Small investors cash in on last week’s GameStop rally
Antonio Thompson could hardly believe his eyes last week when he realized his $3,000 investment in GameStop Corp. had grown to $25,000 in a matter of four days.
He bought the stock because it was hot, even though he wasn’t exactly sure why it was climbing to absurd heights.
“I assumed the frenzy was all about the new consoles coming out,” said the 26-year-old Monroeville man. “Everyone my age has fond memories of GameStop. And you gravitate to what you know.”
The video game retailer has captured the attention of the world since its stock price shot up in only a few weeks time from about $17 a share to a high point of $483 a share.
But the company’s spectacular stock price rise is more remarkable for the way it occurred and the people behind it — small investors who organized on the social media platform Reddit joined forces to bid up the price of GameStop and essentially wage war on Wall Street hedge funds that were betting on the company failing.
The wild price action on GameStop has taken the stock market by storm and produced some big winners and big losers in the process.
It has led to some big Wall Street firms crying foul over their billions lost. It has caused online brokers to face backlash for restricting small investors’ ability at one point to trade GameStop shares. Congress has announced an investigation into how retail investors were blocked from trading and questions remain about how it all will affect the rest of the market.
“It appears to me you have power players who had the market shoved back in their face and now they are complaining about it,” said Jay Sukits, a professor of finance at the Katz School of Business at the University of Pittsburgh. “This is a situation where the little guys are attacking rich people.
“I find it rather comical for these powerful hedge funds to be complaining about a group of individual investors,” he said. “These are billionaires, and this is like them getting a taste of their own medicine.”
While small investors benefited from the rising price of GameStop stock, hedge fund giants were on the opposite side of the trade. Hedge funds had shorted the stock — that is, borrowed shares of GameStop and sold them, hoping to buy them back at a lower price and pocket the difference.
But the strategy backfired. Instead of the stock going down, it shot up higher than anyone ever dreamed it would. By Friday, hedge funds like Melvin Capital and Citron Research had lost a staggering $19.75 billion from shorting GameStop shares, according to S3 Partners, a New Yorkbased firm that tracks short positions on U.S. stocks.
Meanwhile, the online broker RobinHood is facing backlash for taking actions that actually hurt small investors and benefited the hedge funds as the price rose on GameStop shares. RobinHood took steps to block its customers from buying shares of GameStop and would only allow sales — which caused the share price to fall.
RobinHood said it took the action to stabilize the market volatility. But customers are outraged. Some have deleted the app. Some have threatened lawsuits.
Federal lawmakers on both sides of the political aisle are calling for a hearing in the House of Representatives on RobinHood’s decision to restrict GameStop trades. However, Pennsylvania’s U.S. Sen. Pat Toomey is generally against any Congressional action.
“We can have our hearing, but I hope it doesn’t reinforce a tendency to do things we haven’t made the case for why they need to be done,” Mr. Toomey said in an interview Monday on CNBC’s “Squawk Box.”
He pointed out that online trading platforms like RobinHood and TD Ameritrade make it easy for small investors to trade at no cost, which democratizes the capital markets and allows people of ordinary means to participate on a small scale, which can grow over time.
“So, I hope we don’t end up doing something that damages a really, really good innovation in our capital markets,” Mr. Toomey
said. “It’s legal to short stock. And it should be legal. It is a helpful, in fact, necessary part of price discovery. So there were hedge funds shorting this stock. That happens every day, and that’s perfectly OK.”
The online community of Reddit investors targeted other company stocks that also saw significant price increases, such as AMC Theaters, Blackberry, Bed Bath & Beyond and Nokia.
Andrew Stoltmann, a Chicago-based securities attorney, said it’s only a matter of time before we see an epic massacre of retail investors who jumped into the fast rising stocks looking for a lottery ticket to wealth.
“We clearly have had the pump,” Mr. Stoltmann said. “Now the second half of the equation is the dump. Right now investors are walking through a landmine. It’s just a question as to when they’ll step on the mine and blow themselves up. We’ve seen this movie before.
“In a way I am loving this. I hate that small investors will get shish-kabobed. But the small investor who has long been the gum on the bottom of Wall Street’s shoe is sowing chaos and anarchy for hedge funds.”
Mr. Thompson is happy he sold his stock when he did. GameStop shares fell by about 40% Monday and he would have lost a significant amount of his profits by now had he held the shares.
As a health care recruiter, it would have taken at least a year and massive life changes to save the kind of money he made on the GameStop trade.
“I’m talking about some severe sacrifice, like not going out and eating rice and beans all the time,” he said. “I told my mom about all the money I made and she thought it was fake when I showed my account. It was the easiest money I ever made. But now I’m going to invest in a lot less volatile securities and pick stocks that are more sensible and steady.”