in the weeks leading up to the major squeeze was pretty sound -- especially if you understand general human psychology & how market structure can provide an edge.

https://twitter.com/maxolson/status/1362445000743612426

No good trader would fool themselves into thinking investing in $GME at $50 or $AMC at $20 was based on business fundamentals. But it doesn't need to be. Again, investing is about the odds, and only betting when you have an edge.

What was the edge here? A complete break down of collective accuracy of the market, driven by herd mentality + forced structural buying.

Each of these stocks was like a dying nightclub. But you don't have to own the nightclub to profit: you can get a cut of profits for only 1 or 2 nights [bet on short-term supply & demand of stock] or even make prop bets on how many people will show up in given night [call opts]

This is where basic psych comes in. People are memetic herd animals -- they want to do what other cool people are doing, especially if something becomes a ~~Story~~. This was breakdown #1.

#2 is a basic understanding of the mechanisms that force short sellers to buy back their shares after so much losses. (Beyond the scope of this thread, but checkout the original Reddit $GME pitch for more) reddit.com/r/wallstreetbe…

Back to a prop/options bet on 1 of these "nightclubs". The market is giving low odds they will be packed with people on any given night (with Covid & all). Lets just say 10/1 odds. But you think this is being skewed by relying too much on long-term chance these clubs will die.

You also know there is momentum building for people to go there, & (I know I'm stretching the analogy here but bear with me) that there's a *structural obligation* for some to go there once enough people show up, further increasing herd mentality.

So what are your odds? Even if you're realistic & think this is far from a sure thing, you think there's at least a 40% chance it happens. So 60% you lose entire bet, 40% chance you get 10x. That's… a pretty good bet.

And if you spread a handful of similar bets over different durations & multiple "nightclubs" it minimizes risk even further. (This is where Kelly allocations come in to properly size 1 or basket of bets)

This takes a very different mentality than traditional "value" investing based on business fundamentals. But it's investing nonetheless, and not just about luck.