What do you make of the circus around GameStop?

If you’ve not yet heard about it, but read any of the business or financial news, you probably will.

(I’ll leave you to search articles from your preferred source of reliable news)

Edit: this is a good overview from the BBC

Here’s a quick (incomplete) potted history:

  • A US-based, listed retailer of physical games (including, in particular the physical media distribution of video games, like CD/DVD/cartridges) called GameStop was losing money and about to close a large number of stores. [No shock there]

  • Investors bought in and suggested it moved online to compete with Amazon. [Heard it before]

  • Large funds take a dim view of this strategy and ‘short sell’ the stock, betting that any recent increase will be reversed. [Once again]

  • An army of small retail investors object, coordinated via a Reddit board, to what they see as an attack on a brand they know / like / identify with, and see an opportunity to give the hedge funds a ‘financial black eye’ - by boosting the value of the stock so large investors lose money - quickly. [Now there’s a surprise]

It sounds more like the plot of a Hollywood movie trying to get us interested in financial stories, in the style of ‘The Big Short’, than the content of our financial pages.

However, GameStop stock values continue to rise, costing large funds and brokers a lot of money, and bringing these small investors a substantial gain (on paper) - for now.

From the outside it is interesting to observe, watching a market being ‘manipulated’ in real time.

However, it gives a dim view of the volatility and reliability of the market, and how it works, for inexperienced investors. It also is potentially risking the money of a lot of small investors who may not be fully aware of the background to the rise, and who may not be able to afford for the stock to return to previous / normal valuation levels.

On the other hand, it might represent the power of smaller investors to support those companies and brands they truly love now that they can influence this more directly via investment (trading) platforms.

In the long run, does anyone win?

What do you think?

(note, this is personal commentary on a current news story, and not advice concerning any particular stock or how and where you might invest your money. This is not a place to seek, give or solicit investment advice. If you are unsure whether investing is right for you, then you should seek the advice of a qualified investment advisor. With any investment your capital is at risk)

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This reminds me of the Hertz saga, where novice investors managed to push the price up, despite being right at the back of the queue in the open insolvency.

Essentially, private investors add an extra layer of unpredictability, as they sometimes just won’t play the accepted game.

I wonder with Hertz in the US how many got burnt or getting burnt at the exit!

Edit:

Some listening

Planet Money: Owner Of A Broken Hertz Hertz stock skyrockets after company goes bankrupt : Planet Money : NPR

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Ooh, yes. I remember the Hertz saga. Will definitely listen to the podcast as I had wondered what had happened there.

This is slightly different though, in that Hertz was already in Chapter 11 and some investors thought they might make a profit. I doubt many cared about the brand, or the mission to target short sellers.

The GameStop saga feels more ‘crusading’ and so they might have a role to play to revive the brand in some way? It is risky for those involved, still, but I’m interested in the fact that small investors are having a big impact by working together

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Agreed. Hertz and GameStop are playing out very differently, but they do show that the scope of what’s possible has widened considerably with the influx and broader organisation of small investors

The news reminds me of the famous quote: “the market can remain irrational longer than you can remain solvent”.

This reminds me of another famous quote: “in the long run we are all dead”.

But, does anyone win? A quote from John Bogle’s book will give you an answer: “owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game.”

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I think everyone likes seeing the big guys take a hit from the little guy(s). Its a nice little victory, but I don’t know how sustainable this is - Robinhood are taking flack for blocking further purchases and I don’t know how sustainable this is as a form or protest…

I wish I’d known in advance and given it a go. That’s said, I don’t know if I’d been able to resist cashing in my $10 share once it hit $1000… and I’m sure many people are.

So I imagine that any group trying to do this frequently would be plagued with people who’d sell as soon as the price shot up, thus undermining the effort. I suspect there are more people motivated by these potential gains than those wishing to make a protest investment to upset the big fund managers shorting the stock…

One limit of the the currently popular share dealing apps is that (as I understand it) you’re not a true shareholder - the platform is. So you can’t go to the AGM and make proposals/vote. With some co-ordination that’s probably a more effective/sustainable form of activist investing… A platform to enable this is another one of my ‘one day…’ schemes.

On the contrary, that’s exactly what they want them to do (as well as forcing the hedge funds to start panic-buying). They’re using call options for the “gamma squeeze” for extreme leverage, which pushes up the price far more than would be possible with the same funds and shares alone.

Google salvaged Robinhood’s one-star rating by deleting nearly 100,000 negative reviews

https://apple.news/AbCUPMmkYQ0Sv7bA_4jrwpQ

As this is playing out, I am sure there will be a lot more to read and learn. However, I can’t get over the feeling that while there are arguments to justify the cause (on both sides), ultimately it is the regular troops on the battlefield who end up taking the consequences (and rarely the benefits).

I fear for the small investors, many of whom are doing this to make money, who are unlikely to really understand the risk. The disruption will make us all think, and may result in better regulation of hedge funds, but it will also result in more regulation of trading by retail investors. A bit like the seatbelt laws, they will be there for their own protection.

I am certain there will be plenty of discussion about democratising investment, and that is good, … but that also democratises the risk, and as a small investor, you may not have deep enough pockets, or the mental resilience, to deal with this.

Certainly this is a very good reason that Dozens does not, and will not, be a ‘Trading’ platform. Trading of this sort does not contribute to Financial Wellness any more than a lucky spin on the Casino roulette table does.

What I worry about (personally) is how this sort of trading activity might now become more widespread, potentially opening itself up for abuse by the less scrupulous, and that the whole thing will be associated with “Investment” … putting more risk-averse individuals off from doing something positive with their money.

I actually don’t see any winners here other than the social media platforms (including Reddit), and the short term profits for platforms that enable this activity, possibly to their long-term detriment. I say that as someone who worked, and lost a job, during the original Dot Com Bubble.

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I can see your concern here, but my worry is that when the regulators prevent retail investors from fully participate in the market by restricting the instruments available to them and limiting their risk exposures, it creates an uneven playground in which big players have more firing power and can make bigger profits with the same capital. In the long run this may even damage the efficiency of the market, because it removes some of the arbitrage opportunities available to smaller market participants.

There’s also another way of thinking of it. For a buy to open call option or a long position on a stock, the risk is no higher than a bet on a horse - in the worst case you’ll loss all of your money. Since betting on horses is allowed, why should they ban retail investors from buying these options or stocks?

I personally would be more worried of over regulation, as the EU did (and still doing). Because regulations cannot cover everything, and it eventually drives the very same people they are trying to protect to less regulated alternatives, such as CFDs, spreadbets and cryptos, even oversea brokers, and the result can be even worse as the advertising and marketing aren’t monitored and regulated as much as the regulated products.

I’m an advocate on an open and free market in which all instruments are made available to everyone, as long as you read the warnings and agree to take the risk. The regulator’s role is to set the standards, including but not limited to advertising, marketing and ethic, and ensure the companies are following the standards set by them. The government also has an important role to play, which is to invest in financial educations (for school age and adults). On the subject of investing, trading and gambling, they should encourage people to invest for the long term, avoiding short termism, and treat trading as a risky career and gambling as an expensive hobby rather than get rich quick schemes.

I’d also argue that the regulators should make the social media platforms display risk warnings on the relevant pages to prevent unsuspected people from getting themselves into risky investments they don’t fully understand.

This, I totally agree. It’s a loser’s game for investors on both sides, the only beneficiaries here are the intermediaries.