For those of us not living under a rock, we are witnessing one of the most hilarious stories in United States history. What am I talking about? I am talking GameStop—ticker symbol GME. In just two weeks, GameStop’s stock price rose from $35 to $325 per share. Certainly, GameStop itself didn’t really do anything. This lovable video game company did not reveal record-breaking earnings or an innovative business plan. No, this company’s stock skyrocketed in recent days just because a bunch of people wanted to stick it to the man. A large-scale investing war broke out about between billion-dollar hedge funds and millions of retail investors on the reddit page Wall StreetBets. This tug-of-war has become so impactful that some fear it might cause issues in the broader stock market. Moreover, we’ll likely see Congress pass some new regulations once this saga unfolds. Anyhow, what a time to be alive. This story isn’t over yet, but I want to describe everything that has happened so far concerning the meteoric rise of GameStop’s stock.
Before we begin discussing this recent event, I want to provide some context that many people are not talking about. There’s plenty to this story that does not meet the eye. To truly understand this phenomenon, I want to regale the story of two characters in this GameStop story. The first is Keith Gill, and the second is Dr. Michael Burry
“His Name is u/deepf*ckingvalue”
Back in 2019, a little-known stock trader Keith Gill started to started to purchase call options on GameStop (GME) stock when it was about $5 per share. Essentially, an option is a contract that gives you the ability to buy a set of amount of shares at a predetermined price (in the future). Call options are basically a wager that a stock’s share price will increase. Suffice to say, Gill truly believed that GameStop’s stock was highly undervalued in 2019.
From mid-2019 through this past week, Gill would make an occasional online post—on the infamous subreddit WallStreetBets—about his huge position in GameStop. Using the username “u/deepf*ckingvalue,” Gill garnered some attention for his unusual position on a seemingly irrelevant company. For starters, the man actually spent tens of thousands of dollars in a company that most people thought was going to become the next Blockbuster (yes, I was young when Blockbuster was still around). Most institutional investors and stock analysts would have laughter Gill out of the room for his unorthodox position. Well, he ended up having the last laugh.
Here’s where the story gets interesting: on his YouTube channel, Gill posted a video in August 2020 about a potential “short squeeze” on GameStop’s stock. We will discuss what a short squeeze is later, but he basically predicted that GameStop’s stock price would jump up dramatically in the coming months. The point here is that Gill predicted a rapid rise in GameStop’s price just based on the fact that the company was heavily shorted.. Briefly put, the broader investing world had no clue who this guy was or what he was predicting until this past week.
This guy is either really lucky or a freaking genius. Someone needs to make a movie about this guy. The man is going to likely become a multi-millionaire when this is all said and done. On that note, we will now talk about another figure in the GameStop backstory (who already had a movie made about him): Dr. Michael Burry.
The Big Short anyone?
Over a decade ago, Dr. Michael Burry—star of the book and film The Big Short—became famous for predicting the 2007-08 US Housing Market Crash. He made over a hundred million dollars for himself by betting against these mortgage-backed financial securities that greedy investment banks and financial institutions bought up in the 2000s. Once US housing prices declined in 2007/2008, subprime mortgage owners couldn’t make their payments and US financial institutions when belly up. Wall Street held the bag while Burry walked away with a boatload of money. The man became an investing legend for this “Big Short”—which led to the Michael Lewis book and the later movie of the same title.
Fast forward to 2019, Burry started buying up shares in GameStop after the company’s stock price tumbled that year. In January 2019, GameStop’s stock price started at $15. It fell to $5 twelve months later. Still, Burry was long on GameStop. His investment firm Scion Management bought enough GameStop shares to own three percent of the company.
Burry claimed to have bought this stock for two reasons—with the second reason becoming crucial to what has happened recently. First, he thought that company was undervalued since in-store gaming purchases would likely exist for a bit longer than most Wall Street investors anticipate. That reason should makes sense. Secondly, Burry bought this this GameStop’s stock to convince the heads of GameStop to buy back its own stock. Doing so, the supply of GameStop’s stock would decrease—making each individual share worth more. Since 2019, GameStop has bought back 38% of its shares. You will soon see why this decrease in supply will become important later on.
Fly Me to the Moon: GameStop stock in 2021
Having described these two characters, I will now discuss how the heck GameStop’s stock price skyrocketed from $35 per share on January 15th to $325 per share on January 29th. In just a five day span alone, GameStop’s stock price rose nearly 400% (from January 25th to the 29th). Logically, you’re probably wondering how this all happened. When’s the last time anyone’s been to a GameStop? Two events happened. The first involved Ryan Cohen—founder of Chewy.com; the other involved several hedge funds making a risky bet on GameStop’s stock price going down.
In early January, billionaire investor and entrepreneur Ryan Cohen joined the GameStop Board of Directors. His inclusion into the board stemmed from when Cohen’s investment firm purchased around 10% of GameStop’s stock back in November. Cohen’s personal motive to join the GameStop board came from his desire to transform the company. Previously, many investors lacked faith in GameStop’s leadership to carry the company forward into the future. Cohen’s hope was to push GameStop into e-commerce and digital video game sales and away from its previous brick-and-mortar store model. The initial rise in GameStop’s stock was likely due to Cohen’s joining the board. So, we can chalk up GameStop’s stock rising from $20 to $45 per share due to Cohen. So, the next factor will explain huge gains in GameStop’s stock on the week of January 25th—from $76 to $325 per share.
