JEFF PRESTRIDGE: This Reddit war may end in tears

JEFF PRESTRIDGE: As an advocate of investing, it is fantastic that small investors have taken on hedge funds – yet I fear that it could all end in tears

Hedge fund managers are not everyone’s cup of tea – indeed no one’s cup of Tetley’s, bar their clients and loved ones. 

Usually clever and always seriously rich, they often make their money destructively, by betting on listed companies’ misfortunes through a process called short-selling. In other words, they make profits when a company’s share price falls. Yes, all pretty vile although all perfectly legal. 

Often, their actions trigger corporate failure although they will argue rather convincingly that they are only hastening the inevitable. Bad businesses, they say, deserve to fail, be bought out or taken over – and they are merely quickening that process. 

Keyboard warriors: Many investors, including some in the UK, have been enthused by what has been achieved through Reddit

Keyboard warriors: Many investors, including some in the UK, have been enthused by what has been achieved through Reddit

But it’s an activity that reaps them rich – indeed obscene – rewards. No wonder, they are often described as financial pariahs and vultures. 

So it has been with a smile that I have watched in recent days an army of retail investors – most based in the United States – take on some of these reviled hedge fund managers and win. 

By buying shares en masse in companies that hedge fund managers have short-sold, these private investors (connecting through social media site Reddit) have managed to drive up the prices to such extraordinary levels that a few short-selling managers have run for the hills, suffering massive losses along the way.

On the other hand, some private investors have made extraordinary profits, although most are profits that have yet to be crystallised. 

The focus of the action has been around GameStop, an unremarkable US video games retailer that had attracted the attention of short-sellers. 

Its share price at the start of the year was just above $17.25. Last week, it broke through $480 as private investors piled into it before falling back as brokers in the United States started to curb private investors’ dealings in the company’s shares. 

Restrictions that drew stinging criticism from some US politicians who believe it is the short-sellers whose activities should be curtailed. 

As a strong advocate of stock market investing, I think it is fantastic that small investors have taken on the hedge funds – and for the time being have won. Retail investor empowerment is as powerful a force as short-selling by multi-billion pound financial vultures is a destructive one. 

Yet I fear that it could all end in tears. Many investors, including some in the UK, have been enthused by what has been achieved through Reddit. 

They have resultingly opened share trading accounts – through the likes of online platform eToro – in the hope of making quick profits from other companies where there are short-sellers, but through collective buying they may be able to drive the share price up.

But investing – in my eyes at least – is not gambling or making short-term profits. It’s about investing for the long term in the hope of generating a return better than that from other assets such as cash, property, bonds and gold.

The Reddit phenomenon is all rather reminiscent of what happened in the tech stock market boom of the late 1990s when investors in their millions piled into technology stocks in the hope of making big bucks, only for the market to come crashing down in early 2000, leaving most of them nursing huge losses. 

From an investment point of view, I am more enthused by the analysis that fund manager SCM Direct put together last week on generating investment returns that exceed inflation (real return). 

It looked at the annual returns delivered by the FTSE All-Share Index over the past 50 years and then compared them against inflation and other assets such as gold, house prices and cash. 

The only asset that provided significant real returns, irrespective of the prevailing rate of inflation, was the stock market. Gold only really comes to the fore when inflation is rampaging (above six per cent) while house prices thrive in periods of low inflation (below three per cent). 

Of course, the past is no indicator of the future, but investment experts Research Affiliates believe that with inflation in the UK set to increase, it is UK shares that will again provide investors with solid real returns. 

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