Episode 76: Gamestop, Robinhood, and Taxes

Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:
Welcome to the WealthAbility Show where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host founder and CEO of WealthAbility. So the big news at the end of January was not the trial of a former president, was not the coronavirus, no it was trading, it was the Grassroots Traders versus Wall Street an the epic Robinhood, AMC, GameStop trading frenzy is the best way I can put it.

Tom Wheelwright:
And a lot of people asked me so, what's really happening and I'm very lucky because today I have two special guests, Andy Tanner who's the author of Stock Market Cashflow which is a Rich Dad Advisor book and a fellow rich dad advisor with me and a good friend of mine and my business partner in software development, Ryan Husk, who is a young entrepreneur in Silicon Valley and so, who is in the middle of all this.

Tom Wheelwright:
So this is just too much fun to not do a podcast on. And really, I think there are a lot of lessons to be learned, and so what will come, just like we always do on the WealthAbility Show, we'll talk about lessons that… Things to learn about this, not just that what actually happened, but what can we learn and is there a way we can actually figure out what we should be doing when we look at things like this? So Andy if you just give us a quick little background on what you're doing up to these days.

Andy Tanner:
Sure. Well, first off, thanks Tom for having me and Ryan, it's really good to see you. I've known Tom for many, many years, he's not just a teacher of mine but he's also my accountant so I'm a client and Ryan and I we've known each other. How long have we known each other Ryan?

Ryan Husk:
It's been like five or six years, I think or-

Andy Tanner:
At least.

Ryan Husk:
Yeah. It's-

Tom Wheelwright:
Oh no, it's been longer than that because I've been married six years.

Andy Tanner:
Right.

Tom Wheelwright:
And if you recall Ryan, you were the one-

Ryan Husk:
That spilled the beans.

Tom Wheelwright:
…. spilled the beans on my engagement to your mother. So there's another disclosure is I'm married to Ryan's mother. So I think it's been probably seven or eight years you guys.

Ryan Husk:
Wow.

Andy Tanner:
[crosstalk 00:02:50].

Ryan Husk:
It's gone by really quickly.

Tom Wheelwright:
We are getting old Ryan.

Ryan Husk:
I know.

Andy Tanner:
So yeah, just a little bit about me, Tom covered it. My book is Stock Market Cashflow, I've been a Rich Dad Advisor for many, many, many years. Robert Kiyosaki has taken Tom and I very gracious all over the world together we've had the chance to teach together. So, my phone's been blown up for sure, people sense, is there opportunity here? Is there not? And there certainly is, it's a high risk opportunity, some people got in, got out, so we'll talk about it.

Andy Tanner:
I think the thing I can maybe help people is to understand what happened. And what's going to happen, I've no idea, but I think I can opine on it, but it is a interesting story. So that's-

Ryan Husk:
You don't want to try and read the tea leaves?

Andy Tanner:
No, no, I just-

Tom Wheelwright:
Thanks Andy. So Ryan, tell us a little bit about what you're doing and where you are.

Ryan Husk:
Yeah, absolutely. Thank you so much for asking me to join you guys. Andy, it's always so nice to see you. Tom, same with you of course. So a little bit about me. I'm based in the Bay area in San Francisco, I am an entrepreneur, I am an advisor for 500 Startups with products and partnerships and then I'm also an entrepreneur in residence for the Startup Growth Lab.

Ryan Husk:
And then I'm about to start a permanent role with Twitter doing strategic partnerships as well, so my area of focus is typically product development and partnerships in the tech field and I'm an avid Robinhood retail investor they would say, but I did get my first education directly from Andy. So everything that I've done, mistakes or not, most of them have turned out pretty well and I can thank Andy for a good foundation for that.

Tom Wheelwright:
Awesome. So let's get right into it, Andy. Can you just… And Andy's going to share a screen so if you're listening to this, I encourage you to go and watch it on YouTube as well. Andy's a really good at describing what he's drawing, but Andy basically tell us what happened and then maybe explain not just what happened, but what might've happened to certain individuals and we'll let Ryan pipe in on what happened in his…

Andy Tanner:
So to understand what happened, we start with understanding what a short position is, that's jargon, right? We have long positions and short positions. And even though I might mortified in intimidated drawing a financial statement with an accountant here in the room, I'm going to do my best to describe it this way.

