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HomeTradingTranscript: Spencer Jakab - The Big Picture

Transcript: Spencer Jakab – The Big Picture


 

 

The transcript from this week’s, MiB: Spencer Jakab on Reddit, Gamestop & Meme Stocks, is below.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

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BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My special guest this week is Spencer Jakab. He is an editor at The Wall Street Journal’s Heard on the Street column. Before that, he wrote the Ahead of the Tape column and was the Lex Column author for the Financial Times. He just wrote a new book “The Revolution That Wasn’t: GameStop, Reddit and the Fleecing of Small Investors.” Spencer Jacob, welcome to Bloomberg.

SPENCER JAKAB, WRITER AND EDITOR, WALL STREET JOURNAL: Thank you.

RITHOLTZ: So first of all, I really enjoyed the book. I read it on the beach this summer and a couple of weekends, really reads like a fascinating novel. If it wasn’t a work of nonfiction, it could never have been made into a work of fiction because it just wouldn’t be believable, would it?

JAKAB: It’s crazy, right? It lends itself to a book and I knew that right away. When the story began to unfold, I sent an email. I had a three-quarters written book proposal about something else, sitting at home during the pandemic, and wrote an email to the Acquisitions editor at Penguin Random House, a person I don’t even know, didn’t know then. And when I saw this story begin to unfold, the first article had not been written about it. One of my sons brought to my attention — yeah?

RITHOLTZ: Yeah. Let me stop you and just say the book came about, and please pardon my language, because your sons’ self-described themselves as degenerates, apes, and retards. Can you explain why a group of people would self-describe themselves that way?

JAKAB: So I have three sons, and two of them are very online. They’re all online, but two of them are very online. They are on Reddit all the time, and they were on this forum on Reddit called WallStreetBets, which was at the epicenter of this story. And the people on this forum, it’s an investing forum but not really an investing forum. There’s a different investing forum on Reddit called r/Investing. This is r/WallStreetBets, which is an entirely different place.

RITHOLTZ: Speculative, lots of axes to grind, lots of social issues come up. It’s not a straight-up investing group.

JAKAB: No. It’s like Jackass for finance. What it is, it’s like, you know, you do crazy stuff on there, and you show off crazy stuff. And you — I don’t know if a lot of the crazy stuff actually ever happens because you can’t tell. People are using pseudonyms, but they were all over that. And my oldest boy, he’s now 23. He was a college senior when this happened, came over and he said, “Dad, are you going to write something about GameStop?” And so GameStop, they’re all into video games. I’ve driven them there lots of times. They were going there less and less over time, which is a problem with GameStop as a business.

RITHOLTZ: Right. It’s, you know — it’s in a mall. It’s old school. It’s the blockbuster of video games.

JAKAB: Totally. Totally. That’s the problem. That’s why it had been losing money for years. That’s why — that’s how it found itself at the center of the story. The book is not really about GameStop and people always ask me about “Don’t you think this? Don’t you think that about GameStop?” Like, I can talk to you about GameStop, but that’s not really the interesting thing here.

RITHOLTZ: Right, right.

JAKAB: The interesting thing is this unprecedented thing that made it the most traded security in the world for a while, the most searched term in the world for a while, you know, and from just total obscurity and I said, “No.” Why? You know, a friend of mine, this kid who I’ve known since he was, you know, as tall as my knee, had bought it. And I took a look and he’s doubled his money in the last two days, maybe he should sell. They’re talking about it on WallStreetBets. And I’ve seen this dozens of times before, you know, it’s a kind of a flash in the pan and —

RITHOLTZ: Right.

JAKAB: — I really wouldn’t hang on too long. And what kind of got my attention was he said, “No, he’s not going to sell ever. No, he can’t sell.” So what do you mean he can’t sell? And so, you know, I started reading the board, and I was like, “Oh, my God, they’re executing a corner on this stock.” So they all sort of agreed online to buy as much as they could, and not sell, and then buy options too, which forces further buying by options dealer. So it was this trap. It’s this thing that you can’t really do, as you know, Barry, like you can’t —

RITHOLTZ: Not legally.

JAKAB: Not legally. Right.

RITHOLTZ: Like, you and I can’t get together and do this. But a bunch of anonymous teenagers and others, it wasn’t just teenagers, could talk about it in this venue without real fear of reprisal because they’re a bunch of little guys engaging in some speculative wishful thinking.

JAKAB: That’s right. And if you take it at that point, there were about 1.9 million people on the forum. By the end of the next month, there were 11 million people. So they quadrupled in four days. The number of people in this forum is big, people got so excited by it. And so those people, individually, may not have had a lot of money, but they did two things. First of all, there are a lot of them.

JAKAB: And they all rushed in, in the same way, into the same stocks, especially GameStop. And also, people were telling them, “Hey, if you want to get real bang for your buck, don’t even buy the stock, by way out of the money, call options on the stock

RITHOLTZ: Right.

JAKAB: And then the options dealers will have to basically, as it goes up, they’ll have to buy and they’ll buy a lot more than the money that you put down.

RITHOLTZ: In professional terms, that’s a gamma squeeze.

JAKAB: Yes, it’s a gamma squeeze. And most of these kids — well, very few of these kids know what a gamma squeeze was, but it was all explained there. I was reading all about it on the board. I don’t think they were breaking the law because they’re talking about it openly.

RITHOLTZ: Right. Right. This was no dark conspiracy. So let’s talk a little bit about WallStreetBets. When it first started to erupt, I think the knee-jerk response, and I’m as guilty as anybody, was how is this any different than the 1990s in Yahoo message boards and Raging Bull? But there was a slightly different factor. What made this so different than what we saw 30 years ago?

JAKAB: So you’ve heard it, it’s a cliche by now, but it is true, more or less, that “The four most dangerous words in investing are: this time it’s different,” right? And that’s something, I’m a real student of financial history. I was really —

RITHOLTZ: John Templeton very famously said that.

JAKAB: Totally. And I went into this, with that echoing in my head. I go into everything with that echoing in my head. Whenever there’s a crash, or mania or panic, that people — human psychology is basically unchanged since Paleolithic times. And so the way that we react to something financially is never good, but it’s always very similar. So history rhymes, it doesn’t repeat, but it rhymes. That’s the reason. It’s the way that our brains are wired. But this was different. And —

RITHOLTZ: And tell us — tell us what was different about it.

JAKAB: The difference is that private companies understand psychology too. They have psychologists who work for them. They have social psychologists who work for them. And the same people who you go into a Vegas casino. And there are no clocks on the wall, there are no windows, people are bringing you drinks. The same people who designed sports gambling apps and things like that, designed social media and designed brokerage apps that that these young people were using to access this. And they induced all kinds of — they just put these speculative tendencies on steroids basically, is what they did. Social media and the investing apps together on the same device, on your smartphone, being used by the same people together —

RITHOLTZ: Along with — along with WallStreetBets and Reddit.

JAKAB: Yeah.

RITHOLTZ: So the difference — this time was different because — and to the fact that everybody is stuck at home. Most of us got stimulus checks, so people have cash in their pocket. And there’s no gambling, there’s no sports, their usual entertainment is shut down. This really seems — and you described it in the book as a perfect storm that just teed up to send this — to use their power lens to the moon.

JAKAB: Yeah. I mean, it’s so interesting because several things had to happen really all at once, for this to happen. And so I traced that and explained the social forces, because I think that’s — I mean, that’s how you tell the whole story, and it’s very interesting, but it’s also how you understand what it means going forward. And I want them, you know — and I hope that there are lessons in the book for people who invest, people who invest their own money, people on Wall Street to take away from this, to understand how it happened. Not that it’s going to happen exactly this way again because, as I said, it was a perfect storm. But you have to go back to 2018 when you had sports gambling legalized outside of Vegas, in most of the U.S.

RITHOLTZ: Right.

JAKAB: And so you had all these young, mainly men, playing daily fantasy sports. They had the apps already, the FanDuel, DraftKings and what have you on their phones. And all of a sudden, they were actually gambling. There’s this legal distinction between daily fantasy sports and gambling-gambling. So it’s the only type of sports that negatively correlates with age is sports gambling. Then —

RITHOLTZ: Oh, really?

JAKAB: Totally. Everything else is — the older you are, the more likely you are to play slots and things like that, but not this. Then you had, in late 2019, so you had a five-year period when half of the new brokerage accounts opened in the U.S. were opened by Robinhood, which is a tiny broker, even though at this time.

RITHOLTZ: Give that data point again, half of all new brokerage accounts were Robinhood/

JAKAB: Yeah. Not in dollar value because they were tiny, so the median value of those accounts was $241, which is peanuts.

RITHOLTZ: Right.

JAKAB: But the number of accounts, that’s something and I would love to go into what made Robinhood possible, okay, because there’s some changes there that you need to understand but —

RITHOLTZ: So let’s explore that right now. Why was Robinhood — and PS, you know, I looked at Robinhood in 2014 in a seed round and I weighed. You want to give free trading to millennials? This is the single dumbest investing idea I’ve ever heard of. And I passed on it. What made that possible, Robinhood possible, where 20 years ago, you couldn’t have had the sort of app on your phone like Robinhood?

JAKAB: Well, our mutual friend Howard Lindzon was one of the early investors in Robinhood.

RITHOLTZ: He’s the one who pitched me on it.

JAKAB: He was? Okay. And then so he —

RITHOLTZ: Literally, Howard, that’s the dumbest, blank idea I’ve ever weighed. The trades are free, and you’re giving it to the least wealthy people in the world? How are they ever going to make money?

JAKAB: It was Howard in video. He was kind of a dummy about it too because he was smart enough to invest.

RITHOLTZ: Yeah.

JAKAB: But then he was dumb enough to say, “Guys, this is a great app. You should charge like $1 or $2 for it, like people will pay that,” which was totally wrong because the fact that — and so —

RITHOLTZ: You still had to link it to a bank account.

JAKAB: Right.

RITHOLTZ: But you could download it for free. And once you went through the process of opening the account, that’s when you found out they need this info, they need your phone number, they need that.

JAKAB: Right.

RITHOLTZ: They need your bank account. And before you know it, you’ve opened up your financial life completely to Robinhood.

JAKAB: And your first brokerage account and it costs 75 bucks to get out, to sort of — you know, to move your account to somewhere else.

RITHOLTZ: Well, you don’t — you don’t —

JAKAB: So if you have $241, you know — yeah.

RITHOLTZ: You liquidate it and move on.

