What does the GameStop Squeeze Mean For the Future of Investing?
This article was published in February 2021
Do investors need to take note?
Early into the new year, the share price of GameStop began to edge upwards. The brick-and-mortar video game retailer was widely thought to be a relic of a former age. However, it had caught the attention of millions retail investors using Robinhood and other online brokers. Within a few short days, the floodgates opened. GameStop shares topped out at a 1700%1 increase on their price at the start of January. Attention soon spread from social media, to financial news, to the mainstream press and even the US Federal Reserve.
Many claims are already being made about what this means for investors. But is what we are seeing really as different as everyone says? The world is no stranger to asset bubbles, and some seem just as irrational. As early as the 17th century, a Dutch phenomenon widely known as ‘tulipmania’ saw the price of certain rare tulip bulbs increase to equivalent of a mansion on the Amsterdam Grand Canal, before coming crashing down in 1637. So, what is so different about this latest example? Do investors need to take note for the future? (Head to page 2 for the answer.)
GameStop’s rise and fall
GameStop’s price movements from Jan 4th to Feb 18th
GameStop’s recent stock market story started in unremarkable fashion. Ryan Cohen, the former boss of Chewy, an online pet-food store, began buying up GameStop shares in August 2020. In November 2020 he wrote to the board, suggesting the company invests in e-commerce. Impressed by his plan, the board offered him and his associates seats on the table. The market responded positively, by the second week of January, GameStop Shares had doubled in value since Cohen first bought his stake.
It is unsurprising that a pivot to e-commerce might make a traditionally physical retailer more favourable to investors. Yet Cohen himself wouldn’t have expected the events that followed, much less that his 12.9% stake would make soon make him an overnight billionaire2.
On the 12th of January, the stock price began to surge, that week, it would rise by around 700%1. At its peak, the GameStop’s market capitalisation rose to $24bn, as much as a mid-ranking S&P 500 company. As with most asset bubbles, the price soon burst. The stock is rapidly declining at the time of writing and looks to be on the way back down to near its original value.
Is this time really different?
While bubbles are nothing new, there are reasons that this scenario is quite different to others in the past. An important difference is the apparent motivation of the event. The initial idea to buy stock or otherwise bet on GameStop had little to do with the perceived value of the company, or even about making returns at all (at least overtly). The overriding sentiment was more about ‘sticking it to the man’.
It is now widely known that GameStop was the most shorted stock in the US coming into January 20213. This means that large hedge funds were betting on its share price to fall. The demand for shares and options in GameStop gained traction after the suggestion that an increase in its share price could seriously damage hedge funds, who were relying on prices to fall. The birthplace of the suggestion appears to be a community called ‘wallstreetbets’ on popular online forum Reddit. The forum started January with around 2 million members, this has since jumped to over 8 million.
Although some on the forum had been citing GameStop as an undervalued stock for months, many saw the opportunity to hurt hedge funds as a way of getting payback on rich elites of Wall Street. An overriding message throughout the last couple of weeks appears to hold large financial institutions as corrupt and self-serving. They are largely blamed for the financial crash of 2007/08 and the economic depression that followed. Whether you agree with this sentiment or not, it is clear that millions of retail investors have found a way to hurt financial elites. Many appear to be revelling in it, sacrificing huge potential gains to hold onto their positions and force hedge funds into capitulating.
Since the initial buy-in from members of the forum, the dramatic increase in price has been supplemented by people looking to make a quick profit. Hedge funds themselves also bolstered demand as they were forced to buy the stock at inflated prices to cover their positions. This is known as a ‘short squeeze’. These are characteristics that are shared by other bubbles historically. However, the initial motivation for many of the investors has not been seen before, at least at this scale. GameStop has also inspired demand for other largely shorted stocks such as Blackberry, Nokia and AMC Entertainment, to name a few, in an attempt to further damage hedge funds.
Whether the trigger came from a genuine frustration with the status quo on Wall Street, or from figures looking to benefit from inflating the price of stocks, is unimportant. It matters little that many on Wall Street would have benefited from the sudden increase in trading volumes3. The idea that retail investors could take on the elites and win is what inspired these dramatic events. The pervading narrative so far appears to confirm that that’s what happened. This idea may be here to stay. Many retail investors have also discovered they can conspire online to drive up stock prices for their own benefit. It already seems many are shifting their attentions to other assets, with silver in the crosshairs.
Continue to page 2 to see what this all means for regular investors
1Google Finance. 2021. GameStop Corp. Share price.
2 The Economist. 2021, Will the GameStop?.
3The Financial Times. 2021. No, Wall Street Bets is not a revolution.
Featured image credit: Tiffany Hagler-Geard | Bloomberg | Getty Images
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