Andy Tanner:
We have income and we have expenses and that's opposite. You might even look at that as opposite. Income is the opposite, income is money coming in and expenses is money going out. Not good or bad, just the opposite. We have assets, those are things that we own and then we have liabilities and those are also opposites. And what's really interesting is to put something in this column, as an asset you would buy and that's what puts something here. And if we want to put something in the liability column, one common way to do it is to borrow.

Andy Tanner:
And what's really interesting is, I talk a lot about cash flow, but if we just talk about net worth for a little bit or equity, if I put something, this is fun education I think Tom, if I put something in this column and it increases in value, my net worth would increase. And if I put something in this column and it decreases in value, guess what? My network will increased.

Tom Wheelwright:
Right.

Andy Tanner:
And I think Tom, that, that is worth talking about this all by itself, right? If there's any good that came from all this Reddit stuff and all the hedge funds getting their butts kicked, it's that someone may be even for the first time watching this, “Oh my gosh, there's two ways I can increase the value of my balance sheet. I could either buy things that I believe are going to appreciate in value or I could borrow things that I believe are going to go down in value.”

Andy Tanner:
Now, when you put numbers in this, people start to get confused but if you just look at it conceptually, it doubles my opportunity in my life. I say, “Hmm, I'll go hunt for things I'm thinking go up in value and I'm going to go hunt for things that go down in value. I'll buy the things that are going up, but I could also borrow the things that are going down.” So if we're going to take a short position, and it would have four steps to that.

Andy Tanner:
The first thing I would do is I would borrow something that I felt was going to go down in value. In this case, there were many, many, many hedge funds that would borrow the stock. So if I'm a hedge fund over here and I'm just over here happy for the moment and there's the brokerage over here, let's just say, and there's clearing houses and a lot of stuff here, but let's just call it a brokerage, and I say, “Hey, I would like to borrow some shares.” Let's see, just do one share of GameStop to make it simple. Is that okay Tom if we use-

Tom Wheelwright:
Perfect.

Andy Tanner:
So here's a one share of GameStop. So now this hedge fund owes one share of GameStop and that's, it is. Now GameStop let's put their chart up here and let's say GameStop is trading at $10 a share just for fun, $10 a share is worth trading and they believe it's going to go down. That's their imagination that is going to go down. And so what they do is, they'll sell it to an investor and they sell those shares for cash. So on their balance sheet, they would have cash that hold, but they still owe that share.

Andy Tanner:
Think of when you have a mortgage, you get a check, you can get cash two ways. You can go earn it in your business or you can borrow it, but either way you have it in your hand. And if you take that cash and buy a house with it, you still owe the money to the bank. Well, here, even though they sold this or they trade away, they sell it away, they still owe the brokerage shares.

Andy Tanner:
Well, in order for them to do this, they not only have to have the cash they got for it, but they have to have some extra just in case. Hopefully for the hedge fund they would say, well, now if it goes down to five dollars, so let's pretend it went down to five, now they could buy back at five so they send five dollars out, they brought 10 in, they send five out and then they can return the shares to the brokerage, right? They get the shares back and I'll be darned when it's all said and done, but they just made five bucks. So-

Tom Wheelwright:
So Andy, if I can stop you there just for a second, so most people think about the stock market is, well, the goal is to buy low and sell high-

Andy Tanner:
Then you did.

Tom Wheelwright:
… [inaudible 00:10:08] difference here is what they're trying to do is sell high and then buy low. So it's really just-

Andy Tanner:
That's right.

Tom Wheelwright:
… the order of things. It's not that it's different in what you would do otherwise outside maybe the borrowing, but in any case, you're still buying and selling, you're looking at hopefully selling it higher than you're buying it for.

Andy Tanner:
That's right. You're still buying low and you're still selling high, it's just in the opposite order because it's going the opposite direction and the only way to do that is to borrow, in fact, people that aren't real estate actually do the same thing. They borrow, they take the money, trade it for the house, trade it back for rent and pay their payment, right? One, two, three, four. So a very, very simple. Well, this is all fine and dandy if it goes down but what if it goes up? What if it goes up to $20 well, that's a problem because they always share.

