Meme stock and erstwhile videogame retailer GameStop is back in the limelight as Reddit ringleader Roaring Kitty stirs up another trading frenzy. Warren Buffett commented at length about the speculative behavior during the first GameStop mania in 2021. Then, the “Oracle of Omaha” called the stock market a gambling parlor for retail investors, encouraged by Wall Street’s investment banks and brokerages. “It’s become a very significant part of the casino group that has joined into the stock market,” Buffett said at 2021’s Berkshire annual meeting . “They’ve got systems set up so that if you want to buy a three-day call on a stock, you can do it. And they make more money selling you calls than if you buy stocks. So they teach you.” Buffett lamented the soaring use of short-term call options, saying that brokers extract more revenue from these bets than simple, long-run investing. The 93-year-old investment legend views stocks as small pieces of businesses and prefers to hold his investments for years, if not decades. Options trading in GameStop exploded after Roaring Kitty, whose legal name is Keith Gill, touted his large positions in those risky vehicles. He just exited 120,000 three-week call options against GameStop a few days ago. “There’s nothing illegal about it. There’s nothing immoral,” Buffett said of the use of short-term derivatives. “But the degree to which a very rich society can reward people who now know how to take advantage essentially of the gambling instincts of not only [the] American public, [but a] worldwide public….It’s not the most admirable part” of the culture. ‘Like pulling the handle on the slot machine’ During the 2021 episode, Robinhood and other brokerage firms came under fire for relying on ” payment for order flow ” as their profit engine in lieu of commissions. These brokers receive payments from market makers like Citadel Securities for routing trades to them. “They don’t make money unless people do things and if they get a piece of them,” Buffett said. “They make a lot more money when people are gambling than when they’re investing. It’s much better to have somebody [who’s] going to trade 20 times a day and get all excited about [it], just like pulling the handle on the slot machine.” To illustrate the danger of a gambling mentality and institutions that profit off it, Buffett read his favorite quote from John Maynard Keynes in The General Theory of Employment, Interest, and Money , saying it sums up the problem of the greatest markets the world ever imagined. “Speculators may do no harm as bubbles on the steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done,” Buffett read.
What Warren Buffett said about GameStop mania then, as the frenzy returns in 2024
Jun 17, 2024
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