(BBC): Amateur investors swept up in the trading frenzy surrounding US retailer GameStop “could lose everything”, the former stock broker who inspired the Wolf of Wall Street film has warned.
Jordan Belfort, who was jailed for market manipulation in 1999, said such investments could be “great on the way up, but painful on the way down”.
GameStop shares surged 700% last week as amateurs, inspired by tips shared on social media, piled into the stock.
But they have dropped sharply since.
Shares fell 63% on Tuesday to $81 – a far cry from last week’s record of almost $350.
Belfort said he sympathized with the small-time traders drawn to GameStop, many of whom wanted to turn the tables on big Wall Street firms.
But he told the BBC: “You must be so careful because eventually these stocks are going to come crashing back down to earth.
“If you are looking at this as a way to make your living, you’ll have to catch a falling knife on the way down. I would urge people to take their chips off the table.”
The trading frenzy began in late January, when small-time investors began buying up shares in GameStop, a loss-making video games retailer.
Many Wall Street hedge funds – known as “short sellers” – had bet against the firm, meaning they stood to make money if its stock fell, but lose heavily if it rose.
But amateurs, inspired by posts on Reddit and Youtube, realized they could drive up the price if they bought en masse, inflicting losses on the big players and making gains for themselves.
The excitement also encompassed other stocks such as AMC and Nokia, while the price of silver has seen intense speculation.
‘Real danger’
Belfort said the trading had taken on a political tone, with investors seeking “justice” against Wall Street firms they perceived had behaved unethically.
He added: “All of a sudden there is a way for people to communicate on message boards like Reddit, there’s a way for them to trade instantly on platforms like Robinhood.
“You put those two things together with the power of social media and bam – just like that the little guy got the best of the big institutions.”
However, he said there was a risk of people getting swept away in the excitement, noting that those with little understanding of stocks were now buying GameStop shares.
“Be aware of being the last person on the bandwagon, that is really the danger here.”
Belfort, who is now an author and motivational speaker, defrauded investors of $200m in the 1980s and 90s and is still paying restitution to his victims.
His memoir was the inspiration for Martin Scorsese’s Wolf of Wall Street film in 2013, but he sued the film’s producers for fraud and breach of contract last year claiming $300m in compensation.
Belfort alleged Red Granite Productions – whose co-founder Riza Aziz was arrested on suspicion of money laundering last year – lied about being “legitimately funded” when he sold the rights to his story.
The company’s lawyer described the lawsuit as “desperate and supremely ironic”.