Tom Wheelwright:
Well, it's a problem for the hedge fund, right?

Andy Tanner:
It's a problem for the hedge fund. They always share, they only receive $10 when they sold at 10, right? So if it goes to 20 and they have to buy a 20, if they have to buy back at 20, they're going to lose $10. And so there's something called a margin requirement. REQ a margin requirement that says, “Hey, you have to have enough cash on hand, hedge fund to prove to us that you can keep your promise, that you can buy that back and return what you've borrowed from us. We want our shares back.”

Andy Tanner:
And so if the price goes up, they'll get something called a margin call and they'll call the hedge fund, say, “Hey, look, this thing's going up, you have a choice and this is an ultimatum. You can either A, go deposit more money in your account to cover this margin requirement or you're going to have to liquidate these positions at this $20 loss what do you want to do?”

Andy Tanner:
And that puts people in what's called a short squeeze sometimes. The hedge fund might believe, you know what? Maybe this rise is temporary, eventually go back down, let's just dump some more money in for margin requirement but what if it goes to 30? And what if it goes to 40? Well, here's what people really ought to know about a shorting a stock is it's extremely risky and here's why, if I enter a position and I say, “You know what? I think I'll buy it right here and I will enter a position here and I'm going to own the stock so I'm long, I'm going to own the stock.” Then I might have a target and it could be in the infinite how high could go, it could go any amount of high height, but if it goes down, my max loss is zero.

Andy Tanner:
Well, if I enter a short position, it's just the opposite. If I enter a short position, which means I've borrowed and sold, which means I've borrowed and sold my stock, I need to wait for to get it back, now my upside is to zero, but my downside is infinite. And so there's more risk in a short position because as that stock climbs, there's no ceiling on how much money they can lose. So as GameStop began to go to $20 and 30 and 100 and 200, these hedge funds were getting margin calls saying, “Look, you need to prove to me that you can buy it at 200 and give me my shares back. You need to prove to me that you can buy a 300 and give my shares back. You need to prove me we can buy a 400 and give me my shares back.”

Andy Tanner:
And as it kept going, they were in what's called a short squeeze. Well, eventually they had funds run out of money and the broker says, “Sorry, we're going to force the sale.” So they got to take the hit or they're forced to sale and that's why these hedge funds lost. And in my opinion, I'm just going to pine here, Tom they deserved to lose-

Tom Wheelwright:
Well, they did. And here's the way I like this Andy. So the word hedge, right? Let's think about that word, right? The whole idea, you hedge your bet. A hedge fund by definition should never lose massive amounts of money because the whole point is, that they've hedged their bet-

Andy Tanner:
Right.

Tom Wheelwright:
… so that they're hitting a lot of singles, but no home runs. And then they don't strike out very much either, right? I mean, that's basically the way I look at it and that's really all this going on. And if you have a hedge fund that doesn't hedge its bets I mean, to me, it's not really a hedge fund, it's just a gambler.

Andy Tanner:
Yeah. And they really were a little greedy, trying to have a lot of risk. This is nothing new, there's an interesting story of Herbalife where Bill Ackman took a short position, made a lot of press and hey, during the illegals pyramids game, the STC shut him down and really wanted to go after him and Carl Icahn says, “I don't like really like Bill. I got deep pockets. Maybe I'll start buying the stock.” So Carl Icahn started buying Herbalife and [inaudible 00:15:09] Bill Ackman, sweat in it and pretty soon, Carl won, and he said, “Hey, you got to cover your shorts.” Here's where Ryan, we can shift to him and talk about maybe the Reddit group, because these guys, either one or two things happened and I'll let Ryan fill me in because I wasn't on the Reddit border, I wasn't reading it.

Andy Tanner:
But my feeling is, they would say, okay, these hedge funds have put themselves in a very vulnerable position. GameStop had a massive short interest. I mean, one of the top, if not B top in the market, their fundamentals were very, very weak, they had a little bit of cash, well, quite a bit of cash, but they were having innovation issues. Are they going to be able to not be the next blockbuster who fell victim to streaming Netflix? And so one story is, these Reddit guy says, “Well, we like our little GameStop. We don't want it to go the way of blockbuster is, let's buy and own it and save it, shareholders.”

