The Day David Won

David vs. Goliath. It's a resonating story with which many are familiar. We seem to have an acute fascination with rooting for the underdog. Moreover, we love to see the brutish bully taken down from his prideful position.

On January 26th, the Davids of the world got a win over Goliath — a win more gigantic than Goliath himself. A seismic Wednesday sent aftershocks up and down Wall Street. It will forever go down in history as the day retail investors gave the collective middle finger to hedge fund money managers.

You’re Shorter Than I Expected

How’d it all get started? How did we get to this arena where Wall Street hedge fund managers squared off against an army of retail investors?

Short selling. It's one of the most dangerous games you can play in the investing world. Essentially, you’re borrowing shares on margin and selling those shares with the intention of repurchasing them at a later date at a lower price: sell high and buy low.

The risk of loss, in theory, is unlimited — hence why so many investors avoid these treacherous waters. But, hedge fund managers went well over the horizon.

Looking to add value to their portfolio, money managers saw several waning companies and decided to go short. Stocks like Gamestop, Blackberry, AMC were short-targeted by the hedge funds. Assuming that companies like these will further fall from glory, the managers took out huge short-interest positions.

These were the most shorted stocks in the market. The Wall Street moneymakers thought they had this in the bag. Borrow and sell shares of stocks like GME and AMC and buy back later after the stock price had declined for a nice profit.

Well, enter WallStreetBets.

Snooze You Lose

A Reddit group named WallStreetBets caught on to what the hedge fund managers were doing. And to be honest, it wasn’t that hard. With the use of stock screeners, the Redditors could see stocks like Gamestop, AMC, Blackberry, Bed Bath and Beyond were heavily shorted — and heavily exposed to ginormous potential losses.

Aroused with a comradery to see the big money institutions fall to their knees and the preservation of the targeted businesses, an army of retail investors mobilized to fight. A movement to push back against Wall Street was afoot.

A tidal wave of aggressive investors started buying into Gamestop’s stock and options. Driving up the stock price through an overwhelming amount of volume, the holders of the short positions began to feel the “squeeze.”

Wall Street couldn’t have predicted or plan for the onslaught that ensued. They had no Paul Revere running through the chatrooms declaring, “The Redditors are coming! The Redditors are coming!”

With every dollar that Gamestop’s stock rose, the hedge fund shorters began to lose money. [Remember, the goal of short selling is that the stock will go down, not skyrocket up. The hedge funds borrowed shares on margin and are now being forced to buy back shares at a higher price for a loss; furthermore, they are contractually obligated to pay interest to the lender for borrowing those shares, which increases the already embarrassingly large losses].

Gamestop went from under $10 to over $100, then over $200, then over $300. With the stock surging over 400% in a single week, hedge funds like Melvin Capital, who were deep in the short, began losing billions of dollars. Eventually, the stock’s upsurge was so financially painful that Melvin Capital’s board moved to close their short position in Gamestop.

But WallStreetBets was still hungry. They utilized similar tactics and began buying into AMC, BlackBerry, Bed Bath and Beyond, Express, and Nokia, which further increased hedge funds' portfolio losses.

Suffice it to say, I don’t think there are enough alcohol, cocaine, and hookers on Wall Street to take away the pain of losing billions and billions of dollars in the span of a few days because you got out-maneuvered by day traders in sweatpants.

The aftermath was, of course, chaotic. In an already mercurial and turbulent time, this financial episode stole the headlines and trending hashtags.

Financial media elites decried the movement as manipulative. Average, small investors rebutted that it's all legal within the rules of the game and that Wall Street has no room to talk about financial integrity.

But what should not get lost in the discussion of the legality and integrity of what transpired is the emphatic declaration of “screw you” to the people who think they can do whatever they want and get away with it.

Reddit’s WallStreetBets group and all the millions of retail investors who joined the cause sent a strong and undeniable message to the financial elites. It is not a bad week when you give Wall Street the middle finger (by costing them billions of dollars) and making money doing it.

The retail investors won. David slung his slingshot and shattered the glass protection that covered the hedge fund portfolios — and now those money managers get to pick up the pieces in utter humility.

As a young finance graduate, I have often been told and seen that Wall Street is the “end goal.” It's the Mecca of Money. The final destination of a bolstering financial career. Well, I beg to differ.

To me, it would be a highway to hell — and I don’t want to go down that path of greed.