Investors who stick to an investment decision not only with the proverbial iron fist, but with an even harder diamond fist, are known as Diamond Hands.
What does „Diamond Hands“ mean? Meaning, definition, explanation
There is now a meme for this term, which shows a fist formed from diamonds. This came up when investors bet on Gamestop stock (WKN: A0HGDX) from early 2021, which they had arranged to buy on the social network Reddit and whose price initially rose fabulously, only to fall again afterwards. The Diamond Hands held on to Gamestop, while their counterparts – the so-called Paper Hands – sold off the losses fearfully. Diamond Hands, on the other hand, stand steadfastly by their convictions. The term is credited to the Reddit board, but this type of investor has always existed: the most successful investors in the world are Diamond Hands at heart, as we will show.
Diamond Hands of the Big Investors: Buffett, Soros & Co.
Those investors who became billionaires on the stock market and are among the richest people in the world are or have Diamond Hands. The two most famous names are Warren Buffett and George Soros. They are not mere speculators, although Soros became very famous with his speculation on the fall in the value of the British pound in 1992. But at their core, they are so-called value investors. They are looking for values they can believe in forever. Warren Buffett made the statement that he basically never buys a stock that he ever wants to sell again. These are true Diamond Hands.
Of course, Buffett, Soros & Co. also sell when prices fall, realizing profits for the most part. But at their core, they live on a rather small salary as fund managers (Buffett: ~$7,000/month) and are constantly making decisions about which stocks to add to the portfolio and then holding on to them with Diamond Hands. In doing so, they manage the money of clients who trust their investment decisions. Their fund (like Warren Buffett’s Berkshire Hathaway) receives a small commission for this and can pay its manager Buffett a salary for this. In addition, Soros & Buffett themselves buy the stocks they recommend, if only to remain credible to their clients, hold on to them with Diamond Hands and became billionaires in this way.
How does an investment strategy with Diamond Hands work?
To hold on to stocks with Diamond Hands, investors must follow the strategy of value investing. This is what the big investors have been practicing for decades. They identify undervalued stocks based on certain metrics such as the P/E (price-to-earnings) ratio and based on their business model, then buy them and hold them regardless of price fluctuations. Both are important:
The P/E ratio and other fundamental ratios prove that the stock is trading comparatively cheaply on the stock market in relation to the company’s earnings. There is potential for the share price to rise.
The business model is absolutely promising. Such business models are currently (2021) tech stocks and stocks associated with renewable energies. There are a few more business areas, such as biotechnology.
However, it is not enough for a company to be in a modern business field. Even such companies can fail, like the German company Solarworld, which manufactured very modern monocrystalline solar modules and ended up delivering ready-to-use photovoltaic modules to customers. The company, which was listed on the ÖkoDAX from 2007, eventually got into trouble and filed for insolvency in 2018. The background resulted from a too rapid expansion up to the attempt to take over parts of Opel AG, but also from distortions in the international market of photovoltaic modules, which from about 2010 Chinese companies entered, which profited from state subsidies and put European companies under pressure with dumping prices. This example means that it takes extensive research to identify stocks that are worth holding on to with Diamond Hands. Nevertheless, mistakes can never be ruled out.
Even the great gurus Buffett and Soros occasionally err. George Soros, who studied philosophy, narrowly escaped fascist persecution in the mid-1940s as a Hungarian Jew, and leans toward left-liberal ideas (including supporting progressive movements in Eastern Europe), bet on a crash in the U.S. stock market with put options (which win when prices fall) after Donald Trump took office in 2017 because he was deeply suspicious of the new right-leaning and uneducated president. Soros was 87 years old at that time and thus quite an old hand (he is currently – fall 2021 – still alive).
In the case of the U.S. stock markets under the influence of Trump’s economic policies, he was nevertheless wrong: the stock markets continued to rise blithely in 2017 and on an ongoing basis. Soros held on to his put options with Diamond Hands and lost a billion dollars.
Were Diamond Hands justified in Gamestop stock?
A very brief conclusion: As of September 2021, they are (still) justified. The share price of the U.S. retail chain for entertainment software and computer games rose gigantically from around $20 to $480 (at its peak) in January 2021 after young online traders on Reddit formed a community and agreed to buy the stock. The share price had initially fallen gradually in the years from 2016, albeit comparatively moderately.
The background resulted from a slightly changed market environment for Gamestop’s business model. The company had to close around 200 stores because its software and computer games were increasingly rarely purchased on physical data carriers and instead online. Eventually, Gamestop generated losses, and its stock price fell. The Corona pandemic with its store closures caused further losses. Nevertheless, the business model with computer games remains very interesting, and Gamestop can also enter the online market.
This was discovered first by a major investor (Ryan Cohen), who entered the company and thus fueled the share price, and then by the community of young online traders, who are often big fans of computer games themselves and also have a perfect command of communication via social networks – in this case Reddit. Since they agreed to buy Gamestop shares, they collectively pushed the share price gigantically. As a result, the stock was extremely overvalued for a short time, and the first investors sold it to realize profits.
Incidentally, the U.S. Securities and Exchange Commission (SEC) also took an interest in what was happening on Reddit, and investigated the suspicion of collective market manipulation (without result, because in the case of swarm intelligence it cannot be proven). The stock now fell back almost to the initial value as late as January 2021, then it was bought again and reached ~$300 again after all. The Diamond Hands, for whom the meme was created at that time, held on to it. By the way, on 9/30/21, the stock cost ~$176. So those who bought it at the beginning of 2021 and held on to it with Diamond Hands were rewarded for this holding with high profits until the date 09/30/21.