The GameStop story has been one which we have been following with interest this week here at bdb. A victory of David over Goliath as some of the narrative might have us believe. Whilst I love a good underdog story, I am not so sure.
For those who hadn’t spotted it, the story in a nutshell was that a group on the social media platform Reddit (and then everyone else it seems!) got together to invest in GameStop shares. Someone had seen that at least one hedge fund had taken large short positions in this stock believing that its valuation was high relative to its prospects and that its price would fall. If the ‘amateur’ traders could make the price go up, they could make the hedge fund lose money.
When you ‘short’ a stock, you borrow it from somebody else, sell it in the market and then hope to buy it back at a lower price before you have to return it. If things go your way, you get to trouser the difference, if you don’t, the potential losses are unlimited as you could be forced to buy back at a much higher price.
In another incredible demonstration of the power of social media, the message quickly went viral with people using mobile phone driven ‘free’ stock trading platforms to buy up shares. As demand for the shares increased, so did the price and eventually the hedge fund had to close out its position resulting in huge losses (although they deny they have gone bankrupt).
In the end, the plug was pulled on the fun with the trading platforms curtailing the ability to buy the shares. This led to a short term dip in price and cries of foul play, although trading has since been reinstated albeit with some restrictions. We watch with interest to see how the story unfolds from here.
Hooray for the little guys teaching those good-for-nothing hedge fund managers a lesson and pocketing a few quid in the process! - Not so fast...
Is this really a victory for the little guy over the ‘Wall Street fat cats’?
It may have been painful for a few short selling hedge fund managers and their clients, however a quick inspection of the largest holders of GameStop shares show us who the biggest winners will be from a rising share price.
Recognise anyone? I don’t see Mrs Davis at number 74 here nor @funkytrader675419. Perhaps not quite the victory for the small guys over the institutions of ‘Wall Street’ being talked about. Bdb’s clients will however find some very familiar names in this list.
Social Media has once again flexed its muscle. It has shown it has the power to move the market as well as elections and delivered a bloody nose to a few on this occasion. The story has engaged thousands, some of whom will have bought stock for the very first time.
Ultimately this comes down to the difference between 2 very different activities: investing and speculating. The hedge funds have speculated about the short term prospects of the company and lost the bet. @funkytrader675419 & friends are also speculators even if it perhaps had more of an eye on delivering a social dividend rather than a financial one. As with the casino, the consequences of a bad call can be huge.
Very soon, this will pass, and the world will move on. GameStop shares will settle on the price which reflects the market participants collective best prediction as to the future fortunes of the company. Not an artificially driven valuation. It can be seen that there will be lots who jumped on the bandwagon too late who will already be licking their wounds from heavy losses (perhaps some folks getting carried away who don’t have it to lose).
I fear for those who continue to pile in long after the end credits are rolling on this story, propping up the price based on short term momentum rather than the fundamentals of whether GameStop is in fact going to be a successful company or not.
Whilst it might be fun to play the trading game, it is best to keep it to an amount you are prepared to lose in full.