February 5, 2021

GameStop: We Took Our Eyes Off the Ball



Post By: Shlomo Maital, Guest Writer

First, the facts. A group of day traders (amateurs who trade stocks online) organized on the Reddit page called WallStreetBets. There are a lot of them. They number some five million. They trade mostly by buying and selling stock on the RobinHood app, which is designed to enable costless small trades (down to a fraction of a share).

The target? Gamestop. GameStop is a traditional brick-and-mortar chain of stores that sell video games, predicted to swiftly go the way of Blockbuster. Wall Street hedge funds felt the business was short lived, and decided to short sell shares, knowing that they would likely make money when they bought them back. Wall Street hedge funds decided the business was going to sink, and many sold GameStop shares short and bought ‘put’ (sale) options, betting the shares would fall.

On January 11, GameStop announced three new directors. The stock surged. It went from $20 to $350 to $469! The day traders were ‘squeezing the bears’ (the short-selling hedge funds, who would have to buy costly shares to close their obligations to sell). One hedge fund had to be bailed out, to the tune of $3 billion!

RobinHood then suspended trading in GameStop. Why? Liquidity. RobinHood feared stock brokers would not have money to buy the shares they had committed to sell, leaving Robin Hood holding the bag. GameStop shares then fell 44%, after rising 40% that very day. But the next day, a Friday, GameStock shares opened at double their price on Thursday.

One day-trading investor, who spent $50,000 and led the charge, became a paper millionaire.

The former head of the Dallas Federal Reserve said, “Someone’s going to get hurt”. It will be those drawn in to buy GME (GameStop) shares at high prices. As I write this, it is down to $275 (as I edit this, it is down to $53.50). When those who bought stock start to sell, its price will fall precipitously.
. . . . . .
So, how do we make some sense of this episode? Modern day Robin Hood? The little guy taking revenge on Wall Street robber barons?

Here is how we see this. In the NFL football league, speedy wide receivers race 50 yards downfield and haul in passes. They do this by locking their eyes on the ball, until they fold it into their chests.

We took our eyes off the ‘ball’ – the capital market. It is a place where people who have money (pension funds, investment funds, etc.) offer to lend it to those who need it (businesses, and startups, who want to grow and invest). Capital markets that do this job well, and are well regulated, thrive.

But at times, we take our eyes off the ball. Capital markets become casinos, where more gambling than investing goes on. This occurred last in 2007/8, when investors gambled wildly on “credit default swaps” and “subprime mortgages” – resulting in a global financial crisis.

GameStop shares are not worth $469. This is a ‘bubble’. You can drive the share price up to this level, if enough people buy the shares. But the price is not justified by the real value created by GameStop stores. Over time, bubbles like this one burst. Usually the results are ugly.

However, it is hard not to applaud the scrappy day-traders, for drubbing the giant hedge funds. This may be a historical first — like one of the 13 NFL teams [1] who have never ever won the Super Bowl, winning it for the first time.

Let’s keep our eye on the capital market ball. Its job is to enable those who are creating real value, and need money, to obtain money from those who have the money and are interested in investing it at a profit in strong value-creating companies. The key is value. Value to whom? To society. To the economy. To working people, pensioners, and yes, wealthy hedge fund investors. They’re all in the market. But it’s not a game. It is not a casino.

This is fundamentally a tale of the power of collective action. With increased knowledge of a space, the people are able to make informed decisions and impact society. This expands well beyond the world of the stock market. Every aspect of our lives is improved by increased knowledge and collaboration, from the stock market, to COVID-19 (collaboration here being primarily virtual), to the transportation space.

Transportation mobility may seem utterly distant from the capital markets. But there is a strong similarity. Millions of vehicles and millions of drivers have a common goal – to reach their destination safely and smoothly. Just as millions of small investors want to invest wisely and profit. Each generates valuable information. When that information is aggregated and managed and optimized, vehicles move fluidly and money moves fluidly, to its proper destination.

In the end, it’s simple. Transportation mobility and capital markets are about creating value. When that goal drives behavior, good things happen. When darker motives intervene, bad things happen.

[1] Tennessee Titans, San Diego Chargers, Philadelphia Eagles, Minnesota Vikings, Jacksonville Jaguars, Houston Texans, Detroit Lions, Cleveland Browns, Cincinnati Bengals, Carolina Panthers, Buffalo Bills, Atlanta Falcons, and Arizona Cardinals.

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