JAKAB: Exactly. Yeah, that’s — that would be the smarter thing to do, not that their customers always did the smarter thing, but we’ll get into that later, but yeah. So they — I mean, in late 2019, every other broker said, “Well, screw this. You know, we’re — if you can’t, you know, can’t beat them, then join them.” And for a Schwab or a Fidelity that has much wealthier customers, they sell all kinds of services that Robinhood doesn’t, they’re like, “Wow, we’re going to lose some money on this, but we have to match them.”

RITHOLTZ: Right.

JAKAB: And it shows you how dumb they were because they all were wringing their hands about cutting their commissions to zero. It was no longer the bulk of the money they made anyway.

RITHOLTZ: Right.

JAKAB: But it was still a pretty nice chunk of change for them. And they thought that it would cost them money, and it made them money because you had an explosion in trading activity as a result of everyone going to zero and so that — there’s a psychological concept that’s not appreciated. I mean, you have — you learn all about elasticity of demand, and you learned that when things get cheaper, people will desire more of it, but it depends what kind of thing it is.

RITHOLTZ: And this is only up to a point.

JAKAB: Only up to a point. But there’s a special kind of product where people — once you go from costing something, it doesn’t matter how little to nothing, but people will go crazy, they will explode, and that’s specifically fun thing. And so you don’t think about buying a stock as a fun thing, but Robinhood made it fun.

RITHOLTZ: It’s the same dopamine hit as gambling or getting on a roller coaster, or just a little smidgen of heroin for the weekend.

JAKAB: Totally. And it’s the same thing as think about when you’re a few years old, I mean, so you’ll remember like if you had to call somebody long distance, I mean, you know, my family, my parents are immigrants and we had, you know, relatives far away. And I remember like, you know, the very rare occasion they would spring for a phone call, like everyone had to be lined up next to the phone and you got your one minute on the phone and then hand the phone to the next person. And then it was like, oh, they’re tearing their hair about how much it would cost.

Now, calling anyone in the world anywhere is free, and so people do it all the time. You know, they do it way, way more than if it just cost a tiny amount of money because there’s no cost to it. There’s no incremental cost to it.

RITHOLTZ: Right. And as a note with Schwab, when they — and they were the first major broker that seemed to have introduced free trading, and then all the other dominoes fell after them. When you looked at their revenue the next quarter, I think something like 59% of their pre-free revenue came from just float on cash.

JAKAB: Right.

RITHOLTZ: And trading volume was really, really, you know, that high single digits, low double digits. And then eventually payment for order flow more than made that up so — and a lot of assets flowed into them. So all told, this was a win-win, at least, for established Wall Street firms.

JAKAB: Yeah. And they were like, “Why did we wait so long to do this? This is great.” They were all, you know, just gushing about how smart they were to do this, even though they had held off on doing it for a while. That was late 2019. And then what happened in the early 2020 is you had the pandemic, and the pandemic was just the perfect thing to kick off the speculative excess. Of course, you know, you’d had free money for many years, basically. You know, you’d have zero —

RITHOLTZ: You would, low cost credit, but literal free money showing up in the mail, in the form of a check or direct deposit that kicked in the second quarter of 2020.

JAKAB: Yeah. If you were 23 years old and you had been, let’s say, working, maybe living with friends. All of a sudden, you’re in mom and dad’s basement. You get this check for 1,200 bucks. You might be getting extended unemployment benefits. You’re not spending money going out every night. You know, you’re at the age where you spend money as soon as you make it. All of a sudden, you weren’t. You’re bored.

You’re sitting there looking at your phone for 12 hours a day. And you’re looking at social media. All of a sudden, all these new social media people are popping up, talking about stocks, the stock market, you know, this whole rise of influencers. And so you go in — you know, your buddy tells you to open up a Robinhood account. And you opened up a Robinhood account because he already has a Robinhood account. And he’ll get — he got a free share of stock when he opened it. And he’ll get another free share of stock. Mystery, it’s like a sweepstakes because it could be a $2 stock, but it could possibly be a $50 stock, right?

RITHOLTZ: Right.

JAKAB: You don’t know. It’s like a, you know — I mean, it’s like —

RITHOLTZ: All told, that’s a cheap cost of acquisition for a brokerage firm, right?

JAKAB: All told, the average payback period was five months for that investment.

RITHOLTZ: That’s unbelievable.

JAKAB: So they didn’t really need to — they did have advertisements. Their advertisers were really kind of to — kind of, you know, make themselves look good, basically. It wasn’t to get new customers. Their ads were all touchy feely, “You were born an investor. I never thought I could do this.” And the people they showed their ads are not the typical lucrative customers they had either. They were, you know, mainly female, a few older people. It was young males primarily.

And the thing is most of their customers, they don’t make money on, but there’s a subset on which they make a lot of money. And so those are the people they’re trying to get. It was young, risk-seeking, you know, kind of maybe not two wise men. And as a father of three young men, I can — I know what I’m talking about. And you know, and so that’s when you had the explosion during the pandemic. And you had all this volatility which was just addictive. It was like crack cocaine, you know, you couldn’t stop. And then in the year from the pandemic bear market bottom to a year after, 96% of American stocks rose, which was crazy.

RITHOLTZ: It’s huge.

JAKAB: It’s unprecedented.

RITHOLTZ: It’s a huge, huge number.

(COMMERCIAL BREAK)

RITHOLTZ: So let’s talk a little bit about the revolution that was and by using GameStop as an example, as you did so well in the book, and it has to begin with a guy whose name we now know as Keith Gill. Since this is a family station, I can only use an acronym, he went by DFV on Reddit. And on YouTube, he was Roaring Kitty. And he basically takes all of his money, some 50,000-something dollars, buys LEAPS like a year or two, off in the future, way out in the money. And this just looks like wild.

So he buys calls, betting the stock will go up on GameStop, which is a couple of bucks, a buck or two, or three at that time. And he posts it without a whole lot of commentary on WallStreetBets on Reddit, just a picture of his brokerage account with the options there in his portfolio, apparently nothing else, and the phrase, “I like the stock.”

JAKAB: Yeah, YOLO, you only live once. So he is a really, really fascinating character, an unusual character. And the one of the interesting things is — let me tell you that — I mean, of course, this whole history is there to be seen. But for 90% of this story, he’s there in the background, doing these videos, four-hour, five-hour long, you know, videos, talking about the stock and talking about investing, making these posts, responding to people who mainly made fun of him on his message board, like a lot — he took a lot of heat. And you know, he was — he was unusual in a lot of ways on this forum WallStreetBets. One thing is he wrote in complete sentences. The other is like he was — I mean, you might not think it’s —

RITHOLTZ: He didn’t advocate people go out and buy it. He just said, “I like the stock.”

JAKAB: Yeah. Right.

RITHOLTZ: Basically, as much as — as much influencing as he did was “Here’s a picture of my account. I’m going to live and die on it. You guys go do you want.”

JAKAB: You want a textbook example of not — how not to influence people online.

RITHOLTZ: Right.

JAKAB: And that’s it. Because he was cerebral, he was polite. You know, people would kind of make fun of him. He said, “Well, that’s not the way I think about it because, you know, behavioral finance dictates that blah, blah, blah. And as I follow the teachings of Aswath Damodaran,” whatever, like, you know, stuff like that.

RITHOLTZ: Yeah. No one knows NYU.

JAKAB: Yeah, exactly. The valuation guru at NYU. None of these kids know who that was, you know, right?

RITHOLTZ: Right.

JAKAB: I mean, and so he was just basically sort of — you know, it was like a tree falling in the woods. I mean, some people were like — you know, sometimes he would make money and then say, “Hey, you should sell.” I’m like, “No, no. no.” And then he’d lose half of it. And people who were following said, “Wow, what an idiot. You know, for the money that you lost, I could have done this and that. You could have bought a GameStop franchise.” Yeah. So he invested $53,000 of his money. He’s not a rich guy at all. He was working — he didn’t say anything about himself, by the way. And he was — and I think had he said this, he probably would have had less influence, he’s a chartered financial analyst, which was a difficult qualification to get.

RITHOLTZ: CFA. Sure. One, two and three have — each have like a 50-something percent fail rate.

JAKAB: Yeah.

RITHOLTZ: So he’s in the industry. And then being smart and hardworking is always good. but getting a little lucky is better. And not long afterwards, along comes Michael Burry of “The Big Short” fame and basically takes a position in GameStop saying, “Hey, you know, this is a classic cigar butt. There’s some value here and there’s way too much negativity about it.” What happens from there?

JAKAB: Well, I’ll tell you, this is interesting too because I won’t say the entire name, but DFV is Deep Effing Value. So value is part of his moniker. And he was upset, he said, you know, “Thanks a lot, Burry, for jacking up my cost basis,” because —

RITHOLTZ: I can’t buy more.

JAKAB: Well, he said, “Now it’s going to be more expensive to buy more.” Thanks for nothing.

RITHOLTZ: Right. You would build the position over a couple of years. The technical term is pyramiding. You keep adding to an existing position as prices gradually rise, but they practically doubled overnight.

JAKAB: Right. And he — and most people, I mean, 99.9% of people on this board would be like —

RITHOLTZ: Especially option traders.

JAKAB: — “I bought these options and, like, now doubled my money, you know, because the stock went up, because Michael Burry shows up, who was played by Christian Bale. That’s why most people think of Christian —

RITHOLTZ: Right.

JAKAB: — the picture of Christian Bale instead of Michael Burry himself.

RITHOLTZ: At the drum set in “The Big Short.”

JAKAB: Yeah. Totally. And so — and people are like, “What’s wrong with you? Like, you should sell.” Like, you know, he — this is like a stroke of luck. And it’s not how he viewed it at all, which is a very rare form of thinking. So he — I think like —

RITHOLTZ: He was surprisingly long time for someone buying options.

JAKAB: Totally. And I think — I would not be surprised if this guy shows up one day, five years, 10 years, maybe not even that long, you know, managing some kind of value fund, just sort of like a kind of a hip Warren Buffett or something, because he really — he has that way of thinking. First of all, obviously, he has analytical chops by having had a CFA —

RITHOLTZ: Right.

JAKAB: — maybe not Buffett-like, but he certainly knows what he’s talking about. But he just has that kind of unusual way of looking at things and inverting things that you need for success. But at the same time, as we’ll see later, he’s got that — you know, he’s cool and young. And he was 33, 34 during this episode. And the point at which he became really super influential, one of the most followed people on the planet, basically, for a couple of weeks, he wasn’t posting any kind of analysis. You know, he was like — he became the hero briefly of this whole movement.

