Lessons Learned From Gamestop

Gamestop stock (ticker GME) did not gain over a thousand percent in one week because people wanted to get rich quick; it was not a simple pump and dump scam. It was something far more dangerous. Millions of people around the world, mainly Reddit users, teamed up to buy stock ticker GME (Gamestop). They did this not because they believed that Gamestop had done something to increase its value. They did it because of something called short selling. A few hedge funds, it seems, borrowed hundreds of millions, or billions, of dollars work of Gamestop shares and immediately sold them. This means that they were betting against Gamestop stock going up. They hoped that the stock would go down and they would be able to buy back those shares, cover, for less.

A Devious Plan

This gave a few Redditors an idea. They did not like those hedge funds that had short sold Gamestop because those same funds had helped to cause the 2008 financial crisis, according to Reddit comments. Some blamed these giant hedge funds for causing the loss of 401Ks or houses back in 2008. So, they hatched a plan. They would buy Gamestop stock and cause it to go up. This would make the short sellers lose money.

People on r/wallstreetbets, a subreddit devoted to risky investment practices, started to buy the stock. Millions more joined in. This caused the stock to go up until it reached an all-time high of $482.55 on January 28. After starting the month around 21 dollars. The sky was the limit. The world was going to be forever changed, and the stock market would never be the same. That was the sentiment. But instead of causing a class revolution, the lower classes winning against the super-rich, it did the opposite.

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The Sentiment on Reddit

On Thursday, January 28, in the late afternoon, things were looking good for the people who post on r/wallstreetbets. Sure, the stock had gone down by over sixty percent that day. But morale was high. People looked at this decline as a healthy correction, something that was far from the truth. They salivated over the billions of dollars that they had made those hedge funds lose. The humans hanging out on r/wallstreetbets felt euphoric. The stock climbed around 60 percent the next day, and people rejoiced. They felt even better when a tweet from S3 Partners on that Saturday reported that GME short-sellers had lost 20 billion dollars! The moon was so close, and those on r/wallstreetbets refused to sell. Even though all the signs pointed to disaster.

Some Posts from Wall Street Bets

Users started to post how many shares they were holding in one chain of comments. One of these comments reported that someone was holding four thousand five hundred shares, bought at ninety dollars. The price was over two hundred and fifty dollars per share at the time, making the value of those shares north of a million dollars.

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Many comments showed an emoji with two hands next to a diamond. This referred to the term ‘Diamond Hands’, meaning hold on to the stock, no matter the decline. Don’t sell even if your losses are piling up.

The opposite of ‘Diamond Hands’ are ‘Paper Hands’. If somebody has ‘Paper Hands’, they sell when the stock goes down. This is sometimes because they don’t want to lose their life savings.

One comment even said that the next day’s market open would be the beginning of a big war. It made a reference to Panzer tanks which was basically likening the saga of Gamestop to World War Two.

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The retail investors against the banks and hedge funds. Some thought that this was the beginning of a class revolution, with the masses rising up against the rich using short squeezes. They posted rocket emojis, indicating their belief that the stock was going to ‘go to the moon’.

Some even advised investors to set limit orders (orders to sell shares when the stock reaches a certain price) at five thousand dollars or even a million!

People were too hyped up, which is one sign of a bubble (a fleeting period of increased interest) about to burst.

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The Collapse

The stock did collapse; right now it is at fifty dollars. As a result, that dream, once so vivid, of ticker GME changing the world is now as elusive as a flying pork chop. Why did this happen? Well, no matter how much the Redditors told people not to sell, people did cash out. They could not afford not to.

Some claim that unfair market manipulation tactics by the hedge funds caused the crash. But even if this contributed to the steep decline, the reality is that the crash was caused by the fact that it is impossible to convince a big group of people to act as one. Wall Street Bets attempted to convince all shareholders to never sell. They thought that if no one sold, the price would never go down again. But, of course, some people decided to sell.

Other Reasons

In addition, many people invested money that they could not afford to lose, something that is certainly not advisable. This made them sell at the first sign that the price was going down. This was not the ‘Diamond Hands’ strategy, but it was a fairly prudent one. Others made so much money that they were able to pay off their debts and mortgages. Once they saw that they had made enough money to change their life, they could not resist selling. This also caused the stock to go down.

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The price of the stock was just not sustainable. It was attained using short squeezes and gamma squeezes (hard to understand phenomena), not an increase of fundamental value. Prices usually go back to the value of the underlying assets. This can be seen throughout history with the Dutch Tulip Bubble of the 1630s and the 2000 dot-com bubble. People lose interest and everything goes back to normal. This is what happened with Gamestop stock.

Who Won the Battle?

In the end, the hedge funds won. Although at the height of the price spike the funds had lost 20 billion dollars (S3 Partners), that number has probably dwindled to only a couple billion. And the sad thing is that according to a large number of Wall Street Bets comments many people invested money that they should not have. They invested their rent money, their paychecks, into Gamestop because of some sort of anger at the hedge funds. But now, since the price has gone down around eight hundred percent from highs, it is very probable that many of those same people have lost their money. Money that they could not afford to lose. This anti-rich sentiment, this phenomenon of people throwing money at GME, has almost undoubtedly lost middle and lower class people more money than it has lost the hedge funds.

Lessons

So what should be taken away from this?

  1. Stocks do not just ‘Go to the moon’. They do not normally behave like GME. They only do this when the market is manipulated or during a bubble that is about to collapse.
  2. Causing short selling hedge funds to temporarily have losses on their books is not the way to cause reform in the US. It is not a way to narrow the wealth gap. Legislation is needed to do that.
  3. Do not invest more than you can lose. That is reckless. Do not just say ‘You only live once’. You will not like what will happen if you lose all your money on the stock market.
  4. Do not buy a stock after it has just gone up over a thousand percent in the last week. It will almost always go down again.

So, remember to always do your own research, pick safe investments, and diversify. If people keep trying to attack hedge funds using stocks, the only people who will be hurt are the ones recklessly buying shares. Accountability is needed if an entity causes a financial crisis or behaves unfairly, but justice is not attained through market manipulation.

This is not financial advice.

Photograph of a Gamestop by Ser Amantio di Nicolao, distributed under a CC BY-SA 3.0 license. GME chart by Tradingview. All other photographs from pixabay.com.

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2 Comments

  1. Wow, incredible blog layout! How long have you been blogging for? you made blogging look easy. The overall look of your site is fantastic, let alone the content!

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