Andy Tanner:
The other story would be someone saw these hedge funds were way overextended and they're like, “Let's go buy the heck out of this and stick it to them.” So which one of those is true? I don't know. I'll leave that to Ryan to tell me because I wasn't on the Reddit board.

Tom Wheelwright:
Thanks Andy. That was a terrific explanation-

Andy Tanner:
[crosstalk 00:16:28] tell you what a short is and what happened to these hedge funds-

Tom Wheelwright:
… that was a trivial explanation for short. And really interesting because when I look at this, we can apply this in our investing lives because we do this all the time, we just do it in a different order or we might do it for example with real estate where we're borrowing cash and if the cash goes down in value, then we make money on the borrowing side and we also make money on the investments.

Tom Wheelwright:
If you think about this, this is why people say that real estate is such a good inflation hedge because it does multiple things and one of the things it does is it bets against the dollar, okay? So let's let Andy walk through.

Andy Tanner:
So I'll use a little different language here rather than sell because I think it's even better. It's called an exchange, right? It's called a trade, the Chicago board of trade, the New York Stock Exchange. Let's call it a trade and what we really do is we borrow, we trade it or sell, when we can say that's a sell here, we trade back, which is a buy and then we return whatever it is that we bought.

Andy Tanner:
And it can be a stock, it could be a cup of sugar, it could be your neighbor's lawn mower, it could be an iPhone, it could be anything. So this is interesting and real estate. The first thing in real estate you do is you borrow cash. Maybe you borrow $100,000. The second thing you do is you trade it for a house, right? This house in here. So you're selling your cash when you buy a house, it's really just a what? A trade. You're trading what you borrowed for a house.

Andy Tanner:
Now I got to get the money back sometimes so I can either sell it or I could get rent, which now I've traded back. I've got the money back and then number four is, what am I going to do with number four? I'm going to return this when it's worthless because 30 years down the road, those dollars are worth much less. In fact, that's why banks have to amortize. The banks-

Tom Wheelwright:
But the return here, is paying back the mortgage, right?

Andy Tanner:
That's the payment.

Tom Wheelwright:
That's the amortization of the mortgage.

Andy Tanner:
It's your payment. And if they didn't have metricized, they'd amatorize, they lose every time because usually after 30 years, those dollars are much less valuable when they go back to the bank at the end of that 30 years than they are when you bought them. So as a trader, I don't see real estate so much about the house, I see it for the beginning of what borrowing cash, trading cash away for a house, getting cash back with rent and then returning it to the bank.

Tom Wheelwright:
And Andy, to go to your earlier point, your net worth goes up as the house goes up-

Andy Tanner:
That's right.

Tom Wheelwright:
… right? And your net worth goes up as the value of cash goes down and that's called inflation.

Andy Tanner:
Yeah. It's pretty cool because it's really a bet on inflation because this is going to be fixed if you're smart, probably fixed, right? And so let's see what happens if the dollar goes down. Well, first of all, the debt gets paid down anyway, but the value of that debt goes down-

Tom Wheelwright:
Right.

Andy Tanner:
Your asset prices going to go up even though the square footage is the same, the number of shares you own is the same but the price goes up. The square footage of the home goes up, the ounce of gold is the same but the inflation makes it go up just takes more dollars to buy it. Rent goes up, this is fixed and of course, your net income or your cashflow would also go up.

Andy Tanner:
So look at this, if you're short the dollar, rents go up, asset price goes up, debts value goes down, cashflow goes up. That is the formula for investing and the federal reserve says, “We have a goal of 2% inflation.” If they achieve that goal over 30 years, that's not a bad investment right there.

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Tom Wheelwright:
Everything from turnkey rental properties to mortgage financing, to property management, visit their website to learn more and download your free copy of the ultimate guide to passive real estate investing at turnkeyrealestateinvesting.com. That's turnkeyrealestateinvesting.com. So Andy true story, so several years ago, you and I, you'll know who I'm talking about, I know you with the gold guy, right? And he said, “Best inflation hedge.” And I said, “Help me understand how it's better than real estate.” And he could not explain that. And I'm going, “Because-

Andy Tanner:
No, you're right.