RITHOLTZ: So following Michael Burry, not much longer than that, Ryan Cohen, who is the founder of Chewy, which essentially is the most successful online pet food and goods store, essentially what Pets.com couldn’t do, Chewy became. And Ryan Cohen then says, “Hey, we think GameStop can become an online purveyor of video games. Forget the brick-and-mortar, that’s just where they were. Let’s talk about the future.” And now, the stock takes another leg up from $1 and $2and $3 to $5 and $10. Tell us what happens next.

JAKAB: Yeah. So he shows up, and then things start to get interesting. It starts going up to the point that it was at the point that Deep Effing Value would have sold. You know, he said, like, “I think, you know, this” — he had made enough money, he was a millionaire.

RITHOLTZ: Right. On paper.

JAKAB: Just a million, just 1 million, 1 million then 2 million, a couple of million, no big deal and life-changing money for him.

RITHOLTZ: Before taxes?

JAKAB: Exactly. Before taxes. But then a light bulb goes off. And even before this, a light bulb kind of went off in his head, some months before, because someone had pointed out on this board, like, “Hey, this could be the greatest short squeeze of your life.”

RITHOLTZ: The mother of all short squeeze.

JAKAB: The mother of all short squeezes, you know, the kind of the Saddam language.

RITHOLTZ: Yeah.

JAKAB: And it briefly doubled, and then settled back down. But that was a foretaste and that’s the first time he mentioned like, “Hey, in addition to all the good stuff I think about GameStop, there’s this additional possibility, I’m not going to really count on it, there could be a short squeeze.” Because, you know, the thing that GameStop and the other, they call the meme stocks, you know, had in common was that they’re all kind of losers. They weren’t —

RITHOLTZ: AMC, the big movie chain, which was dying on the vine during the pandemic; Hertz, which had already declared bankruptcy and was waiting for the court to just dole out the assets, which is insane. What were some of the other ones that —

JAKAB: Blackberry, remember those?

RITHOLTZ: That’s right. Nokia was another one that popped up.

JAKAB: Yes.

RITHOLTZ: Like, we used to call —

JAKAB: Bed Bath & Beyond.

RITHOLTZ: We used to call that dumpster diving, when you’re looking through the wreckage on Wall Street to find that cigar stub, what can I still smoke that someone else has thrown away?

JAKAB: And 2020 was possibly the worst year ever for short sellers, for people who bet that stocks are going to decline, usually by borrowing the stock and selling it. So basically, they opened themselves up to unlimited losses, in theory, and limited gains. And so 2020 was a terrible year. You had all kinds of dumb stuff going up, that they were betting against, Nikola and you know, I can go on and on and on about them.

RITHOLTZ: So let’s put — let’s put some flesh on those bones, and this is data from the book. In the 2020 market, we saw a 34% drop. And then beginning on March 25th, markets rallied to finish up more than 20% for the year. And during that year, short sellers lost collectively $245 billion, which is pretty astounding. But then when you look at the three months leading into January 2021, when the meme stocks really exploded, a basket of the 50 most shorted stocks that had a market cap of at least a billion dollars, that basket doubled. Those are some insane stats if you’re a short seller.

JAKAB: Yeah. That is just a world of pain if you’re a short seller. And so think about it, if you’re — I mean, there are people out there, Jim Chanos and what have you, who are dedicated short sellers. There are a lot more people out there who have short selling as part of their strategy. That’s the bulk of short selling,

RITHOLTZ: Right. Some people just find bad companies to bet against them. Others run what’s called like 130-30, a long/short portfolio, where you’re 130% long and then 30% short. So net, you’re 100% long, but you have a hedge if the market goes down. And you bet that, the worst stocks will fall more than the best stocks.

JAKAB: Totally. And that’s usually a smart bet because usually you don’t worry about something terrible happening to you, being ruined, right? I mean, you don’t think “What’s the worst thing that’s going to happen?” Then you bet against GameStop. And let’s say somebody shows — the best buyer shows up and buys it —

RITHOLTZ: Pays double.

JAKAB: Pays double. Okay. You had a really bad day.

RITHOLTZ: (Inaudible), right?

JAKAB: Right. You got a terrible day, but that’s it. Not a terrible day, but you had a bad day. It’s probably some small part of your —

RITHOLTZ: Right.

JAKAB: — huge portfolio. And so what these meme stocks had in common was that they’re all losers like that. They’re all companies that have not made money in years, were headed for bet possible bankruptcy, were sort of just anachronisms like Blackberry. They’re the companies, like in 2001, were sort of hot, not in 2021, right? And so, they were in a horrible year for short selling, they felt safe betting against these companies, but they felt too safe. And that was the kind of the dry kindling that started this fire was that they felt so safe betting against some of these companies, that their short positions left them no exit if things really went wrong.

But no one — as we said, at the beginning of the show, it’s not like you and I, it would be illegal for us to gang up and say, “Hey, I happen to know that XYZ hedge fund is very heavily short this thing. And we can ambush him by basically colluding, putting all our money together, and pushing it, you know, to the moon.” But because then he would be forced to buy back, then his money — he would pile his buying on top of ours to buy back the stock, and then there’ll be a stampede for the sort of — it’s like shouting fire in a crowded theater.

RITHOLTZ: Right.

JAKAB: Short squeezes happen all the time, but you don’t — like those ambushes, they used to happen before there was an SEC. Now, you can’t do that.

RITHOLTZ: So again, more data points, you know, a normal stock, a billion dollar-plus stock might have a short interest of 10% or 20%. If that gets up to 30%, 40%, 50%, that’s called a crowded short, “Hey, too many people are betting against it.” Some of these small cap and micro-cap stocks had shortest interests of 80%, 90%, 100%. GameStop had a short interest of 140%. This was a lot of dry kindling and people lighting sparks, wasn’t it?

JAKAB: It totally was. I mean, 140% of the float. And people — and of course, there are ongoing sort of, you know, complaints and conspiracy theories, like that’s illegal. You can’t — you know, it is not illegal because there’s a process called rehypothecation, where if you — you know, if you go in the market today and you buy a stock, and then it’s in your account at Schwab or whatever, Schwab might lend that stock out even if you purchase that stock from a short seller. They don’t know where it came from. So —

RITHOLTZ: Right. A stock can rehypothecate that and —

RITHOLTZ: Right. Right. It could be lent twice or three times. It happens.

RITHOLTZ: Right. There’s no ceiling on the amount of short interest other than, hey, at 200% or 300%, you know, it’s financial suicide. At a 100%, there’s no room for error —

JAKAB: No, no.

RITHOLTZ: — you know, as we clearly saw. So let’s talk a little bit about short selling, and what’s good and bad about it. But I got to start by asking about a story you tell about the history of the paperwork crisis on Wall Street, and how does that relate to what’s going on with Reddit and GameStop, and the meme stocks? Tell us about the paperwork crisis.

JAKAB: Sure. Well, there’s a great book by John Brooks called “The Go-Go Years,” where I think I first heard about that. I’ve read about it in other places, too. But the paperwork crisis was something that happened during a previous speculative mania in the late 1960s, when you had just an explosion in trading activity. And this was before things were computerized.

RITHOLTZ: Right.

JAKAB: There was so much paperwork, in fact, that the stock market had to be for a long, long time closed on Wednesdays, just in order to allow people to catch up, you know, settling all the trades and making —

RITHOLTZ: This was the Nifty Fifty era and a lot of stocks. The postwar bull market was still running from, you know, the late ‘40s right up to the mid ‘60s. Wall Street was hot.

JAKAB: Wall Street was hot. And that was at a time that it was really expensive to trade, which is the — that’s the reason that I — one reason that I brought it up because it wasn’t until 1975 that commissions were deregulated. So for years and years and years, this is a complaint saying that, like, brokers could charge fixed commissions, and it was just really expensive for brokers to help themselves to your money, basically, on Wall Street.

RITHOLTZ: Right.

JAKAB: So you know, all these people who were involved in this never could have been involved because the hurdle, financially, to get into trading was just too high, and then you couldn’t be hyperactive, and even then people were hyperactive. Then when you brought commissions down, and down and down, you know, you had dot-com and whatever, and then — you know, then now you had this, which was —

RITHOLTZ: That was $8 tradings down to — now to free.

JAKAB: Down to free, that kind of makes it a little bit easier for there to be a speculative mania. And so, that was just kind of part of the kind of long arc of history on Wall Street that I tell, and yeah, and so making it free. You really crossed the Rubicon, but even making it cheaper made things easier. Of course, it’s made cheaper in the middle of the worst decade ever really, except the 1930s.

For Wall Street, 1975 was a terrible time. You know, if you had gone to like these brokers with like, you know, sideburns and white ties and polyester suits and stuff in 1975, who were like having a terrible time financially in 1975, and you’re like, “Oh, this is the first step in, you know, this kind of revolution.” It’s going to make you guys really rich. You know, you’re going to have this surge of people in the ‘80s coming in. The 401(k)s are going to be invented and all this stuff. They would have thought you were crazy.

Like, you know, then some guys going to, you know, go on this thing called the Internet, his name is Roaring Kitty, and he’s going to, you know, make a video game store, you know, be the most traded security on the planet from total obscurity. Like, then, they really think you’re crazy. But that’s — you know, that was the beginning of it. That was a key step.

RITHOLTZ: So that’s how we ended up eventually getting to the point where trading became free. The short squeeze that was orchestrated on Reddit has this underlying theme that short sellers are evil, that this is all a big conspiracy theory. Even Elon Musk has weighed in on this. Why the animus towards short sellers?

JAKAB: Yeah. If you look at the way that short sellers, and I’d encourage readers to go to Google right now and type in “short sellers are” and tell me what you see. And it’s not going to be a nice word, it’s not going to be a nice description. So going back to the history of stock markets, back to the 1630s in the Netherlands, short sellers had been reviled because, whereas most of us buy a stock and then hope it will go up and keep paying us dividends, they are making the opposite bet.

Making that opposite bet, though, is not predatory at all. As a matter of fact, the existence of short selling is very beneficial to every one of the markets, but especially to a retail investor that doesn’t know a lot. And I’ll explain why. One reason is that short sellers provide a lot of liquidity to the market that wouldn’t otherwise exist.

RITHOLTZ: Sure.

JAKAB: But there — if there were no short selling, then that there are only two things you could do. You could say, “I’m going to buy the stock or I’m not going to buy the stock.” You abstain or you vote yes.

RITHOLTZ: Right.

