GameStop is a symptom of larger problem in the markets
A marauding band of daytraders promised to bring vigilante justice to the stock market. “HOLD THE LINE!” reads one post on a Reddit channel called WallStreetBets, urging others not to sell their holdings of GameStop, a struggling videogame retailer.
“Wanted to let you guys know that all those sophisticated hedge funds are using all their fancy tools to try to outsmart us,” another poster warned. “We don’t really have many tools to fight against them other than buy and hold.”
These self-proclaimed avengers of the retail investor are trying to punish hedge funds that make money by driving down stock prices, a tactic called short-selling. When the short-sellers lined up against GameStop, readers of WallStreetBets teamed up to bankrupt them with something called a short squeeze.
This motley crew encour
aged amateur traders to drive GameStop’s share price up 1,700 percent. When the price went up, those betting it would go down suffered losses. One fund, Melvin Capital Management, had to take out $2.5 billion in emergency loans.
What started as a pique of frustration among a handful of traders has become a cultural phenomenon. Pundits created a fanciful narrative of David-styled investors slaying Goliathesque Wall Street traders. Others marveled at how average people powered by a shared disdain for the system could use internet chat rooms, mobile phone apps and small trades to wipe out billions of dollars in wealth.
None of this would have been possible two years ago. But take a pandemic where gamblers are at home and bored, give them government stimulus money, a broadband internet connection and free online trades for fractions of stocks, and you have a recipe for rebellion.
Volatility, though, is how professional traders make money, and the little guy loses.
Professional traders call investors who chase the latest trend dumb money. Amateurs tend to buy high and sell low because they have a fear of missing out, what young people call FOMO.
The touts who promoted GameStop did believe the company was turning around. They had good reason to hate the shortsellers, who are often portrayed as Wall Street’s villains. Tesla CEO Elon Musk has famously derided them for holding back his company and was thrilled by the uprising.
GameStop fans, though, overplayed their hand.
Over the last two years, the company’s revenue has steadily declined to $6.4 billion. The company has lost money in three of the previous four quarters. GameStop traded at $20 a share on Jan. 1, a fair price.
The corporation’s total stock value was $682 million on Oct. 31. After the stock run-up, it had a market capitalization of $22.6 billion. The stock price rose 8,127 percent compared to Feb. 1, 2020. No way is GameStop worth that much.
Despite the pleas on WallStreetBets, traders are selling GameStop stock, and the price is plummeting. Many people are capturing huge profits, but the majority who got in late are losing their savings. Undoubtedly, many will proclaim they were cheated.
Others are taking their winnings and moving them into bitcoin, the cryptocurrency that Musk boosted last week by adding the name to his Twitter profile.
“I do at this point think bitcoin is a good thing, and I am a supporter of bitcoin,” Musk said on the audio-only social media app Clubhouse late Sunday, according to CNBC. Bitcoin jumped 20 percent the next day as amateur investors scrambled to get in on the next big thing.
If tens of thousands of people mindlessly following strangers’ instructions on the internet sounds familiar and frightening, it should.
“From the Rohingya ethnic cleansing in Myanmar and WhatsApp-related killings in India to the Capitol riot and the stock-market takeover, these individual phenomena are each unlikely, but social media all but guarantees more of them,” the Wall Street Journal’s Christopher Mims wrote.
There is an old saw that “You can fool some of the people all of the time, and all of the people some of the time.” History demonstrates that the unscrupulous can always convince some portion of the population to do something awful, immoral, illegal or unwise.
The limiting factor in the past has been the difficulty in reaching a large enough audience to obtain critical mass. Stockbrokers and journalists acted as gatekeepers, sifting through business ideas to promote the good and squelch the nefarious.
Social media’s algorithms make it easy to deliver lies directly to people ready to believe them. Just as the people who raided the Capitol are facing federal prison time, the GameStop hangers-on will suffer the consequences of their gullibility.
We should not coddle these people but let them learn their lesson the hard way.