If you’ve been tuned into any financial media outlets over the past few weeks, it would’ve been nearly impossible not to have heard about this story. The GameStop “Short Squeeze” has become the stuff of Wall Street Legend, and it’s also a sign of the times.
There have been hundreds of articles written on this story recently (many with great explanations on the mechanics of this whole situation), so I won’t go into a ton of detail here. Here’s a brief recap of what’s happened.
- Over the last few weeks the stock of GameStop (GME) has experienced an eye-popping rally of over 1,800%. Trading in the stock has been so volatile and voluminous lately that the exchanges have actually halted trading numerous times (at the time of this writing trading has been halted yet again).
- GameStop has become a favorite target of some prominent hedge fund short-sellers as it has struggled to survive in recent years.
- Millions of amateur at-home traders have banded together in a Reddit stock trading discussion forum, known as Wallstreetbets, to buy up the stock of GameStop and squeeze out the professional short-selling hedge funds. And it’s working.
These hedge funds have been forced to cover (buy) their short positions at large losses, which has further propelled the stock to new heights. Of course, fundamentals have gone out the window and the stock’s price has no relationship to it’s actual prospects at the moment. This will reverse at some point and it’s anyone’s guess where the stock will finally end up.
Below is a 1-month price return chart of GameStop’s stock. This is a rare sight.
For now, the amateur traders have defeated the professional hedge funds. Their goal was to inflict financial pain on the pros and they won. My opinion and feelings about this are mixed. There’s nothing illegal about what’s occurred. I think it highlights the democratization of trading in the digital age. Individual investors have power they’ve never had before thanks to the internet and social media. Of course some of them don’t understand the game they are playing and will inevitably get crushed at some point.
And “short squeezes” along with other maneuvers like “market corners” have been going on for centuries. They were particularly brutal in the gilded-age of the 1800s when power brokers like J.P. Morgan and Jay Gould would engage in all out stock wars – mostly in railroad stocks. The difference now is that the “little guy” investors have leveled the playing field.
I do not feel sorry for the professional hedge funds. They know the risks and rules of the game they are playing. What I don’t like about this situation is that it perpetuates the stereotype that the stock market is just a wild west casino. Even in light of the craziness of a few stocks, the market is remarkably efficient and very difficult to manipulate. It is the greatest wealth building machine on earth, but it’s not perfect.
For those that are unnerved by this type of activity in the market, let me assure you that in the context of a globally diversified portfolio this will have zero impact on you. And to be clear, I have no problem with investors having a little fun with play money (truly money you can afford to lose). I get it.
It’s a game we simply choose not to play with our clients’ portfolios.