JAKAB: You can’t vote no. You can’t say, “You know what, the stock is too expensive.” And so there’s nobody to really — to kind of correct the value of a stock. It takes a much, much longer time for the kind of the scales to fall from our eyes. Not just when there’s a fraud like Enron, which was exposed by a short selling —

RITHOLTZ: Well, Jim Chanos is a lot.

JAKAB: Yeah.

RITHOLTZ: And he’s — Enron was but one of many frauds that he and other short sellers have identified. And in fact, short sellers seem to do a much better job than the FTC or the SEC, or whatever organization is in charge of investigating corporate fraud. Then, you know, they’ve done a really good job letting investors know, “This company is lying to you. And if you put money into this, you’re going to lose it.”

JAKAB: As Jim says, you know, short sellers are financial detectives, and regulators are financial archaeologists. You know, after the fact, they come in and do something hopefully good. Yeah. So they — I mean, I’m not holding short sellers up as like a paragon of virtue. They’re out there on Wall Street. They’re trying to make money. That’s the free market. They’re out there. They’re playing a very dangerous game. They have to be really confident in selling something short because as I said, the losses are theoretically unlimited. The gains are capped. It’s the inverse of what you face as a normal investor.

By the way, I’m not encouraging anyone out there to go and sell stock short. It’s a very dangerous and complicated thing.

RITHOLTZ: It’s hard.

JAKAB: It’s hard and I don’t think that people need to do it. But I think that we’re all better off if short sellers are kind of unmolested, I guess, in the market. That’s — you know, they’re not — there have been times, especially bad times, the market and research has shown this again and again, when you when you restrict short selling, then you wind up kind of delaying the normalization of the market like in 2008 and around the time of —

RITHOLTZ: Short sellers are the first one to step in and buy in a crash because they’re covering —

JAKAB: Right.

RITHOLTZ: — and saying, “All right, we’ve made enough money.” And literally, studies have shown they’re the first buyers then the value guys come in and the technicals. There’s like a whole arc of that.

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RITHOLTZ: You referenced in the book about 2004 Harvard study by Professor Owen Lamont that said, “When you have companies complaining about short sellers, in general, they do much worse than the average stock and much more frequently go bankrupt.” So it’s almost a red flag when you hear management, Dick Fuld is a perfect example.

JAKAB: He got handed a copy of that study.

RITHOLTZ: Right. In the book, you say when he was complaining about it, someone literally handed him a copy of the study and I guess the implication was, “Hey, Dick, maybe you should just not go there.”

JAKAB: Yeah. Well, he did not take that advice. Unfortunately, for him —

RITHOLTZ: And then he went bankrupt.

JAKAB: Yeah.

RITHOLTZ: So it fits the study perfectly. So short selling isn’t necessarily inherently evil, and yet, that seems to be the gestalt on WallStreetBets.

JAKAB: And that’s a really interesting point in which I can understand where the people who mainly were involved in this came from. So it’s like young people between the ages of 18 and 35 primarily, who participated in this, mostly male, as I said, but gender doesn’t matter in this case. But their formative financial experience before they ever could invest was the global financial crisis. And so — and there’s this lingering anger that like “We never really got our pound of flesh. My parents lost their home. My parent’s friends lost their house.”

RITHOLTZ: Right/

JAKAB: Or “I had these student loans that are really hard to pay back. I can’t earn enough and I can’t buy a house. And these guys are getting rich.” And decades since the GFC, you know, you’ve had further kind of spread. You know, the rich have gotten richer, and the poor have not gotten much wealthier. And so, you know, you really do have polarization in terms of wealth and income and access to all kinds of things in this country. It’s not, you know, a very egalitarian society that we live in, much less so than in the past. And so, they focus that animus on not on rich people because they like Elon Musk and they like other rich people. They like Silicon Valley rich guys.

RITHOLTZ: They love (inaudible), right?

JAKAB: Yeah, exactly.

RITHOLTZ: Right?

JAKAB: Yeah, he’s cool. But they — if you wear a suit and work on Wall Street, you’re like a cartoon villain to them. And then specifically, if you’re a hedge fund manager, hedge fund managers to them are evil personified. And then if you’re a hedge fund manager who sells stock short, where there’s already this bias against betting against something, there’s this kind of sense that like they want to ruin a company, which is not what they want to do because that’s not what happens when you bet against a company.

RITHOLTZ: It’s too hard to do that.

JAKAB: Totally.

RITHOLTZ: So there was something you referenced in the book off of Reddit that cracked me up. A lot on the memes, you know, this was really amusing and entertaining.

JAKAB: Oh, yeah.

RITHOLTZ: So the intersection of the social side of it, the political, economic warrior side of it, and the investing side, it’s a weird group. I love this “Bankrupting Institutional Investors for Dummies.” Like, they photoshopped the “Investing for Dummies.” And we’re going to go after the hedge funds, who, by the way, had nothing whatsoever to do with the great financial crisis, but seem to have garnered a lot of criticism that they were somehow involved when they — of all the people to blame, are not them, right?

JAKAB: Right. Yeah.

RITHOLTZ: Right. There’s lots of stuff. If you want to —

JAKAB: Angelo Mozilo or someone like that, right?

RITHOLTZ: Right. There’s a million people to blame. But of all the folks, hedge funds really were not involved in the financial crisis. So it seems weird that there’s a sort of undirected general smoldering rage, and it’s just looking for an outlet.

JAKAB: And then they told them on the board, “Hey, there’s this hedge fund manager who I could –otherwise a low profile guy. His firm is, believe it or not, called Melvin Capital, what a dweeb.

RITHOLTZ: And how did the name Melvin Capital come about, that name?

JAKAB: So Gabe Plotkin, who’s one of the big losers out there.

RITHOLTZ: Which is a dweeby enough name to begin with. It’s like — no, no, Gabe Plotkin isn’t nebbishy enough.

JAKAB: Right.

RITHOLTZ: “Let’s call it Melvin.”

JAKAB: It was his grandfather’s name.

RITHOLTZ: Yeah.

JAKAB: His grandfather was a convenience store owner who he really admired. And so he named this —

RITHOLTZ: A lovely sentiment.

JAKAB: Well, people laughed at it. Like, there were — like, some of the commentary when he set up the fund.

RITHOLTZ: Right.

JAKAB: Because he came from SAC, which was then later shut down.

RITHOLTZ: Steve Cohen. Right.

JAKAB: Steve Cohen’s fund. And now it’s Point72.

RITHOLTZ: Now, Points — right.

JAKAB: Point72. But he was seeded by Steve Cohen, and he, four years, had huge success. It was a very good fund. People weren’t laughing anymore.

RITHOLTZ: Lights out.

JAKAB: Right. He personally —

RITHOLTZ: High double digit returns.

JAKAB: Totally. He personal — this is like — it’s just incredible to me, this number. I’ve mentioned this. People said, “No. You must — you must be — you must be wrong about that.” He — you know, people not from Wall Street are like, “Really?” Like, he earned personally $846 million the year before this whole episode went down.

RITHOLTZ: Right. He was a billionaire, multiple times owner over, not even counting what he still had. Like a big chunk of Melvin was his own capital as well at that point.

JAKAB: It was. So — and $7 billion of it went poof in a few days because of this.

RITHOLTZ: Oops.

JAKAB: Yeah. So — but he was — and there are other hedge funds that were short GameStop, but he was especially short and because he had a fund that specialized in retailers and things like that, and consumer discretionary/

RITHOLTZ: The dead center of his target of companies that either were overvalued or overpriced, or should be bankrupt.

JAKAB: And he testified that in 2014, when he set up his fund, that was one of the first positions he put on. It was a good bet too in 2014, because it went down a lot between 2014 —

RITHOLTZ: Where was he initially short from?

JAKAB: Gee, I think it was probably 40, 50 bucks at that time so, yeah, he rolled it down —

RITHOLTZ: Down to?

JAKAB: — to 260, I think.

RITHOLTZ: Which raises the question really, what are you hanging around for the last buck or 2?

JAKAB: Well — and it was — yeah

RITHOLTZ: Crowded short, you know. Is it just not wanting to pay the taxes? I don’t — that was one of the things that you don’t answer in the book and I don’t — I have yet to read that answer. But you’re short something at 40, it drops to $1 or $2, who cares about that last buck? What are you waiting for?

JAKAB: Yeah. And I mean, obviously, you know, in reporting a book, there are people you speak with who are on the record, people off the record. I did try to kind of sauce that out and never really to my satisfaction, did and I just think it was because it was still — there was just nothing else too short.

RITHOLTZ: I guess $2 to zero is still another 100%.

JAKAB: Still a 100%. Yeah. So —

RITHOLTZ: Yeah, I guess.

JAKAB: Yeah. And then the reason that they became aware of him, because the way that short selling works is you can see how much short interest there is in a stock, but you can’t see who is shorting it. But if you buy derivatives for your fund —

RITHOLTZ: Right.

JAKAB: — that have the same effect, and he did, and that was — turned out to be a fatal mistake because —

RITHOLTZ: Because these were in call options where you’re deciding in advance how much you’re risking, when there are certain derivatives where you have full exposure in both directions.

JAKAB: There are. Although he owned puts which are — which do have a limited loss. You can only lose the premium.

RITHOLTZ: Right.

JAKAB: And that’s what showed up. And then he — and then he was being talked about on this forum, you know, when Ryan — same time that Ryan Cohen came in, and then he opted. And even when he was being talked about — and I mean, there’s — I don’t want to kind of get into. Obviously, I did — I did —

RITHOLTZ: Well, let me — let me say things that you don’t want to say because I can get away with them, where maybe you are uncomfortable saying that. Here’s a guy who’s incredibly successful. He’s a Wall Street professional. He’s a billionaire. And he sees a bunch of wise-asses and kids on a message board, mocking him, and he’s like, “Really? Let me show you how it’s done because this POS is going to zero.” Like, it’s easy to see, yeah, there’s a lack of humility there, but it’s not, you know, faulty and juberous. It’s just, “I’ll show the kids how it’s done,” and it didn’t work out.

JAKAB: That’s — I think that’s a pretty good guess at what happened. I think also it’s an organization of 30 or 40 people who may not have gotten to his level yet.

RITHOLTZ: Right.

JAKAB: I think the person one or two levels below him just didn’t take it seriously. They were like these mean, “Why would you? Give me a break. Why would you?”