Tom Wheelwright:
… it's not.” Because your debt actually is very proportionate where gold is swings, wild, lays, manipulated, et cetera but your value or cash absolutely changes exactly proportionate to your inflation. And on top of that, you're getting rent and your rent's going up and then your real estate going up and the argument we had was, he said, “I'm going to just let the gold go up and then buy real estate,” and going, “By the time…” No, you're losing that way. Just the opposite, what you should be doing is, you should be buying all the real estate now and then when all things go up, then buy gold.

Andy Tanner:
That's sell your real estate by the gold.

Tom Wheelwright:
Exactly, exactly.

Andy Tanner:
I'm a big fan of gold and I own-

Tom Wheelwright:
As do I, but I own it primarily as a safety net.

Andy Tanner:
If I sell my gold for a $100,000 an ounce, that means bread is $200,000 a loaf, right? I mean-

Tom Wheelwright:
Right. Exactly.

Andy Tanner:
If gold goes up, stocks are through the roof, real estate is through the roof and food, clothing, shelters through the roof so-

Tom Wheelwright:
Right. I look at it as if I'm selling my goal, I'm in trouble.

Andy Tanner:
Yeah. We're-

Tom Wheelwright:
It's really a store of value. So, Ryan, all right. So back to, Reddit, to Robinhood, to GameStop, tell us what happened from your stand, you were in the middle of this as an investor, I know you're on social media a lot, you're watching the stuff, this is your profession anyway, so tell us what happened from your perspective, just from your perspective.

Ryan Husk:
Well, so I think Andy asked two questions was like, are people rallying around this nostalgic brand because they think there's more value here or are they trying to stick it to Wall Street? And I think the answer to his question of which one it is, the answer is yes, both of those things. So the first-

Tom Wheelwright:
That's what I suspected.

Ryan Husk:
… I think GameStop is a brand that people recognize that a lot of people who are at the age of, that grew up playing video games are now playing the Wall Street game, especially on apps like Robinhood. What's been very interesting is that there's been an opportunity to take education and implement it in a way that allows people to play in the stock market when they couldn't do it before as easily and Robinhood is absolutely one of the forums where people have really taken advantage of being able to do that especially during the pandemic, when there's a lot of free time and a lot of people on their phones.

Ryan Husk:
So Reddit has a number of subreddit so communities where people talk about trading, one of them being WallStreetBets and WallStreetBets is the subreddit that has definitely been the topic of controversy. And I think that a lot of people saw how much GameStop was being shorted. And Andy, I think you're right where it was one of the most shorted stocks.

Ryan Husk:
And it was very much being treated as if it was an insolvent company, as if they were already bankrupt and that wasn't necessarily true. I think GameStop actually, is still one of the few places where you can get a lot of both physical and digital content, this year PlayStation and Xbox, both released new gaming systems and that's the first time in like five or six years maybe, GameStop was one of like three or four retails, retailers that were able to provide it in large quantities. So it still has a relevant place in culture and then retail.

Ryan Husk:
And I think the GameStop was looking at changing their business a little bit, being more experiential, creating really strategic partnerships, looking at online content and a lot of people were interested in that. Like many businesses, games, health was obviously affected by COVID because they were still a majority retail company. And so anything that's based in a mall or something like that is going to be really challenging for the business to continue to succeed.

Ryan Husk:
So if you're looking at the price of game stock earlier this year, where it was like at six dollars, that's probably thinking about the market and pricing probably considerably undervalued. So it started to gain some interest because six dollars for a stock that stock like GameStop, I think, is a pretty good deal. At some stage, there starts to be this little bit of a rallying around GameStop and through the community people are talking about, they're doing research, you have people within the community who are certainly amateurs, but you also have people in the community who make their living doing trades and sharing their wisdom on Reddit the same way that you might find content that you guys create on Facebook, right? It's a platform for people to share their knowledge.

Ryan Husk:
At some point there began to be more and more institutional investors, shorting game stock and you started to see this and it very truly became like, “We're going to push against this, we believe in this company, we want to support this company.” And as much as the stock market and the economy, we like to think of them as very structured, but they're truly very emotional and reactive in a lot of ways to what's going on in the current time and place because there are people behind that.

