Su Wantang placed the new tea in front of Zhao Chen, and instead of turning around to do other things as usual, he sat down opposite him.
Shen Zhiyi's hands were crossed and pressed on the computer cover. The two people looked at Zhao Chen across the conference table, with something similar and uncertain in their expressions.
Zhao Chen picked up the tea cup and noticed that both people were looking at him.
He put down his cup and leaned back in his chair.
"You two have a problem."
"At Las Vegas, you teach us Kelly Criterion, expected value, and Thorp how to use math to beat the dealer."
Su Wantang's tone was very calm, as if he was stating a confirmed fact.
"You said you can only bet when the expected value is positive, and the bet ratio cannot exceed the optimal ratio.
Is the expected value of what you are going to do now positive?"
Shen Zhiyi took over and spoke faster than Su Wantang, as if he had already done the math.
"The GME stock price has risen from six US Dollar to nearly twelve US Dollar, and the Short Selling ratio is still over 90%.
If we follow the logic you taught us before - a high ratio of Short Selling means that Short Sellers is at risk of stampede -
This logic was established at the time of six US Dollar. Does it still hold true at the time of twelve US Dollar?
The cost of Short Sellers is concentrated below ten US Dollar, and the stock price has risen to twelve US Dollar, the floating loss is already huge.
They can either increase margin calls or start covering.
If Short Sellers starts covering, the stock price will be pushed higher, but again--
If Short Sellers chooses to hold on until the end, the stock price may fall because no one will continue to buy it.
The positive expected value you mentioned, how do you calculate it here?"
Zhao Chen picked up the tea cup but didn't drink it.
"The Kelly Criterion you learned in Las Vegas is blackjack in the casino.
There are only you and the dealer on the table, the rules are rigid, the card pile is limited, and the probabilities can be accurately calculated.
But there are more than two people at the GME table."
He put down the tea cup and picked up the Short Selling structure diagram that Lin Shicheng left on the table.
"Short Selling ratio is one hundred and five percent.
This means one thing - the number of shares of Short Selling that were loaned out in Circulating Supply exceeds the actual number of shares in circulation.
The same batch of stocks was lent to Short Selling and sold to the buyer. The buyer lent the stocks to another Short Sellers, and that Short Sellers was sold to the next buyer.
The same batch of chips is used repeatedly in the Short Sellers chain, forming a cycle.
This cycle has a physical limit--
When all the stocks that can be borrowed have been borrowed and there are no new chips in the market that can be borrowed Short Selling,
Any new Buying Pressure will trigger a mutual stampede between Short Sellers."
He turned to the last page of the structural diagram, where there was a sketch he had drawn by hand last night.
A circle represents Circulating Supply, and several arrows are drawn outside the circle.
Each arrow goes out from the circle and back again, labeled "Lend-Sell-Lend-Lend-Sell."
The number next to the circle is "One Hundred and Five Percent".
"The physical limit of this cycle is - once the stock price rises to a certain position and Short Sellers floating losses exceed the margin, the brokerage will Forced Liquidation.
Forced Liquidation is not selling, it is buying.
Short Sellers must buy back the stock to return the borrowed chips.
When all Short Sellers are Forced Liquidation at the same time, the Buying Pressure on the market will exceed the selling order by several orders of magnitude.
At that time, it's not a matter of how much the stock price goes up, it's a matter of whether anyone will sell it."
Shen Zhiyi stared at the simple picture for a while.
Her fingers tapped lightly on the laptop lid, then stopped.
"You just said, 'It's not investment, it's Short Squeeze'. I understand.
But what I want to ask is another thing - if Short Squeeze really happens and GME's stock price is pushed to several hundred US Dollar or even higher, then what?
Is GME, the company itself, worth that much money?
Its Fundamentals has not changed, Q3 Report is most likely still losing money, and the store is still closed.
If the stock price is pushed to several hundred US Dollar, someone will eventually take over.
What will happen to those retail investors who bought at high prices?"
Zhao Chen leaned on the back of the chair, looking from Shen Zhiyi's face to Su Wantang's face, and back again.
He picked up Zisha Pot and refilled his cup of tea. The sound of Tea Soup pouring into the cup was particularly clear in the quiet office.
"Another thing you learned at Las Vegas--
The core of Kelly Criterion is to manage long-term growth rate, not a single win or loss.
But in the case of GME, it's not math that really determines the outcome. It's human nature."
He held the tea cup in his hand and did not drink it. He just felt the warmth of the cup wall with the temperature of his palm.
"GME's stock price will eventually get back to where it should be.
Maybe it's worthless, maybe it's fifty US Dollar, maybe it's less.
This company does not have Fundamentals support. Offline game retail has been squeezed by both digital distribution and the epidemic.
All Ryan Cohen can do is bring it back from the brink of death and give it a decent chance of transformation.
But this process may take several years. And during those years, Short Sellers will always exist.