RITHOLTZ: Before this all happened, why would anyone take degenerates and apes seriously? I mean, the whole thing about Reddit — and I love Reddit. I’ve been playing on Reddit for years. There are all these Reddit, you know, slash Rs, all these subcategories that there are rabbit holes. And yeah, Reddit has issues with all sorts of — like every social media, all sorts of problems. That’s a whole another conversation. But if you want to do a deep-dive into anything, there’s a Reddit for it. And some of them are just mind-blowingly astonishing. But if you’re a professional hedge fund manager, how seriously you’re going to take people — and it’s not even in the mean investing channel, it’s in like a sub, sub channel that’s a bunch of goofballs.

JAKAB: Yeah. And 98% of what they post is just rude jokes and memes, and things like that. So there’s not a lot of — the thing is that the memes were the message or the memes, you know —

RITHOLTZ: Right.

JAKAB: They use like hieroglyphs, or that they use to communicate. And so, which is why we call them meme stocks today. And yeah, I mean, they did not take it seriously. They do today. As a matter of fact, there was a study done that showed that today 95% of hedge funds, either themselves, or they pay a service to monitor social media for their position.

RITHOLTZ: Right.

JAKAB: So you know, they take it very seriously today.

RITHOLTZ: They’re using AI to make sure that this doesn’t happen again. And there’s a data point from the book that I have to share. So Goldman Sachs keeps a basket of unprofitable stocks. That’s literally what the basket is called. And in 2020, when the Dow was up about 7%, this gained 300%. Stop and think about how insane that is. The worst of the worst are just destroying everything else.

JAKAB: Yeah. I mean, and that tells you what why a quarter of a trillion dollars almost was lost by short sellers in 2020. It’s because the dumber it was, the better it did. And that’s — and that that really formed the attitude of this — you know, there are people who participated in the same stocks, who had three months, six months, nine months, maybe a year of investing experience. All of it in these crazy markets, everything that some serious guy like Barry Ritholtz, you know, goes on TV and talks about and says, “I would not touch this.” Those are the things that went up, right?

RITHOLTZ: Right.

JAKAB: So I mean —

RITHOLTZ: And went up a lot.

JAKAB: And went up a lot. So — and Warren Buffett, the greatest investor of all time, got out of airline stocks, which he wasn’t right, but he very well could have been right. I mean, things look pretty hairy. We didn’t know there’s going to be a vaccine. We didn’t know how bad the COVID pandemic would be. It certainly looked really bad in in March and April 2020. And he sold out of his airline stocks at a big loss, not typically Buffetty behavior, but good risk manager.

RITHOLTZ: You make the best decision you can with the information you have at that time, and as often as not, you’re right or wrong. And in that case, Buffett was wrong. That doesn’t seem to be what the Redditors were doing. These folks were just — you know, we weren’t democratizing finance. We were democratizing risk-taking and speculation.

JAKAB: Totally.

RITHOLTZ: So throughout the book, we hear the phrase “democratizing finance.” Are we democratizing finance or democratizing risk-taking and speculation?

JAKAB: You know, it’s a phrase that drives me crazy. Democratizing finance, you know, to me is basically bringing investing to a level that anyone can participate. And basically, that has been accomplished through years of competition and technological progress. You know, I give the example, we were talking earlier about the paperwork crisis. It was very expensive to trade then. If you had a little bit of money, that they wouldn’t bother giving you the time of day on Wall Street. You have to have a lot. And then you really got fleece, you know, because of big charges. Even just to — you know, you look — people talk about these long-term charts were like, “Oh, if you’ve invested in 1926, there was much money.

RITHOLTZ: Nobody was doing that.

JAKAB: There was no index fund then. And it would cost you money to reinvest your dividends. And like if you had a little bit of money, if you’ve invested $1, well, you couldn’t invest a $1 then. So it’s totally —

RITHOLTZ: Wait. There were no partial share purchases?

JAKAB: No, no. And so, today, you can — you can do that. At Robinhood and others, you can buy a fractional share. You can buy an exchange-traded fund that cost 0.03% a year. You could do all these things. So the door is open for people with very little money today. And it was — you know, prior to Robinhood, although the Robinhood, you know, in fact, did kind of accelerate things very, very cheaply, very easily to get on that ladder, which I urge anyone, especially in their like teens or 20s, getting started out with lots of decades to compound their wealth, to do.

It is a smart thing to do, to get on the ladder, but not an act of crazy way, in a kind of a — you know, put your money and let it grow. And don’t check it a lot way and save as much as you can weigh, and that really has been democratized. But then when you talk to Robinhood and say, “Hey, you guys are interested are just encouraging. You’ve gamified this thing, and you’re inducing FOMO.” You know, you open up your app, and the first thing you show is what everyone else is doing and buying, what’s up, what’s down. That’s not useful information. That’s information that makes you feel like you’re missing out, makes you feel like you need to be active. And they’re active customers.

The people who use the app were using it in 2020, on average, over seven times a day, opening it seven times a day. They had customers who were trading 11,000 times over a six-month period. There’s just absolutely no reason for anybody to trade 11,000 times or even a 1,000 times, or even a 100 times, you know, a timespan like that. Study after study, by the way, has shown that that is inversely correlated with your performance.

RITHOLTZ: Right.

JAKAB: The more you trade, the worse you do it. It’s a very well understood effect. And even just checking your account frequently, it’s called myopic loss aversion.

RITHOLTZ: Right.

JAKAB: It’s well understood that if you look at your account less, you’ll do better because you’re less likely to see a loss which pains you more than a gain pleases you. And so, you know, that is not the formula for success. They understood that.

RITHOLTZ: And you note in the book, the average Schwab account trades 45 times less than the average Robinhood account. Those numbers were just —

JAKAB: Per dollar in the account.

RITHOLTZ: Per dollar.

JAKAB: Yeah.

RITHOLTZ: It’s just mind-blowing.

JAKAB: And options trading even more. And only 13% of Robinhood’s customers traded options, but options were the most lucrative product for them because —

RITHOLTZ: Yes.

JAKAB: And that’s — you know, you’ve heard a lot about payment for order flow. Payment for order flow I don’t think is — it’s just a mechanical way of paying for trades. I don’t have such a big problem with it. But it is a practice where, basically, you sell your orders to a market maker, that’s office stock exchange that pays you to execute it, and then keeps a little bit of that money. Basically, it was very efficient at matching it up. Payment for order flow, the only problem I have with it is that it enables this behavior by making trading free. Otherwise, I don’t think there’s anything really insidious about it, which is a controversial view now, I know, but —

RITHOLTZ: So let’s look at the aftermath of this. So Keith Gill took $53,000, buys deep out-of-the-money calls. And by the time the calls peaked a year and change later, it’s what? $47 million?

JAKAB: Yeah. I think intraday, he probably had $60 million or $70 million. Yeah. But I think about 49 or 50 at the end of day and he would have more, had he not, because he cashed in some. But he had perfect timing almost. He cashed them in during the week that was the real mania.

RITHOLTZ: So what did he end up netting when everything was said and done? Because I was kind of surprised that he bought more stock.

JAKAB: Yeah.

RITHOLTZ: So from what I recall in the book, he cashes out about $3 million worth of options, and then later sells a bunch of the options and exercises them and ends up with $30 million worth of stock, something crazy like that?

JAKAB: In GameStop, yeah, which is a pretty — even then, you know —

RITHOLTZ: He’s real money.

JAKAB: He was — because he was called to this congressional hearing. That’s the only time we’ve ever heard his voice or seen him. I mean, he was interviewed by colleagues.

RITHOLTZ: Well, other than YouTube.

JAKAB: Exactly. Sorry. Yeah. But — yeah, but he was like a total unknown then.

RITHOLTZ: Right.

JAKAB: And he stopped doing those videos. And yeah, exactly, so people were very curious. It was probably one of the more watched congressional hearings, you know, because of him.

RITHOLTZ: Really?

JAKAB: And he got asked the fewest questions, or almost the fewest questions. But I mean, you know, it was — what were they going to — they didn’t want to antagonize him. And you know — and he was — you know, it’s strange because he was the only retail investor there. And it was really all about retail investors, they could have asked him some pretty good, juicy questions, had they been curious about it, but I don’t think they were they were outraged that trading was halted. And that’s a key part of the story.

RITHOLTZ: So let’s talk about that before we – we’ll circle back to Gill. So right in the height of this, where the short squeeze is having maximum effect. Robinhood is adding incredible numbers of new accounts, offering incredible amount of margin to these new accountholders, and a lot of option trading. Why did they halt the most shorted squeezed stocks?

JAKAB: They did because they did too good of a job. That’s — basically, that’s the answer.

RITHOLTZ: They didn’t have the capital to meet their custodial agreements.

JAKAB: They got a call. And now we have more detail. By the way, recently, a report came out from this congressional committee.

RITHOLTZ: Very recently.

JAKAB: Very recently and a good report worth reading that has a lot of detail. It was actually much worse than what we knew.

RITHOLTZ: They were very close to going under.

JAKAB: Not only that, well, we knew they were very close to going under. What we didn’t know was how close they got to taking other people under.

RITHOLTZ: Oh, really?

JAKAB: Yes.

RITHOLTZ: Who were they going to drag with them?

JAKAB: Well, Apex Clearing, you know, got into trouble, which was the clearing broker for lots of brokers. And the market makers who were processing the trades said, “We’re not going to — we’re going to stop processing these trades because you’re going to — you’re going to create a problem for us.”

RITHOLTZ: Right.

JAKAB: So Citadel, which was the biggest processor of their trades, and they got — they got into a conflict with Citadel.

RITHOLTZ: Ken Griffin’s shop in Chicago, now Miami? Yeah?

JAKAB: Yeah. Ken Griffin is a hedge fund manager. His holding company plays a role in this because it injected money into Gabe Plotkin’s fund —

RITHOLTZ: Right.

JAKAB: — after he lost a bunch of money. But it also plays a role in this because he is the major shareholder in a securities firm also called Citadel. That caused lots of confusion and lots of conspiracy thinking. That was a really big beneficiary of this. But what people don’t understand is that this was a burden to them, too, because it was a dangerous level of speculation and then very narrow set of stocks. And —

RITHOLTZ: Right. And you open a new account on Robinhood, you put $1,000 in, you buy $2,000 worth of stock. And if it drops in half, somebody is going to come up with that money. And if you don’t, someone else is on the hook. Now, they’re adding like half a million accounts a week? Some crazy number.

JAKAB: They’ve added almost a million in a day during that — yeah.

RITHOLTZ: That’s unbelievable. And yet, all this is algo-driven, all this is automated. There is no real adult saying, “We don’t have the capital to extend.” They basically just — it wasn’t until they got the founder of Robinhood, what’s the name? Tenev?

JAKAB: Vlad Tenev. Yeah.

