The Gamestop saga has been fascinating viewing. Here’s my key takeaways.
Ok, I know this is a little out of my usual range, but it is pretty much the biggest story in investing markets right now, and heaps of people have been asking me about it, so let’s go there.
So let’s kick off the basics. Gamestop is a been-around-for-ages bricks-and-mortar video game retailer. Computer games began the move to streaming about 5 years ago, so a lot of people thought Gamestop didn’t have a future.
So they shorted it.
That is, they took out a bet that it shares would fall in price.
Basically, they borrow a share of Gamestop from a broker and immediately sell it at the current price. Then, if things go well and the price goes down, they buy the stock back and repay the broker the stock that they owe.
Because they’re buying at a cheaper price than they sold, they’ve made a profit.
However, if the price goes up, then they’re buying at a higher price, and they make a loss.
And if they’re buying at a price that is 1600% higher, which is what the share price of Gamestop has done over the past month or so (much of it in the last week), then they stand to lose a lot.
And because we’re talking hedge funds who always bet big, then we’re talking about them losing billions.
There’s another dynamic at play. It’s called the ‘short squeeze’. So if the price does start going up, the short sellers start to panic, and then need to buy the stock to close out their positions.
However, that just adds to demand, and if no one is selling because, you know, prices went up 400% this week, then that extra demand just throws fuel on the fire, and prices go even higher.
It becomes something of an avalanche, and this dynamic is what’s called a ‘short squeeze’.
So this is what we do know.
But let me clear a couple of things up.
First up, the media wanted to tell a story about cowboy amateurs ganging together on social media and taking an irresponsible bet that just panned out luckily for them. Like, they had no idea what they were doing.
This is sorta true, but it’s not how this story started. It started with someone taking a good look at the company and seeing that there was value there – a new management team, a deal with X-box, digital sales up 300% in the December quarter.
So sure, there’s some pretty crazy hype that’s followed, but it was on the heels of a solid investment thesis.
Wall Street and the media might want to paint it all as the digital equivalent of a ‘mob riot’ but there was more substance to it than that.
That said, people are talking about it like its some sort of revolution – sticking it to the hedge funds and ‘eating the rich’. Sure. There was at least one hedge fund that took a bath. Awesome.
But short-squeezes always end in crashes, and the question is, who’s holding the baby then? My bet is will be the mum and dad traders who were just a few hours late.
The Hedge Fund managers will lose their bonuses. The late traders will lose their house.
If you think that’s a victory against capitalism, you’re dreaming.
And this goes out to the crypto community as well. Capitalism is a speculative orgy. True enough. But you can’t overthrow that with a speculative get-rich-quick orgy of your own. That’s not how it works.
You’re not overthrowing the system. You are the system.
So that’s what I reckons going on. That’s the key takeaways for me.
It is a pretty wild story. Its fun to watch.
But let’s not lose our heads.