The Goliaths of Wall Street found themselves surrounded by millions of Davids last month, all aiming slingshots at their heads, and they didn’t like it very much, as we got a glimpse of how the future of investing might just play out, and it looks like chaos.
GameStop is a US high street chain, they sell video games on disks and cartridges from shops made of bricks and mortar, how quaint. Much in the same way that Netflix and streaming services have wiped out high street video rental chains, the ability of gamers to download their purchases directly to their consoles over the net has pretty much killed their business model. They were losing money as the double whammy of net sales and Covid restrictions closing their shops put them in a headlock they looked unlikely to wrestle free from.
Several big hedge funds reckoned that the future for GameStop looked bleak and shorted the stock. It´s a common technique these days that allows investors to make a profit from falling stock prices, not just rising ones. The way it works is that you sell a share that you don’t actually own today, you borrow the share from a holder and sell it let’s say at 100 dollars, your gamble is that when it is time to return the share to the person you borrowed it from, the price has dropped, say to 80 dollars, you buy it back, return it to its owner and trouser 20 dollars profit. Very nice. You begin to run into problems however if your hunch was wrong, let’s say the price actually goes up to 120 dollars, you then bear a 20 dollar loss when you buy back to cover your position.
GameStop´s demise however was so predictable that Wall St. went big, and short sold more stock than the company had actually issued. A few sharp eyed keyboard warriors on a Reddit forum, Wall Street Bets spotted this, and hatched a plan.
GameStop held a nostalgic place in the hearts of the Redditors, couple that with the opportunity to stick one over the cigar chomping big guns of the hedge fund world, and they got organised and started buying GameStop shares in huge quantities, mostly via trading apps on their phones, one called Robin Hood was a particular favorite. Tens of thousands of small investors putting a couple of hundred bucks here, a few thousand there and up went the price, and up and up. It topped out at more than a 700% increase in just under a month.
It was checkmate for the big investors who saw their short positions bankrupt them to the tune of billions. The little guys had won, at least they thought they had, for a few days. The stockholders of GameStop couldn’t believe their luck, a month before they were wringing their hands as they contemplated bankruptcy, and now they were billionaires. The Redditors who got in early had benefited from the meteoric rise they had initiated, it was the short sellers, and those late to the table who lost out. Just as the stock peaked, Robin Hood turned Sheriff of Nottingham as they suspended trading in GameStop, they claimed that it was to protect unsophisticated investors from themselves, but everyone suspected that they had been leaned on by Wall St.
The GameStop example raised some serious questions. Collusive trading to manipulate markets is illegal, quite rightly, but the big boys have always found a back door to remain just on the right side of the line, but they certainly cried foul when a bunch of millennials pooled their piggy banks to beat them at their own game. Can it be collusion if there is no leader? How do you stop this? Should you stop this?
One thing that remained constant through all of this brief chaos was Gamestop itself. It started the year as a failing company with an outdated business model and an almost worthless stock, and at the end was still a failing company with an outdated business model and an almost worthless stock, but fortunes were won and lost over it in a matter of weeks. It became the battleground on which a war was fought. A war that had almost nothing to do with the company itself.
We’ve seen it before with the wild fluctuations in the price of Bitcoin and other crypto currencies, they become vehicles for speculation and manipulation with winners and losers, with almost no relation to any underlying value in business terms. It’s a dangerous game, and with the stock market, and bets on stock and commodity prices now available to anyone with a smartphone and a few hundred dollars these ludicrous and unpredictable events seem likely to become more commonplace.
Joe Kennedy, 1920´s banker and businessman, but better known as the father of JFK sold much of his huge investments just prior to the Wall Street crash of 1929. The possibly apocryphal story has it that as he sold up he said. ´When the shoeshine boys are giving out stock tips, the market is too popular for its own good´. It’s probably a lesson worth remembering.
By Phill McCoffers – Economics Correspondent