RITHOLTZ: Tenev. At 3:00 in the morning, he gets a phone call, “We need $3 billion in three hours or you’re out of business.”

JAKAB: Right. 3:00 in the morning West Coast time.

RITHOLTZ: West Coast.

JAKAB: West Coast time so you —

RITHOLTZ: 6:00 a.m.

JAKAB: Yeah.

RITHOLTZ: Market is going to open in three hours. You need $3 billion, or you’re done.

JAKAB: Yeah. Even as hot as things were in early 2021, you don’t — people don’t drop $3 billion on you in three hours when they’re all asleep, right? So —

RITHOLTZ: But he managed to actually get — just get this done between lines of credit and some cash, and then restricting all these meme stocks?

JAKAB: Right. They had about a $700 million line of credit they drew down. They already had $700 million on deposit at DTCC. And then they said, “How about if we don’t allow our customers to buy any more of these, we’ll only let them sell?” And even then, they really bent the rules to get them in business. And that’s what people do.

RITHOLTZ: Because if they blew up, this — most of this stuff wasn’t systemic. But at that point, if Robinhood blows up 0– and maybe it’s not the great financial crisis, but there are waves that are going to — going to really have a negative effect.

JAKAB: Totally. And their customers were so angry at not being able to buy these stocks. What they don’t realize is had they been allowed to buy them —

RITHOLTZ: They would have gotten destroyed.

JAKAB: They would have gotten — not only would they’ve gotten lost a lot of money because their money would have been locked up for weeks, by which point —

RITHOLTZ: Right.

JAKAB: — you know, GameStop have lost —

RITHOLTZ: Right.

JAKAB: It would have lost 95% of its value. But you — everything would have been frozen, you know, for weeks or even months in Robinhood, right? So they would have been wiped out, the vast majority of it.

RITHOLTZ: So let’s bring this back to Keith Gill, who –when I — you’re going through the book and when you — when you look at the boards, he is described at separate times at the Reddit boards, as he’s a genius visionary. He’s just a guy who got lucky. He’s an idiot who left generational wealth changing amounts of money on the table. What was he really?

JAKAB: So he was a very unusual person to be in this group at all, right? But the fact that — so people, when they started getting excited about GameStop in the past of a short squeeze, then he was discovered. Then he became — he went from being this kind of laughingstock to being a celebrity, and his posts changed then too. And to his posts were — they were posts of memes and things like that. He was talking about Ryan Cohen on his — on his YouTube channel. People still didn’t know his identity. They didn’t know his identity until two Wall Street — you know, other people could figure it out.

I mean, like, you know, but until two Wall Street Journal reporters interviewed him and published the interview on the 29th, which is the day after trading was halted, 29th of January 2021. And it was a great interview with him, iconic picture, the pictures on my book.

RITHOLTZ: The head band, the whole thing, and literally in the basement.

JAKAB: In the basement, I spoke with the photographer who was there, taking the shots of him. And I spoke with them, of course, and there’s a lot of, you know, things that fell to the cutting room floor. So really fascinating story, all the kind of “This is the lair where he operated that you saw on the YouTube videos.” And he became a hero. And basically, what he did, what was — at that point, what he was doing every day was just once a day, after the market closed, he posted a screenshot of his E-Trade account, obviously not with his account number or his name. And —

RITHOLTZ: Right. Just the value of the options he had in GameStop.

JAKAB: And just the fact that he hadn’t sold and people were like, “If he’s not selling, I’m not selling. If he’s in, I’m still in.”

RITHOLTZ: And when this — this went from 50 to 100, back to 60, people gave him grief. And then it went to a million and then down to 500, and people gave him grief. And then it went to 2, 4, 10 million, and suddenly we were off to the races.

JAKAB: Yeah. And it’s called — it’s a concept called social proof. You know, someone is making money doing something. And you know, unfortunately, there are a lot of people on the Internet who have claimed to have or actually have made money doing something because they got lucky, you know. But the fact that someone — you know, it’s like when you turn on — if you ever can’t sleep and you turn on an infomercial, and you see some guy with like two blondes under each arm.

RITHOLTZ: In front of an audience.

JAKAB: In front of an audience. And a Bentley and his big house, it’s probably not really his Bentley or his house, but whatever.

RITHOLTZ: Or his blondes, right?

JAKAB: Right. You know, but that’s — you know, that is a very well understood concept. Like somebody and someone just like you, by the way, someone who — an ordinary guy who now doesn’t have to work and, gee, we used to have to worry about bills, Bob. But tell him we bought Joe’s system and now, you know, flip real estate and you got — we’re making $50,000 a week, you know. And so that’s what really hooks people is this sort of — if they did it, that I can do it too.

RITHOLTZ: And the logic of that always annoys me because I always want to say to the people, if this was so lucrative, why aren’t you doing it? And why are you selling the how to? You know, I get those in newsletters, “Hey, why don’t you just raise some capital from friends and family, and manage money this way if it’s so lucrative. But it turns out the value is in selling it to suckers, not actually the underlying.

Although that said, Gill ended up $3 million ain’t nothing. It’s a reasonable amount of money, even before taxes, and he still has what’s the latest filing? In terms of GameStop stock, what does he own? It’s around 100-plus boxes while recording this. —

JAKAB: Yeah.

JAKAB: — down from 460. But still, he’s got $5 million or $10 million worth of stock, right?

JAKAB: No, maybe more than that.

RITHOLTZ: Oh, really?

JAKAB: No. In the tens — in the tens of millions, I think.

RITHOLTZ: Oh, really?

JAKAB: Because it was $30 million as of April 2021 when it had fallen quite a bit. So I’d have to look it up. But I mean, it’s in the tens of millions, so he’s a rich man. I don’t know if he sold or not. You know, he — and by the way, just to say like, you know, there are people who sort of — who are out there using social proof for manipulation. I don’t think that he ever manipulated anyone. You know, he was actually investigated per se.

RITHOLTZ: Right. Right.

JAKAB: Only people investigated in this whole thing.

RITHOLTZ: And totally cleared, right?

JAKAB: And totally cleared. And I —

RITHOLTZ: He did. You know, he’s not only a CFA, he worked for a brokerage firm and insurance company in his career, I think. So he understood compliance. He understood what he could and couldn’t say. If you look at all of his postings, he just showed his, “Hey, here’s where this is today.” There was no, “Let’s take it to the man, let’s execute a squeeze, let’s do — it was just basically, I love the phrase, “I like the stock.”

JAKAB: And you know, if he had wanted — so you had Elon Musk come into this, and then other people, and a lot of opportunities come into this. If he had said on that Monday or Tuesday or Wednesday, or any point thereafter, shown up and had a screenshot of his E-Trade account and said, “Now, I own deep out-of-the-money options in XYZ company, everyone would have jumped into XYZ company.

RITHOLTZ: Right.

JAKAB: And he would have made a hundred times his money. He —

RITHOLTZ: Although that would have been investigated.

JAKAB: Maybe that would have been investigated, but it probably would have been okay because he’s not saying, “Hey, buy this.”

RITHOLTZ: Right. He’s just showing —

JAKAB: He’s legitimately showing, “Oh, yeah, I actually did own it.” All I did was tell people that I owned it and he would have been —

RITHOLTZ: Which we see on TV every day, people go on Bloomberg and CNBC, and they say, “This is why we own the stock. There’s nothing illegal about that.”

JAKAB: Nope. And I don’t think it would have been illegal in his case either, maybe he would have faced some slap on the wrist. But he could have made hundreds of millions of dollars. He could have made– he could have been one of the, you know, maybe not the wealthiest people in America, but he could have been, you know, close to a billionaire, I think, just by doing that a few times.

RITHOLTZ: Really? Wow.

JAKAB: Just think about it, right? I mean, just think through — pick some option in some obscure company and what X of your money — you know, he already had $50 million in — you know, in value. You know, if you would have made —

RITHOLTZ: Just roll that — just roll that into something.

JAKAB: Multiply that — multiply that by 520 twice.

RITHOLTZ: Right. I’m telling you guys —

JAKAB: And what number you get, it’s too hard.

RITHOLTZ: Right, right. Even 20x gets to a billion.

JAKAB: Yeah.

RITHOLTZ: The only issue would be does the SEC step in and halt the stock and prevent this from —

JAKAB: But it wouldn’t — it would have been the truth, I own this stock.

RITHOLTZ: Right.

JAKAB: And then just the reaction alone and you know, that’s the — you know, the less successfully is that what people are doing every day on TikTok, you know, saying —

RITHOLTZ: Sure.

JAKAB: — “I bought the stock and I think this” —

RITHOLTZ: While they’re still doing on TikTok, I got to get the sense that the finance influencers on TikTok, I love the couple. We only buy stocks that go up if — you know, it’s the old Will Rogers’ joke.

JAKAB: Yeah.

RITHOLTZ: If they don’t go up, don’t buy them. That’s how we support our lifestyle. I kind of have got — given the sense that here at the end of the first half of 2022, with the market down 20-plus percent, those influencers aren’t quite as influential as they previously were?

JAKAB: Yeah. I think the shine has come off a little bit from the bad financial advice, but, you know, it just never goes out of style and it comes back again and again. But yeah, they definitely have had become less influential. Of course, like anytime I put something — even if it has nothing to do with crypto and if you have this — like you keep saying Twitter and then like somebody replies to you, says, “Oh, I’m investing with” — it just looks some normal looking person’s picture. “I’m investing with so and so, my crypto coach. Like, you know, there’s just so much spam.

RITHOLTZ: That’s just bot spam, right?

JAKAB: Yeah.

RITHOLTZ: And I — you know, you should — if you don’t report and block those, you’re doing —

JAKAB: Oh, I do. I do every time.

RITHOLTZ: So I constantly do that.

(COMMERCIAL BREAK)

RITHOLTZ: Before we get to our favorite questions, my last question, so the meme stocks, they’re down about 50%, 60% since the peak, some even worse. Are we done with meme stocks, or is this just going to be yet another one of those things that sort of cycle in and out of favor?

JAKAB: So I think the meme stocks have chewed up a lot of people’s wealth and enthusiasm for the market. So I think it’s just going to be — you’re having kind of, you know, echoes of what you had originally. I don’t think that you could have what you had originally. But you’ve had — you’ve had some really dumb stuff go up. Like, you had Redbox Entertainment, that people have those —

RITHOLTZ: I hate the DVD.

JAKAB: Right. To sell the DVDs. Right. It was being bought for the equivalent of 64 cents and it went up to $15 just because — I don’t know why, you know, right?

RITHOLTZ: Right.