Ryan Husk:
And so you started to get people behind, Reddit who were really, really frustrated that the stock that they're investing in, they believe in, was getting pushed down because of the institutional investors that wanted to short it because they thought it would go down and in some ways it serves a self-fulfilling prophecy. If you get enough institutional investors shorting the stock, it will go down.

Ryan Husk:
So they started to push back and they started to get people together. WallStreetBets is one of probably several dozen communities on Reddit that has retail investors involved and they decided to organize. And that's something that's really interesting and it's like, the only thing I can think of from my limited financial historical knowledge is, it's the reverse of a run on the banks, right? Like everyone instead of going saying, “Give me back my money,” they were saying, “Take my money. I believe in this. I want to put it in here. I know it's risky.”

Ryan Husk:
There are people who've put money into GameStop that truly aren't looking to get out of it, but they believe it's more important to make a statement. So you also have the people who actually believe it's a good long-term investment, so you've got both sides.

Tom Wheelwright:
Okay. So the other thing you said is that maybe it was an opportunity for them to go after the hedge funds, right? So explain that side of it. What were you reading? What were you seeing in that whole Reddit discussion about that side of things?

Andy Tanner:
What I think is most [inaudible 00:28:47] Ryan is that they were able to organize a grassroots movement to buy it, I'm not convinced everyone that was buying it was financially savvy, I think there are a lot of Robinhood investors that have no clue what they were doing and they're just like, “Yeah, I want to be part of this.” Caught up in the movement of it, so I'd like to see what was the message that they said, “Hey, risk your money in this.” Because it was very risky.

Ryan Husk:
It's absolutely very risky. I think you have a lot of people who double in investing in Robinhood is great because it makes investing incredibly accessible and removes a lot of the barriers you might have in traditional investing with finances and knowing the definitions of things, so that's a good thing for some and makes it significantly more risky for others.

Ryan Husk:
So yes, there are people who do not necessarily know the risks that they're getting into, but that's their choice to make, I guess. In terms of the people who want to stick it to the man, I can't repeat everything. Reddit is not necessarily a PG rated place, and the language that you find on there, although I would probably say you probably hear the same language [crosstalk 00:30:01]-

Tom Wheelwright:
… nobody in this crowd is going to object to free speech.

Ryan Husk:
Yeah, exactly. So, I wouldn't necessarily repeat some things that I would hear, but there's a sentiment that there's absolutely a division between people of working class that come from or that are retail investors, that are doing their best to learn, I can't tell you how many times I've probably heard people say, “If you want to grow up, you need to learn to invest, you need to make this thing.”

Ryan Husk:
And there are caveats there, I think, but a lot of people felt as though they were starting to make investments and they were trying to do this, but they were facing roadblocks that were put on them that they didn't see the same roadblocks putting it against professional investors or hedge funds. And so the idea was a stock is worth how much someone will pay for it. And if you continue to get enough people to buy that stock, you will increase the value.

Ryan Husk:
You can say that this is an isolated incident, but we can also look before all of this blew up, I think it was last Monday, Elon Musk tweeted a very simple tweet that said, “I love Etsy.” And that's the sock John up like 48%. That's one person leading that. I think we saw a lot of the time our former president would speak about companies and they would shoot up or they would fall based on what someone would say. There's are plenty of people that have influence over the stock market.

Ryan Husk:
What's really interesting about this though, is that there is not necessarily a single leader or a single voice in this movement, it is people who have coalesced around an idea that first thing, that idea started as, “Let's preserve these brands that we believe in, let's give them a chance to prove that they can continue to do well,” and when they saw opposition from institutional investors, they said, “Okay, we're going to put our money where our mouth is, we're going to double down, we believe that these companies deserve a chance to thrive and we don't like being told by institutional investors that we can't put our money here and we're going to do it anyway.”

Ryan Husk:
So I would say there's certainly a piece of this that is savvy and thought through from a financial perspective, but there's another part of it where it's emotional and I think we can all have a little bit of pride sometimes and we can all get really invested in idea and that's also a part of it too.

