Charlie Munger Weighs in on Gamestop Controversy

Well, it's most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robin Hood. Robin Hood trades are not free; when you pay for order flow, you're probably charging your customers more and pretending to be free. It's a very dishonorable, low-grade way to talk, and nobody should believe that Robin Hood's trades are free.

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Well, just when you thought it was all over, GameStop short squeeze 2.0, baby! Here we go, get your wallets out, fire up your Robin Hood accounts. No, I'm just kidding, obviously. Definitely don't do that. But what's crazy? We thought this whole situation was done and dusted, and now, right now, GameStop is rebounding hard. It is back up to 132 dollars per share, up 6.6 overnight, and since the 23rd of February, the stock has come up from 45. So it's risen almost 200% in seven trading days.

We'll have to see how long this rise in the share price lasts for GameStop this time. But in the meantime, Charlie Munger himself has sat down in the past week and answered some questions from Daily Journal shareholders. It was a very long Q&A session—like two hours or something like that. All of it's on YouTube, if you want to go watch the whole thing. I definitely encourage that; I'll leave that linked in the description.

In that Q&A session, popped up a lot of questions about the whole GameStop short squeeze Robin Hood saga. And boy, oh boy, did Charlie Munger have some very interesting remarks on the situation. Now, we should go through what happened first, and I don't want this video to get too dragged down on the explanation, so check out the video coming up on the screen right now if you want to learn more.

However, if we summarize what happened—so GameStop, it's a heavily shorted stock; about 130-140% of the outstanding shares were held short. Now, these short sellers were big money managers like hedge funds, and they're going to benefit if the share price went down. But on the flip side, they would get screwed a lot if the share price went up.

Now, Redditors over on Wall Street Bets saw this, banded together, and bought the stock, which sent the share price up and screwed over the short sellers because the share price spiked. A lot of the short sellers had to cover their short position, and in doing so, that only feeds into the buying pressure and pushes the share price even higher. And that situation is called a short squeeze.

A short squeeze in reality looks exactly like this—exactly what happened to GameStop. Now, here's the interesting thing. We saw it go up, and we've also seen it come down, and that's because what happened was Robin Hood stepped in, and a lot of other brokerage sites. It wasn't exclusively Robin Hood, and they essentially stopped their users from buying GameStop shares.

So that obviously evaporated the buying pressure on GameStop. No buying pressure means the share price falls down, and the short sellers that were holding on during that time made a lot of money. So that's a short summary of what actually happened with GameStop.

And next up, let's hear Charlie Munger's view of the events that transpired. "Dear Mr. Munger, please share your thoughts on the recent Wall Street Bets GameStop short squeeze. It seems to involve a lot of your standard causes of human misjudgment."

Well, it certainly does, and that's the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would on betting on racehorses. And that's what we have going on in the stock market, and the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers.

And, of course, when things get extreme, you have things like that short squeeze. It's not generally noticed by the public, but clearinghouses clear all these trades, and when things get as crazy as they were in the event you’re talking about, there are threats of clearinghouse failure. So it gets very dangerous, and it's really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors.

And of course, it's going to create trouble, as it did. So you can tell he's clearly not very impressed, and first and foremost, he definitely puts the bulk of the blame on those speculators that are actually out there buying these sort of stocks because ultimately, they’re the people that actually cause silly situations like this to occur.

These types of people are not your typical stock market investors like you or me; they're the people that, you know, are filling out their betting slip in one hand while they're buying their stocks in the other hand. They're those sorts of people. They are the gamblers that just treat the stock market as this funny little game—they're trying to get rich quick. They don't really care about long-term value investing, building wealth, any of that. They're kind of just in it to gamble.

But he also puts a fair amount of blame on the brokerage sites that are obviously incentivized to reach out to the everyday Joes and get as many people signing up to become novice investors. And you know, just join in—the stock market's a great place to be! You know, you don't need to know anything.

Look, Simon and Joe both invest in stocks. Simon just copies Joe's trades thanks to eToro's trade tracking. Whatever. And look, he's made 20% this year! So, yes, ultimately, the people that are most at fault are the people that are directly causing this situation—the speculators that are banding together and just buying these kinds of meme stocks.

But Charlie does put a lot of the blame onto those brokers that are just trying desperately to get more sign-ups, more users, and encourage more trading activity. And that's what he talks about in this next clip. "Could you give us an update on your assessment of wretched excess in the system? Where does it appear most egregious?"

Well, it's most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robin Hood. And I think all of this activity is regrettable. I think civilization would do better without it. You'll remember that when the first big bubble came, which was the South Sea bubble in England back in the 1700s, it created such havoc that eventually, when it blew up, England didn't allow hardly any public trading in securities of any companies for decades thereafter.