JAKAB: I mean — and stuff like that.

RITHOLTZ: Well, they obviously thought someone else would come along and pay more, right?

JAKAB: Right. It’s the greater fool theory to some extent, but it’s also like, “Lol, this thing is going up, I’m going to buy it.” And the serious person on TV said I shouldn’t buy it because it’s worth a fraction of it.

RITHOLTZ: Let’s show him.

JAKAB: So I’m going to show him and I’m going to buy more. And then there’s —

RITHOLTZ: Yeah, Revlon is another one. You mentioned Revlon. That’s a kind of crazy story because they were — was this before or after they filed for bankruptcy?

JAKAB: After, after.

RITHOLTZ: Like, Hertz, that’s just — oh, so all the equity holders are going to zero? How do I get me some of that?

JAKAB: Right. I mean, it just — it just boggles the mind, right? So you know, there’s no — I mean, I think the only way to explain it — I mean, obviously, there are people not well informed. But I think there are people who’s just nihilistic, who were like, “Ha, ha, look what I’m doing. I’m burning up my money,” or “I’m doing this thing where I should” —

RITHOLTZ: Really?

JAKAB: I think so. I think psychologically, that’s like — that’s also one outgrowth of the pandemic is people just saying, “Look at me, I’m doing this totally dangerous thing.” And maybe some of them are getting out. So a lot of the people I spoke with, who were involved in this, were more sort of the savvy, playing the greater fool, “I see this thing going up, and I think I’m going to be able to hop,” and they mainly did succeed.

RITHOLTZ: So I was looking at this entire Reddit WallStreetBets saga from GameStop to AMC, to Hertz and now Revlon as just a massive combination of bored millennials stuck at home with free trading, and a giant Dunning-Kruger overlay, meaning people are unaware of their own lack of skills. And what you’re suggesting is there’s a different dimension to this that burn the whole thing down, “What the hell, this isn’t working. This experiment isn’t working out here in America, just let it all burn.” Is that what you’re suggesting?

JAKAB: That is part of it. That definitely is part of it for some of the people involved, for sure. And they — they don’t mind making money in the process. It’s like the George Costanza, like just do the opposite of what, right?

RITHOLTZ: Okay.

JAKAB: And that’s what like, “Oh, the smart person on TV, the Spencer Jakab of the Wall Street Journal said don’t do that. I mean, I’ll write an article like pointing out — for example, I wrote an article about crypto and meme stock saying like this, “Some people have a $500,000 price target for AMC, or I don’t know, like a million-dollar price target for Bitcoin.” And I wrote about a —

RITHOLTZ: It’s only 50x.

JAKAB: Right. Yeah.

RITHOLTZ: It’s not an unthinkable.

JAKAB: Well, yeah, and —

RITHOLTZ: It’s harder from 20,000 than it is from 20, but still.

JAKAB: Yeah. But the thing that you have to realize — I’m going to give credit to Victor Haghani of Elm Wealth, who pointed this out. I mean, it’s kind of common sense. But he actually studied, you know, and kind of ran the numbers and did scenarios. And he said, “If you are really short, I think you really have a high degree of confidence.” Like I said, you just went back to the Kelly betting criteria.

RITHOLTZ: Right. That’s something, it’s a sports betting, right?

JAKAB: Exactly.

RITHOLTZ: The study, I love this part of the book.

JAKAB: Yeah. And so if you — if you’re really, really pretty confident in something happening, like, you know, you might be wrong, but let’s say you really are confident, you have reason to think you’re confident, you don’t bet all your wealth. These people are going all and people are like “I mortgaged my house. I’m out on the street, but I still am keeping my AMC because it’s going to 500k.” Like, if it’s going to 500k, how many — what do you need? Two shares?

RITHOLTZ: Right.

JAKAB: Two shares of AMC for 26 bucks? And then if you’re right, then you’re rich. And if you’re wrong —

RITHOLTZ: Who cares?

JAKAB: — and there’s not a 100% chance that you’re right, then, you know, you didn’t lose a lot of money. And so it’s like — it’s illogical.

RITHOLTZ: The 60% 50/50 bet, people end up going — even knowing it’s a loaded coin — I don’t know if this is the same stock.

JAKAB: Yeah. Yeah.

RITHOLTZ: So even though it’s a loaded coin, I think if I —

JAKAB: They’ll lose money.

RITHOLTZ: My college math recollection is that you should never bet more than like 4% of your stake because you can have a run of — even with a weighted coin, of like 8/10 in a row and then you’re busted. Even with a 60/40 coin, you would think how can I lose money? The vast majority of people completely go broke with that.

JAKAB: Yeah, which is crazy. Yeah. And there have been a lot of studies showing that. But — and this specifically, as I wrote that, you know, which I thought was like kind of a smart thing to point out to readers. It’s common sense thing.

RITHOLTZ: So you get the hate email.

JAKAB: And I get the — I get the hate mail, “Screw you, I’m still holding. I’m all in.” Like, okay, I just gave you —

RITHOLTZ: I love that. By the way, over the years, I have learned that the more vociferous the hate mail, the more correct I am because the reason people are so upset is you’re challenging a fundamental belief system that they haven’t thought through. And you’re essentially — I don’t want to say challenging their manhood, but you’re putting a fundamental principle that they adhere to at risk, and it’s confusing. And their own cognitive dissonance causes them to lash out. Maybe cognitive dissonance is the wrong word. But the angrier they get, it means you’re getting closer and closer to —

JAKAB: Totally.

RITHOLTZ: — identifying a truth that is very uncomfortable to them.

JAKAB: And I get these like, “You’re a shill.” Well, you know what, I gave up a very lucrative job on Wall Street to become a financial journalist, you know.

RITHOLTZ: You started out at Credit Suisse, you’re an analyst. At one point, you were ahead of EM Research, right? So for you to be a reporter at The Wall Street Journal, you’re taking a pay cut.

JAKAB: Oh, yeah. I try not to think about that whenever like the kids need braces and stuff like that, but yeah, for sure.

RITHOLTZ: So it’s not just — it’s not just that you’re a shill, you’re just a bad shill.

JAKAB: Right. Exactly. What kind of — what kind of a dummy makes a financial decision like that?

RITHOLTZ: Right.

JAKAB: You’re not going to —

RITHOLTZ: Just the —

JAKAB: Right? I mean —

RITHOLTZ: So let’s — before we jump to our favorite questions, there was one other study you mentioned that I have to talk about because I just love this. So the sports gambling, when people tweet their sports forecasts about what’s going to happen, the more specific they are and the more wrong they are, the more followers they seem to get.

JAKAB: Right.

RITHOLTZ: And the more specific, even if they’re wrong, they generate more Twitter followers. But people who put out these thoughtful, nuanced forecasts that turn out to be right, it doesn’t generate that buzz, that the certitude generates even if wrong.

JAKAB: And that’s a really important thing to understand about finance and life, generally.

RITHOLTZ: And social media.

JAKAB: And social media. And then I’ll just go one step further on that because, yeah, so basically, this study shows that people who are less accurate, but more confident, with just a lot of certitude, get a lot more followers than the people who wound up being right. But in this algorithmically charged social media, you’re not seeing both of those posts anymore, right?

RITHOLTZ: Right.

JAKAB: So you go on Reddit, which has a human algorithm. People upvote and downvote things.

RITHOLTZ: Right.

JAKAB: Okay. So let’s say, Barry, that you go on WallStreetBets and you have a very measured, long cerebral post about something, with some good information and insight. And then I go on there, and you say, “I put 5% of my portfolio into the stock.” And then I go on there, and I say, “I put 100% of my portfolio into the stock, all into out-of-the-money call options, mortgaged my house, did all this crazy stuff.”

RITHOLTZ: To the Moon.

JAKAB: To the moon, you know, rocket ships, I’m going to get a lot more attention. So now a third person goes onto there and says, “Well, I’m a young person who just — to open up their first brokerage account, I hear WallStreetBets is a place to go for advice.” Not only — it’s not like they’re going to see your advice and my advice. They’re only going to see my advice. They’re not going to see your advice, because yours is not going to get uploaded. Yours is boring nd mine is exciting. And so mine gets uploaded, mine is funny, and gets uploaded, and yours is invisible. And so this — that is different about social media today. That’s why, you know, people compare it to Yahoo Finance message boards, which I naively did. And this is different because you don’t see —

RITHOLTZ: So do I. You’re absolutely right. It’s not just that we’re manipulated by algorithms. The algorithms are manipulating our own biology and psychology.

JAKAB: Yeah.

RITHOLTZ: And so we were built for a different era, not right not this era.

JAKAB: Right.

RITHOLTZ: So on that cheerful note, let’s jump to our five favorite questions that we ask all of our guests, starting with tell us what you’ve been streaming these days, what’s keeping you entertained?

JAKAB: So I have never been a big TV watcher. And then during the pandemic, I guess I started more — kind of became more of like a family —

RITHOLTZ: All of us. Yeah.

JAKAB: Yeah. Family social activity, but I’ll only — except for — I’ll watch a football game by myself. But I don’t really watch things by myself. So I always try to like — if I can get — I have three sons. If I can get at least one of my sons and my wife to watch something with me, then I’ll watch it. It’s like a matter of negotiation. So the thing we just finished watching was “Inventing Anna.”

RITHOLTZ: Oh, really?

JAKAB: Which I really liked and I’m always just fascinated by —

RITHOLTZ: She’s kind of the high-end grifter, the socialite?

JAKAB: Yeah. Yeah. She’s the — Anna Delvey was her name and she — is her name. She’s still alive. And she basically convinced all these wealthy people to sort of finance her luxurious lifestyle and you know — and she just — she was a fake heiress, you know. And she almost got a bunch of money from some investment firms to buy a building and start a foundation, and all this crazy stuff. And it’s just — it’s just the kind of — I’m really always been interested in common. I want to watch — I want to watch “Super Pumped.” I want to watch “WeCrashed.” I’m trying to —

RITHOLTZ: I just started “WeCrashed.” It’s fascinating. And I love the book “Super Pumped” by your colleague. So that’s definitely on my list to see.

JAKAB: And then on the podcast, I’m more of a pod, go for a walk, listen to podcasts. I listen to your podcast a lot. Your — I’m a big fan of yours. I like Shane Parrish, Demetri Kofinas, Tim Ferriss. There’s a guy actually I heard on — maybe just a few months back on Tim Ferriss, who I’m really into listening, to Rich Roll, who’s into like doing ultra-endurance sports. I’ve just read his book after I had heard the podcast called “Finding Ultra.” It’s just a fascinating story about how he, you know, went from being in alcohol — still as an alcoholic but in recovery.