Tom Wheelwright:
Hey, if you like financial education the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine, he's a client of mine, he's a former board certified surgeon and he's turned into a real estate professional. So he has this podcast that is geared towards high paid professionals, that's who he's geared towards. So if you're a high paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financially educated, I'd like to take control of my money and my life and my taxes.” I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula podcast with Buck Joffrey. I hope you join Buck on this adventure of a lifetime.

Tom Wheelwright:
And Ryan, one of the things that we always tell our clients, WealthAbility clients is that you want to become a professional investor, and so you do that by getting really good at one thing and that's how you become a professional investor, okay? So Andy is a professional stock investor, I'm a professional tax guy, I'm really good at it because I spent a lot of time at it.

Tom Wheelwright:
Our friend, Ken McElroy is a professional investor in real estate because that's what he does. But I also tell people that once in a while they say, “Well, look like I had a client the other day said, I want to put some money in to…” And he's an actually energy investor, and he wanted to put some money into a small Startup. And I said, “Okay, as long as you remember that, that's not an investment, that's something you're doing with your money.”

Tom Wheelwright:
And I think that's one of the big lessons to recognize here is, is that you really had probably three groups here. You had the professional investors and they were on both sides. The institutional investors, hopefully they're professional they didn't act too professional, but professionals make mistakes too. Then you had the truly, like you said, Ryan, the people who were very much focused on, “You know what? I just want to support this company and it'd be like if…” When Andy was younger, if he bought a blockbuster stock, right? It'd be basically the same thing. I love this company, I think they can do something, I think they can be the next Netflix. They didn't, but he wants to do that, so he's willing to just put some money in really more like, it's almost more like I'm willing to go shop local even though I pay more than shop at Walmart or Amazon where I'm going to pay less.

Tom Wheelwright:
So it's really just, I'm willing to put my money where my mouth is, right? And then I think there are probably some people that also were amateurs that thought they were investing and those are the ones that get caught. And I think Andy, if I-

Andy Tanner:
One of those Tom.

Tom Wheelwright:
… I'll tell you what, I see more of those people… And what's amazing Andy is that these are people that are otherwise very savvy and astute in business or in their jobs or in other pursuits but then somehow when it comes to the stock market, they get emotional. And so Andy, my experience with traders now you tell me, you see a lot more of this than I do, but I see plenty of them. I find that when people make a mistake in investing, it's when they have low emotional intelligence. Is that fair?

Andy Tanner:
Yeah. I mean, lack of discipline, we wish we could be Mr. Spock and all this. And when you watch gamblers, they exclaim with emotion when they win, they explain with despair when they lose. The pit boss is like a piece of cardboard, you just keeps the game rolling. I liked it. I know we're a little over the time, we lot a bit if people hung out this far, they're probably interested.

Andy Tanner:
There's two things that Ryan said I think are worth commentary on. The first thing he said is that people can buy a stock for any reason that they want if they buy it, the price goes up. That's very true. The market is indifferent to… This is another opportunity for a great, great lesson in this idea. In that prices are only about supply and demand, it's only about the balance of buyers and sellers. So Ryan is actually the right. When it's at six dollars, that means that half the people think this balance sheet is not valuable, this balance sheet is in trouble, the other half probably thought, yeah but they have a strong brand, they might turn around and score six bucks to see. So you have this balance is six dollars.

Andy Tanner:
The person in the middle is called a market-maker specialist. He or she does not care about the fundamentals of the company. He does not care where the company is strong or weak and he's just going to create liquidity back and forth asking if there's more sellers and buyers or if there's more buyers and sellers, he will move the price wherever. And so it's very important to understand there is a massive detachment from fundamentals once a company goes public. And the other thing Ryan said is it could go up for any reason.

Andy Tanner:
The third thing Ryan said that's really important to hear is his word accessibility is, I hope I don't get too political, but I have a gun that's in a safe. And the reason it's in a safe is I don't want it to be accessible to my children. I'm all for gun ownership, but I'm also really big on education on it. So I think Robinhood is a good and a bad thing. In my opinion, I think it's good that more people get access, I think it's unfortunate that of all the asset classes, our paper assets have the most participation with the least knowledge so that where I end this and where I wonder is in order for GameStop to stay in the 300s, that means people are going to have to be willing to pay $300 for, it's called the greater fool theory.

