Broker Check

GameStop and a Modern-Day David vs. Goliath

| February 02, 2021
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Is this the new Occupy Wall Street movement with a massive sling shot?

Wall Street bets against companies all the time,
thinking that they are overvalued, destined to fail, or
both. The reality is that at any given time, the big
companies are usually getting a lot of attention from
institutional short-sellers.

In fact, heading into 2021, the institutional shortsellers were betting that the stock price would fall for:

• Intel;

• Apple;

• Salesforce.com and

• Snowflake.

But Wall Street bets against smaller companies too
and as you know, GameStop was one of them. After
all, the company was a brick-and-mortar company
operating in a digital world during a pandemic and
had announced on December 8th of 2020 that it was
closing 1,000 stores (after closing 783 over the
previous two years).

Sure, GameStop executives were suggesting that the
worst was over, especially after trimming losses to
about $19 million in 2020, which was much better
than the losses of $83 million in 2019 and $485
million in 2018. But Wall Street wasn’t buying it –
especially two Wall Street hedge funds named Citron
Research and Melvin Capital – as both took short
positions expecting GameStop’s stock to fall.

Those two hedge funds (as well as others who
shorted GameStop) were simply investing – betting –
against GameStop’s success. And shorting is a risky
position, especially since any positive news about a
company can push up a stock’s price, eating into any
profit for the short-sellers.

As it relates to GameStop, however, there is a lot
more happening. Specifically, internet chatter from a
Reddit community called r/WallStreetBets intentionally
tried to push the stock price higher, which fueled more
interest, which pushed the price higher, which fueled
more speculative buying, which pushed the price
higher – you can see where this is going. The result:

• GameStop was up over 2,000% from January
1st through January 28th and over 10,000% in
the past year through the 28th (those are not
typos) and

• Short-sellers have lost over $23 billion on
GameStop in January alone, according to S3
partners.

What is the End Game?

That question is one that is not easily answered. Sure
there are lots of smaller investors that have made a
fortune buying a few shares of GameStop. And there
are some big hedge funds that are absorbing billions
of dollars in losses.

It really does feel like a modern-day David vs. Goliath
and many outside of the investing world are
suggesting that this is the next movement similar to
the Occupy Wall Street movement. You might
remember that the Occupy Wall Street was a protest
movement against economic inequality that began in
September 2011.
But while Occupy Wall Street gave rise to the slogan
“We are the 99%” which highlights the income and
wealth differences between the wealthiest 1% and the
rest of the country, the movement did not have the
economic tools to truly fight back.
But that has all changed with the advances of online
brokerage firms like Robinhood which advertises
commission-free investing.
Interestingly, Robinhood, Schwab, TD Ameritrade
(bought by Schwab but TD Ameritrade operates its
brokerage firm separately), and Interactive Brokers all
announced that they were restricting trading in
GameStop.

What Should You Do?

While you might be disappointed that you missed a
stock that went up 10,000% in a month, there are
three things that investors should think about:

1. Make sure you know your reason for
investing; and

2. Make sure any investment fits within your
tolerance for risk; and

3. Make sure any investment fits within your
investment policy statement.
Finally, appreciate that this GameStop drama might
very well fundamentally alter the way Wall Street
works. Because what happened/is happening to
GameStop is also happening to:

• Bed, Bath & Beyond;

• AMC;

• Nokia;

• BlackBerry;

• American Airlines; and

• Blockbuster.

But let’s be clear: the above list is absolutely not a
recommendation to buy, sell or hold. It’s simply a list
of companies that are gaining traction within the same
r/WallStreetBets community.

In other words, before you buy any stock, bond,
mutual fund, ETF, closed-end fund or any other
investment product, go back to those 3 suggestions
from earlier.

And please talk to your financial advisor first.

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