RITHOLTZ: Ultramarathon or — is that who —

JAKAB: Yeah. Like he did — he did five Ironmans in seven days, you know.

RITHOLTZ: Insane, just insane.

JAKAB: Yeah, in his 40s. So — and he’s one of the fittest men in America. And so I listened to a bunch of his podcasts now. So yeah, that’s the kind of thing that I listen to. And then I like Hardcore History a lot, Dan Carlin.

RITHOLTZ: Yeah. That’s an interesting — definitely an interesting pod. Let’s talk about some of your mentors who helped to shape your career.

JAKAB: I feel like I should mention somebody at the Financial Times, The Wall Street Journal, and I’ve had a lot of great editors. I have a great editor now, a great boss, I should say, who runs the Money and Investing section. But I’m going to mention somebody who I spent a decade in finance and my boss for the longest period of time, was the guy who really influenced me, taught me a lot. I think I’ve worked harder for him — his name is John Conlin — than anyone I’ve ever worked for. I worked so hard.

RITHOLTZ: I know the name, for sure.

JAKAB: Yeah. He was — he became CEO of Robertson Stephens later.

RITHOLTZ: Okay.

JAKAB: And yeah, he’s a really good guy and just — because now I manage people. I manage a global team of columnists that’s heard on the street. And you know, I think — I think about the good bosses that I’ve had, and then you know very much about him, about like what they were like with me, and how to be — how to be decent to people, how to get people excited, how to get — make people really love coming into work. I mean, I loved working for him.

And you know, I just always felt like he had my back, and I learned a lot from him. But I mean, you know, they’re — not that he’s not smart. They were smarter people I encountered in my time in finance, but I just loved, you know, kind of being, you know, under his wing. I was really sad, you know, when he left and then he went to go work, you know, around Robertson Stephens and was tempted to go there really just because of him. So he had a big influence on me.

RITHOLTZ: Really, really interesting. Everybody’s favorite question, tell us what some of your favorite books are and what are you reading right now.

JAKAB: So I just recently finished Bill Browder’s book, the second book.

RITHOLTZ: Which one? I just read —

JAKAB: “Freezing Order.” And “Red Notice” was his first book. And actually, because I was — I worked in emerging markets, I knew Bill a very little bit. When he was — he’s a little older than me, so he got started a few years before me in this wild east of Eastern Europe, before he founded his firm Hermitage. But his book is a very important book to read now, very entertaining book, both of those books, but especially “Freezing Order”. You don’t have to read the first one if you read the second one.

RITHOLTZ: Right.

JAKAB: About the torture and murder of his lawyer, Sergei Magnitsky, the Magnitsky laws that he’s passed just sort of seize ill-gotten gains from human rights abusers around the world, not just in Russia. And this guy is — he is such a brave man. You know, people have been murdered by Vladimir Putin. He’s an outspoken advocate for justice in Russia. Basically, he just shows you what Vladimir Putin’s Russia is, which is a — it’s a mafia state with —

RITHOLTZ: Thugocracy.

JAKAB: Thugocracy with nuclear weapons, and poison, and acts with impunity around the world. I highly recommend that.

RITHOLTZ: If “Red Notice” wasn’t a nonfiction book, it wouldn’t get published as just too —

JAKAB: Yeah.

RITHOLTZ: If it was a novel, it would be — this is too ridiculous.

JAKAB: Yeah. I don’t think you’ve had him on your show.

RITHOLTZ: He’s coming up when he’s okay for later this year.

JAKAB: Okay, great. Yeah.

RITHOLTZ: I’m plowing through the new book which is, you know, horrifying.

JAKAB: It is horrifying. It’s — he is — he is a brave, brave guy.

RITHOLTZ: Yeah. To say the least. And any other books you want to mention?

JAKAB: So I’ve read —

RITHOLTZ: Well, you mentioned “Bad Blood.”

JAKAB: Well, “Bad Blood” is great, great, great book. I mean, you —

RITHOLTZ: Another book that’s nonfiction.

JAKAB: I read a — I read a book recently by one of your recent guests about Peter Thiel, “The Contrarian” by Max Chafkin, which I liked that book a lot. That’s a —

RITHOLTZ: Yes, really interesting. Really interesting. I enjoyed that also.

JAKAB: Yeah. I highly recommend that book.

RITHOLTZ: Such an interesting character.

JAKAB: Totally. And such a complicated character.

RITHOLTZ: Yeah.

JAKAB: So yeah, I read a lot of things. I have a lot of, you know, friends and colleagues that write books, and so I ended up reading — you know, I feel like I have to read them, and so I read a lot of those. But I read a lot of history and biography too. Yeah.

RITHOLTZ: That sounds really interesting. What sort of advice would you give to a recent college grad interested in a career in either finance or journalism?

JAKAB: Well, I’ll give you finance. The way that I got into finance was totally by accident. I was going to — you know, my — I got an application to program at Columbia University, that was not a finance program. And I got it by accident, mentioned it to my undergraduate advisor who’s still — she’s still — she teaches — (Carol Savitt). She still is on faculty at MIT and she told me like, “Oh, yeah, I went there and you should do that. She kind of saw that I probably shouldn’t be in academic because I was planning on being. I didn’t really have the kind of temperament for it.

And first or second day at this program at Columbia University, I met a kid who’s now 56-year-old kid, who told me he had been an investment banker. And I was like, you know, I just didn’t — my parents were immigrants here and they’re 20s. Nobody we knew was on Wall Street.

RITHOLTZ: Right.

JAKAB: I was like, “Excuse my ignorance, what’s an investment bank?” Like, you know, I have heard the word, but I just — can you just explain to me like a dummy what it is? And — but I was also very anxious about money. You know, if you — if your parents come here with nothing —

RITHOLTZ: Sure.

JAKAB: — you — that tends to be the case. And he’s — the first thing he told me is how much he made, which was — that got me right away.

RITHOLTZ: Eye-popping

JAKAB: Yeah, eye-popping in the 80s, you know, working for Bankers Trust. And I said, “How do I do that?” And he said, “Well, you know, you’re — I was bilingual and Hungarian. And I’ve studied German and Russian.” He said, “They’re going to privatize everything in Eastern Europe. The iron curtain has fallen. You know, they’ll hire you.”

RITHOLTZ: You’re ready. You’re right there.

JAKAB: “They’re going to privatize everything. So just take as many finance classes as you can at Columbia Business School, you’re allowed to in accounting, and then you’ll get hired.” And he was right. And I like to finance classes. I like finance. I find finance interesting, I never thought that I would, and I really was — I’m fascinated. I’m still fascinated by it. I think it’s the most fascinating thing. It’s like a — it’s like my sports, you know, like just watching what happens.

All these people, sort of this 24/7 365-day a year struggle over money and people, computing power, and brains and all this stuff. And so I liked it. But the entire time that I worked in investment bank, and I was — I think I was the youngest managing director in the equity department in my bank eventually. You know, I felt like I’m just pinching myself, this can’t — the amount of money that they’re paying — they’re paying me like four or five times my professors, you know, who are much smarter than me.

RITHOLTZ: Right.

JAKAB: This makes no sense.

RITHOLTZ: Something is wrong here.

JAKAB: And I always like, okay, I’ll be — maybe one more year. And so — and then in the end, I quit to become a writer. And you know, which is I’m glad that I did it that way because I think people — here’s the lesson. Okay. So that’s the attitude you should have is like this is just totally unrealistic. The amount of money you’re being paid if you’re a young person in finance, if you want to — need to make money or want to make money, or want to have that cushion, treat it like a cushion. Don’t go out. And you know, be frugal, treat it like a stupid, stupid thing that you’re being paid so much, because it is stupid you’re being paid so much.

And don’t get your ego wrapped up in it. Because I saw so many people I used to work with, eventually, you know, just have to go to a less prestigious, less lucrative job, and it kind of really, really hurt them, their egos. And don’t ever think that you deserve that amount of money, you know, and —

RITHOLTZ: A little humility goes a long way.

JAKAB: And just — and that money gives you freedom, you know, so use it. I use the freedom to do this dumb thing, which I’ve been doing for almost 20 years now, and I’m glad I did. It worked out. I’m glad it was in that order. You know what I mean?

RITHOLTZ: And our final question, what do you know about the world of finance and investing today you wish you knew 30 years or so ago when you were first getting started?

JAKAB: You know, I wish that I had just agonized over things a bit less in terms of investing my own money. You have a colleague Nick Maggiulli who wrote a great book recently.

RITHOLTZ: Yeah. “Just Keep Buying.”

JAKAB: “Just Keep Buying,” and that is really the mantra, especially when you’re in your 20s and 30s, and stuff like that.

RITHOLTZ: It’s unthinkable when you’re that age. And by the way, Nick is barely 30. I don’t even think he’s 30 yet, which is astonishing how much wisdom that book has for someone as young as him.

JAKAB: I wish that I’ve had that wisdom. You know, because I’ve done fine. But if I had just basically just done like literally those three words, “Just Keep Buying. Don’t worry about it. Don’t keep checking. Don’t worry.” You know, there have been what, four bear markets since I’ve, you know, been in — like old enough to have any money to invest. And —

RITHOLTZ: If this — if you’re counting, this is the fourth one. Yeah, absolutely, 2000, ’08, ’09, 2020, and this.

JAKAB: Yeah. And then there — yeah. And then I thought that. Okay.

RITHOLTZ: You had a couple of pullbacks in the ‘90s, but nothing 2000 and so on.

JAKAB: But I mean, I was always like, you know, trying to handicap things and worry about things.

RITHOLTZ: Right.

JAKAB: I just really shouldn’t have. You know, I mean, that’s — it took care of its own over the decades.

RITHOLTZ: You know you’re always trying to be too smart.

JAKAB: Yeah. Totally. So that’s very good advice.

RITHOLTZ: Really good stuff. We have been speaking with Spencer Jakab, Wall Street Journal reporter and editor, and author of the book which I have to get signed, “The Revolution That Wasn’t GameStop, Reddit and the Fleecing of Small Investors.” If you enjoyed this conversation, well, you can check out any of the previous 400 or so we’ve done over the past eight years. You can find those at iTunes, Spotify, or wherever you get your favorite podcasts.

We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. Sign up for my daily reads at ritholtz.com. Follow me on Twitter @ritholtz. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. (Sarah Livney) is my audio engineer. Atika Valbrun is our project manager. Sean Russo is my head of Research. Paris Wald is my producer.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

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