Andy Tanner:
Well, if I'm going to fall on my sword for GameStop, and I say, “I don't care if I lose $350, I'm buying this share and I'm holding it forever to try and keep the price up.” But if some of those Reddit people and some of those Robinhood beginning to sell, they're selling it to a greater fool than they were and they're not falling on their sword. Who's going to buy GameStop at 500 a share perpetually long-term. I see the stock coming back down very rapidly because I don't think there's enough people to keep it sustained and keep losing and losing and losing because there's not enough people really want to fall on the sword and say, “No, I will not sell no matter what, I'll lose $500 before I sell.” I think most of them are trying to make money.

Tom Wheelwright:
So besides looking at the investment consequences of these trades going on with game stop at AMC, et cetera, we need to look at the tax consequences because they are fairly actually, extremely significant and have a huge impact on the amount you actually make in trading. We have two different types of gains when it comes to trading and losses, by the way, also two different types of losses.

Tom Wheelwright:
So the first is, long-term capital gains and this is what we typically think of when we think of capital gains. We're thinking of long-term capital gains, I find most people don't distinguish and they need to, because the tax consequences are very, very different. We also have short-term capital gains. Now, the definition of long-term versus short-term is really easy. So a short-term capital gain is anything where you hold it one year or less and a longterm capital gain is anything where you hold for greater than one year, so when you're in a day, basically.

Tom Wheelwright:
So what's the difference? Well, a long-term capital gain the first 80,000 a long-term capital gain is a zero tax rate it's tax-free and then the next approximately $320,000 is a 15% tax rate whereas short-term is ordinary income, which can be taxed as high as 37%. Now, I'm just talking about federal, we're not even talking about state taxes, but let's stick with federal taxes now. Let's say that you did really well on that trade, and let's say you made a $100,000. Now you've got salaries and so forth, but let's say you made a $100,000. So here we have a $100,000 gain, if this were long-term, how much would this be taxed at?

Tom Wheelwright:
Well, if this were long-term 80,000 would be free and 20,000 times 15%, or we pay a total of $3,000 in tax on this. Now let's say we're in a 35% tax bracket ordinarily. Not that hard to get into 35% tax bracket. So if we're 35% tax bracket and it's short-term, then we're going to take that $100,000 times 35% or $35,000. So you have a $32,000 difference. So that means that a 100,000 here, if we had a, let's say we made 50%, we have a 50% gain here, so if we had a 50% gain, we need to subtract out, we really only get 65% of that, is our net.

Tom Wheelwright:
So 65% of 50% is roughly a third less, so you're looking at about 40, not bad, right? But you lose a third of it so you're looking at about a 33% gain, right? So that's your net gain, but in a long-term 50% is like 50%, right? So you lose $3,000, so you lose what? Like 5%, right? So you're losing 5% of your gain on 50% here, so 50% long-term gain is really a net of about 47%, right?

Tom Wheelwright:
So this is a big difference between 47%, 33%. So you give a lot of money back to the government when you do these short term trades. On top of that, losses from trading stocks typically can only offset gains so if you have losses, don't come off rest of your income. Gains are added to the rest of your income, losses don't come off, they only come off gains. So just recognize that all gains are not created equal, we always have to look at the tax consequences of the gains and we may think we're making a lot more money than we do. So what do we have to do?

Tom Wheelwright:
That means that, that $35,000, we'd better not go spend that money on, I don't know, video games, we better not plan on spending that money or even reinvesting that money. We better set that money aside for uncle Sam, because uncle Sam's going to come knocking on April 15th for that money. And actually, if you did this last week, then that means that $35,000 is going to be due this April 15th, not next April 15th, this April 15th, if not, you have penalties.

Tom Wheelwright:
So just remember that when we get a good education, it's not just our investment returns that go up, you need to watch Andy Tanner and watch our discussions on videos and podcasts like this. And you see that yeah, you do make more money. And remember also that if you do right, you can pay a lot less tax. And so this is where a good tax strategy comes into play, this is where you sit down with your tax advisor on every single thing you do, especially any type of trading you do. And when you do, you're always going to make way more money in real estate.

 

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