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An overpriced market is nobody's friend, says finance professor of GameStop Saga

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James Angel, associate professor of finance at Georgetown University’s McDonough School of Business, joins Yahoo Finance Live to discuss why the Reddit-driven stock rally is a classic battle between bulls and bears.

Video Transcript

MYLES UDLAND: Let's stay on this topic and talk a bit more about market structure, what this means, what it doesn't, where we go from here. James Angel's associate professor of finance at Georgetown University's McDonough School of Business.

Jim, great to speak with you this morning. You have heard us talking. And I'd just love to start with your thoughts on the situation as we know it today and how you've been thinking about this saga just throughout the week. I'm sorry. Jim, you're still muted. You'll have to unmute.

JAMES ANGEL: This is a fascinating battle between the bulls and the bears. And we've had these battles for centuries. They're always very colorful. The longs and the shorts have very different narratives, and it's always fun to watch. So basically, fire up the popcorn and enjoy the battle.

But it's also demonstrating some blemishes in our market structure. I could get into technical details, but when we see these price spikes that push a price far beyond a reasonable level, it's not doing anybody any good. An overpriced market is nobody's friend, because all it does is set up everyone for future losses. So we need to be asking ourselves, what can we do better to make sure that stock prices reflect economic fundamentals?

JULIE HYMAN: So I guess, Jim, what can we do better? What do you make of the whole democratization idea, right? I mean, isn't it, in theory, a good thing if more people have access to the market, right? But at the same time, we have seen some of the dangers of that because-- but there is this whole narrative of, like, the little guy working against this big system that is stacked against him.

JAMES ANGEL: I love the democratization. And some people go, oh, these people don't know what they're doing. Oh, they're gambling. Well, most people aren't really skilled day traders, just like most people are not good at playing soccer. Only a few thousand people in the planet are good enough at playing soccer to play it professionally.

And the same thing with day trading. But that doesn't mean you can't have a lot of fun doing that. And there's nothing wrong with having fun in the market. The people who are viewing it as entertainment basically are bringing in capital.

They're bringing in liquidity. And they're bringing in information. These are all things we need in our capital markets. So the fact that stock prices are volatile, it's really not a bug, it's actually a feature, because it creates opportunity.

BRIAN SOZZI: Jim, what have been your motivations behind getting-- buying and selling GameStop during this really frenzied period of activity?

JAMES ANGEL: OK, I don't really trade stocks. I collect them. And I just happened to have a small quantity of GameStop in my portfolio. And when I noticed what happened to it, I got rid of it.

And as a finance professor, I feel I have to practice what I preach, so I actually decided to short a very small quantity on Wednesday. We'll see if my broker lets me stay in that position. But I just do this just for educational purposes. I don't expect to become a hedge fund.

BRIAN SOZZI: Jim, what have you-- what have you learned? What have you learned from this?

JAMES ANGEL: I learned that I'm really not a good day trader. I'm not one of those people who actually has a good sense of where the market's going. But as I tell my students, when you find a mispricing in the market, it may get a lot worse before it gets better. So I shorted and watched the stock double. Very painful experience.

MYLES UDLAND: And you know, Jim, speaking of the educational side, I'm curious what conversations this week you've had with your students, I guess, also, over the last couple of years, conversations with your students about how they're thinking about the market. We talk on this program a lot about how much information there is today. It would seem to me that younger people are more educated than ever about the markets before they step into one of your classes. Is that what you're seeing? And how are today's college kids thinking about financial markets?

JAMES ANGEL: Well, I usually break their hearts on the first day of class, because some people expect investing to be really exciting, and I say, hey, if you want excitement, you're going to pay for it. Studies show the most volatile stocks, on average, give you lower returns than the boring ones. When you're doing investing right, it's like watching paint dry.

Or it's like farming. You plant a little money today. You tend it carefully. And if everything goes really well, later on you get a nice bountiful harvest. If anything exciting happens, it's usually pretty bad news.

JULIE HYMAN: Yeah, I love that analogy, and I think it's a helpful one for a lot of people. So to go back to a point you were making earlier, there are some tweaks, you said, that need to be made to market structure to have better sort of price discovery, rational pricing. What are those tweaks? What would you do?

JAMES ANGEL: All right, one of the problems is we don't have enough people who can go short at a time like this in that the short sellers always get blamed when bad things happen, but they're a vital part of the ecosystem. They protect us from overpriced stocks. They protect us from pump-and-dump actions.

And so what we need to do is to bring the equity market rules more in conformance with the Treasury market rules. Now, this has to do with settlement on the second day after the trade that we-- you were talking about earlier. We need to basically update Rule 204. We also need to modernize Rule 15c3-3, the customer protection rule.

And what we need to do is to bring the stock lending rules for fully paid accounts in conformance with accounts that have debit balances. Real technical stuff, but things that can actually make it possible for more people to lend their shares, if they want to. So again, this is technical stuff in the weeds, but we've seen these kind of price spikes before.

About a year ago, there was a company called Phunware, ticker PHUN. It was a bungled SPAC deal, but because of these imperfections in the back office, the stock spiked to well over $100 a share. Now it's $1.73.

So whenever you have these stock prices that go far beyond economic reality, you are baking in losses for future investors, even people who aren't even playing. So if you think about the index fund investor with their retirement plan, hey, if that stock's in an index, guess what? That retirement investor is overpaying for that stock, even though they don't know it.

MYLES UDLAND: Yep. Jim, I think we're going to all learn a lot more about all these technicalities in the months ahead. This was a lot of fun. I know we're going to talk to you soon. Jim Angel with Georgetown University's McDonough School of Business, really appreciate the time this morning.

JAMES ANGEL: Thank you for having me.