They will keep borrowing stocks, keep Short Selling, and keep betting that GME will fall to zero.
Because Short Selling's profits are linear - every time the stock price falls by one yuan, they earn one yuan.
The profits from long positions are also linear - for every dollar the stock price rises, the long side earns one dollar.
But if Short Squeeze happens, the profit structure will become non-linear."
He picked up a pen from the table and drew a curved line next to the sketch.
The horizontal axis is time and the vertical axis is stock price.
The curve starts to rise slowly from around six US Dollar to twelve US Dollar, and then suddenly accelerates, rushing upward almost vertically.
"The vertical part of this curve is Short Squeeze.
At that position, Short Sellers all the math Model will fail.
Their stop loss lines will be penetrated one by one, and their margins will be burned out second by second.
Their Risk Control System will issue the Forced Liquidation command at the same time.
Then there will be only Buying Pressure left on the market, with no selling orders. The stock price will rise to a level that no one can believe."
He put down his pen and looked at Shen Zhiyi.
"You ask me what will happen to those retail investors who bought at high prices.
I'm telling you -- they'll be the last ones to take over.
This is inevitable.
Every Short Squeeze there will be the last group of people standing on the top of the mountain.
But that doesn't mean Short Squeeze shouldn't happen.
Because before Short Squeeze, those Short Sellers had been short on GME for several years,
They smashed GME's stock price from more than 20 US Dollar to three US Dollar.
Those retail investors who cut their profits and left the market at low prices, those who were frightened by the Wall Street institution and used the Short Selling report to clear their positions - they are the first batch of people to be harvested.
Short Squeeze reversed the direction of harvesting. Short Sellers harvested the long position at the low position, and the long position counterattacked Short Sellers at the high position.
In the end, it was retail investors who were hurt, but at least once, the reapers became the ones being reaped."
Su Wantang picked up the tea cup and his eyes fell on the curve drawn by Zhao Chen.
She looked at it for a long time and then asked a question.
"You said Short Squeeze will rise to a position that no one can believe. Then how do you know when to leave?"
"I don't know."
Zhao Chen answered without any hesitation,
"No one can leave at the highest point. I don't need to leave at the highest point.
I only do one thing - set the exit conditions and then strictly implement them.
The exit condition is not the stock price number, but market sentiment.
When the discussion about GME spread from WallStreetBets Forum to mainstream media,
When CNBC began to report on the retail investor war Wall Street, when everyone was discussing this ticket, it was time to withdraw.
It's not about waiting for the highest point, it's about waiting until everyone is talking about it."
He put down the tea cup, and his eyes moved from Shen Zhiyi to Su Wantang and back again.
"You ask me why I dare to go long after the stock price doubled.
I'm telling you - not because I calculated the expected value, but because I saw a structural flaw.
The ratio of Short Selling is 105%, the cost line of Short Sellers is concentrated below ten US Dollar, and Circulating Supply has been repeatedly lent to Short Selling.
Sooner or later this structure will collapse.
Maybe it will collapse tomorrow, maybe it will collapse in three months.
But as long as there are enough bulls holding enough chips and not selling, Short Sellers will be crushed by its own leverage sooner or later.
GME's Fundamentals is really bad, but Short Sellers made a mistake--
They think that Fundamentals bad companies can have unlimited Short Selling.
They forget that Short Selling is the same as long, it has a 'degree'.
Beyond that point, no matter how correct your judgment is, it will be counterattacked."
"You learned one thing at Las Vegas - investing is a science."
Zhao Chen did not look back, his eyes fell on the ferry on the Hudson River in the distance,
"But science can only tell you probabilities and expected values.
Science cannot tell you when Short Sellers borrows the same batch of chips three times, four times and five times, when will the cycle break.
Science can't tell you how angry retail investors will be when they see the Short Selling report from Citron.
Science can't tell you what the money manager at Melvin Capital looked like when he received the call Margin Call Notice at three in the morning.
These are not science. These are people. And human nature itself is the highest probability."
He turned around and looked at Su Wantang and Shen Zhiyi.
"Everything has a degree.
Even if the outcome seems certain, dramatic reversals may occur before that outcome is reached.
Short Sellers Short Selling GME is on the right track -- GME's Fundamentals is really getting worse.
But their Short Selling amount exceeds that degree. If it exceeds the degree, the result will be reversed.
This is why I dared to continue buying when I was twelve US Dollar.
It's not because I calculated the new expected value, it's because I know where that degree is, and Short Sellers has already crossed it."
Shen Zhiyi opened the laptop, wrote a line of words on it, then closed it and stood up.
"I understand. But I want to add one to the exposure monitoring process - the exit condition for GME positions is not the stock price, but the market sentiment indicator.
When the number of WallStreetBets Forum's GME discussion posts exceeds a certain threshold, or when mainstream media begins to report intensively, the exit review will be automatically triggered."
Zhao Chen nodded. "Yes. Write this item into the process."