For the second factor, this whole situation started because a bunch of hedge funds shorted over 120% of GameStop’s total amount of shares. For the non-finance people out there, to short a stock means that a stock trader borrows a stock to sell now that he will buy later at a lower price. “Shorting” a stock means that you make money only if a stock’s price goes down. All right, that fact does not sound like such a big deal. Who cares that a bunch of hedge funds shorted a declining company? In reality, the only reason GameStop skyrocketed was because short sellers have to buy back the shorted stock (by law).
In a sense, stock traders on the subreddit WallStreetBets found a hack to make a ton of money and screw over hedge funds—which are largely lightly-regulated investment funds for super-rich people by the way.
This hack in GameStop’s stock price comes from the simple concept of supply and demand—just with shares of GameStop stock. If a ton of people bought GameStop’s stock and never sold it, then the supply of GameStop stock would be low for people wanting to buy it. Keep in mind, short sellers are legally required to buy back the stock they are shorting (just to note—there’s not specific date by which short sellers must buy stock back). With short sellers borrowing over 100% of GameStop’s stock, the demand for GameStop’s stock would stay high while the supply remains limited. With demand higher than supply, the price for each GameStop share would sharply increase with short sellers bidding up against each other to buy this limited amount of shares.
In essence, there wouldn’t be enough shares to go around for GameStop’s short sellers to buy back their positions. What’s more, If a shorted stock’s price keeps rising, then short sellers are losing more and more money the longer they haven’t bought their shorted shares back. Those increasing losses provide an incentive for short sellers to buy back the stock the stock they are shorting to the losses—which consequently increases the stock price. It’s a self-perpetuating feedback loop until more owners of GameStop stock start to sell their shares to the short sellers.
Here’s how the idea of the “short squeeze” comies into play. In a short squeeze, the share price of a heavily shorted stock price would rocket to the moon because short sellers’ demand to buy is high while the supply of shares offered for sale is quire low (because retail investors don’t want to sell back to the hedge fund short sellers).
Just for fun, here are some of the hedge funds that were humiliated by their risky shorts of GameStop’s stock: Melvin Capital Management, Maplelane Capital, Citadel Securities, Point 72, and Citron Research. These hedge funds have lost billions of dollars this past week alone. Data company S3 Partners claimed that hedge funds have lost nearly $20 billion dollars from shorting GameStop this year. That number will keep going higher to as long as GameStop’s stock price continues to rise. That’s a ton of money!
What Truly Happened: The Lasting Implications
So far, I have focused on describing the backstory to how GameStop instantly became the center of attention in American society. However, I want to finish off this post by describing the lasting implications of this whole situation.
Sure, a bunch of individual investors from the subreddit WallStreetBets beat billionaire hedge funds at their own game. But if you go on WallStreetBets, you’ll find something fascinating. Many of the users on this subreddit grew up during the Great Recession. They all recall how tough their lives were during the Great Recession—mainly due to the greed and rampant risk-taking of investment banks and American financial institutions in the 2000s. After the initial rise in GameStop’s stock price from the initial short squeeze, reddit users decided to hold onto their stocks to make a statement. Many people could have made a ton of money by just selling their shares back to Melvin Capital and Citron Research. But, they didn’t! Millions of users on WallStreetBets have held onto their shares just to make big hedge funds and other short sellers hemorrhage. Ordinary people could have made thousands and even millions of dollars by selling their GameStop shares. No, they are making Big Finance pay for the Housing Crisis.
This whole event with GameStop has become a quasi-political revolt against Wall Street and Big Finance within our country. Wall Street gets to make their own rules and gets bailed out by the US Federal government while hard-working families have had to foot the bill. Sure, it’s okay for hedge funds to meet behind closed doors to decide which companies to collectively buy or short. But when a bunch of individual investors on Reddit make money off of bad decisions made by hedge funds, then that’s not allowed! Well, a lot of people are just sick of the double-standard.
That was the story, but not anymore. Populism is still alive in America. Although President Trump might have left office, the populist seeds he sowed are still around today. Whenever this tale of the 2021 GameStop short squeeze ends, the question is whether populism will stay around in American politics and the stock market.
To close, I’ll mention a few implications/conclusions that I’ve drawn from this truly unique set of events. Although the GameStop squeeze is not likely over yet, we can still can consider what the future may hold.
1. We’ll never see anything like this again. The US Congress and SEC will come up with regulations to prevent a “short squeeze” of this magnitude from ever happening again. My prediction is that hedge funds will no longer have the ability to short over 100% of a company’s outstanding shares.
2. As a country, we’re seeing a soft of unification by populists of the political left and right on this GameStop situation. When’s the last time that Alexandria-Ocasio Cortez, Dave Portnoy, Elon Musk, and Don Trump Jr. all agreed on something? This event won’t likely unify the country long-term. However, I wonder if we are seeing a political alignment between economic populists and establishment-types.
3. The game has changed. The Stock market is not only for the big guys anymore. Zero-commission stock trades and internet forums have given retail/individual investors much more power than they have ever held in the stock market arena. Even though institutional investors still hold most of the capital in the stock market, retail investors can now make their voice heard in the stock market arena.
To date, this post is the longest one that I have ever written. So, thanks for sticking around to read it.