It just created the most unholy mess. So human greed and the aggression of the brokerage community creates these bubbles from time to time, and I think wise people just stay out of them. There you go—human greed and the aggression of the brokerage community.

And going back to that first clip that I played, Charlie Munger said, "You know, the frenzy is fed by those who are getting commissions and other revenues out of this new bunch of gamblers." And you might say, "Well, hold on, Brandon, actually trading on Robin Hood is completely free!" No, it actually isn't because you've got to remember that Robin Hood has to make money somehow.

You know if they're not making money from you, they're still making money somewhere, somehow. You have to remember, with any business, with any service, anything where it's free for you, the customer, you're not actually the customer; you're in fact the product. And this is exactly the case with Robin Hood.

Because the way that Robin Hood makes money is they sell their order flow to somebody else, usually like a hedge fund or something. And then what the hedge fund does is they can see the orders that are going to be coming in so that they can then get on the other side of the trade, and thus they can make money off of you. So Robin Hood is essentially selling you out in order to offer you commission-free trading.

Now, don't believe me? We'll have a listen to Charlie Munger himself talk about this. "What is the biggest lie currently being perpetuated by the investment complex?"

Well, confession confusion—commission-free trading is a very good candidate for that. If you want to emphasize disgusting lies, Robin Hood trades are not free. When you pay for order flow, you're probably charging your customers more and pretending to be free. It's a very dishonorable, low-grade way to talk, and nobody should believe that Robin Hood's trades are free.

There you go, from the man himself. But going back to the prior clip, while Charlie is obviously showing his discontent, he's also cautioning us. This sort of activity from brokerage sites that just want more users, more trades, more sign-ups, you know, more investing activity—I have to be careful because this could lead us to some sort of big financial mess.

And that was obviously stress-tested a little bit with what happened the first time around with GameStop. When things get extreme, you have things like that short squeeze. It's not generally noticed by the public, but clearinghouses clear all these trades, and when things get as crazy as they were in the event you’re talking about, there are threats of clearinghouse failure.

At the time, we were seeing record levels of trading volumes and trading activity, so much so that Charlie Munger himself was saying there was the risk of clearinghouse failure. So something had to change, and paraphrasing his words from before, we ought to be cautious so that we don't cause some sort of massive mess, as he described with the South Sea bubble, where the solution was England just halted the public's ability to trade stocks.

It created such havoc that eventually, when it blew up, England didn't allow hardly any public trading in securities of any companies for decades thereafter, because obviously if something like that were to happen, then we all lose.

So anyway, I found that really interesting. I thought you guys might find that interesting, you know, straight from the horse's mouth. Ultimately, Charlie Munger, yes, first and foremost, the blame comes from the speculators—the gamblers in the stock market—that kind of make these situations occur.

However, he's definitely clearly got some pretty scathing words for some of those brokerage sites that are just hellbent on focusing on new sign-ups, more trades. You know, more trades equal more revenue, and if trading doesn't necessarily equal revenue, then more trades equal more order flow to sell to someone else that wants to buy it, and that's the case with Robin Hood.

So it still means more revenue at the end of the day. Anyway, guys, I thought you would really enjoy that. Let me know, what is your opinion on whose fault it really is in this GameStop saga? What did you think of Charlie Munger's opinion? Definitely let me know what you think down in the comments section below.

And if you did enjoy this video, make sure you leave a like. I really do appreciate every single like, because obviously it just helps this video get shown to more people, which really helps support the channel and helps the channel grow. So I appreciate that.

And if you wanted to watch through the whole Q&A section of the Daily Journal annual shareholder meeting, then I'll leave that linked down in the description below. I'll probably leave a timestamp because they go through some boring stuff first, and then they get stuck into the Q&A. So I'll leave a timestamp where the Q&A starts, and he talks about a whole range of different things. It goes for like over two hours, so it was very, very interesting.

I basically covered every single topic under the sun, really—from Bitcoin, Tesla, GameStop, the state of the market, everything. So if you're interested, check that out; I'll leave it linked in the comment section, or yeah, I'll leave it linked in the pinned comment and in the description.

Alright, guys, that'll do me. If you'd like to learn about how I personally go about my investing, then check out Profitful. We've got an introduction to stock analysis, we've got stock market investing for beginners if you just want to get started out, get some help starting out in the stock market, doing it the right way—the Charlie Munger way, the Warren Buffett way. Check out those courses, and of course, that also helps financially support the channel too.

So I really appreciate it. But that will do me today, guys. Like, subscribe, all the good things, and I'll see you all in the next video.

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