Have you been watching r/Wallstreetbets? At CFOshare, my team is excessively entertained by what’s happening with $GME. The $GME short squeeze was unprecedented in financial history, so what does it mean for society? What can we learn from it? How can I use it to make money?
Entrepreneurs have much to learn from the events of the past few weeks. As professional risk-takers who often find themselves innovating new market-shifting processes, the wins and losses of the $GME short-squeeze are a parable for starting any risky venture.
Here’s our top 5 entrepreneurial lessons learned by the chaos of r/Wallstreetbets:
Develop a plan and be ready to abandon it
The investors at r/Wallstreetbets planned to exit at $1000/share, a 24,900% increase vs. the 52-week low – probably not realistic. Other users planned to ride the stock “to the moon!” In reality, they both made a good run up to $483/share. Their only mistake was failing to face reality and get out while the profits were good.
This is a critical lesson in business: planning is important but being willing to change plans is more important.
Bad entrepreneurs fail to adapt. They cling to something that is working and assume it will never fail. (“Stonks (stocks) only go up!” as reddit posters facetiously put it.) As a business owner, you cannot wait until someone moved your cheese to pivot. You must anticipate risks and hedge appropriately. This is best done through forecasting and regular financial strategy meetings.
Have an exit strategy
r/Wallstreetbets did not have is a realistic plan to get out while profits were up. Small businesses miss their exit opportunities too. The most common exit mistakes we see are:
- Growing too large to be acquired
- Focusing heavily on profitability at the expense of growth and never become large enough to be acquired.
- Treat the business as your personal tax shelter, distorting their company financials to the point that no buyer trusts the company’s earnings.
Do your research on when to get acquired and how you will get there. The best exits begin by planting seeds 2 years before they end, so start early. Lastly, have your board of directors hold you accountable to those goals.
Beware shiny objects
Many users at r/Wallstreetbets invested their life savings into $GME, only to lose more than 80% in the crash. That’s the nature of wealth: hard to gain, easy to lose. You can work and save your entire life and lose it all in a matter of days.
The same is true for business assets – good employees, intellectual property, a strong network and market reputation. These resources can be squandered quickly and needlessly if you go chasing shiny objects like endless research and development projects (which sank Motorola) or “gold rush” markets nobody understands (like the dot-com bust.)
The best way to tell the difference between a legitimate growth opportunity and a shiny object is based on how new and hyped-up the subject is. $GME’s rocket ship to the moon was both new and extremely hyped, thus a bad investment. Evolving your business administration from paper check vendor payments to electronic payments is neither new nor hyped, and thus a smart investment.
The real money is in selling shovels
Most miners lost their shirts in the California Gold Rush. Those that made the most money didn’t mine gold – they sold shovels. The same is true for the $GME short squeeze. Most r/Wallstreetbets users have posted big losses, but there are certainly winners of the phoneme.
Fidelity, Robbinhood, and Schwab have seen hundreds of thousands of new users sign on for investing accounts. Seeking Alpha, once a boutique investment forum, has become a significant media company that charges more for a subscription than the Wall Street Journal. Reddit has doubled the value of their company and may now be the next big social media company. And, I suspect, some hedge funds adjusted their strategy to take advantage of the $GME greed, short selling at the top or selling calendar spreads to capitalize on the high option gamma.
The next time you see a mob of people running to make quick money, think about how you can capitalize on the sensation. A strong service business will always outlast easy money opportunities.
Take it seriously, but have fun
You would think losing hundreds of thousands of dollars is a defeating event. But the trolls at reddit have demonstrated remarkable emotional resilience, creating jokes at themselves to lighten the community’s losses. “My wife is leaving me over this. Good thing she can’t take any money since I lost it all on $GME.”
Business is full of setbacks and challenges. The work you do as an entrepreneur is important but remember: no defeat is ever the end of the world. Lick your wounds, learn from them, laugh, and get back in the ring for another round. After all, the best businesses aren’t the ones who avoid failure – they are the ones who bounce back from failure.