This has been a wild week for Wall Street. I didn’t mean to write about the GameStop Short Squeeze this week, but it’s really hard to take my attention away from what’s going on.
To clear my mind from the onslaught of news, I thought I was going to write down my general thoughts and opinions about the situation. I’ll break down what I think are the good, bad, and ugly aspects of the short squeeze, and how I think it can affect value investors going forward.
I will not summarize the situation as there are hundreds of other outlets already. See the links below for reference.
GameStop Short Squeeze Wiki
What the hell is wrong with GameStop?
Let’s start with the good.
If anything, this week has been fun. It’s breathtaking to see the stocks of a company like GameStop (which has been in decline for years) only rebound so strongly among retail investors.
Browse the comments on Wall Street betting is a wild ride. What is interesting is that most of the posts on this situation have nothing to do with GameStock’s value as a company, but are speculative and political.
This is not really a surprise as most people view WSB as a place for rampant speculation and the stock market is degenerating. No doubt they exist by thread, but it’s also unfair to bring all of these investors under one roof.
Separation of powers
In the past few decades, investing has become far more democratic than ever. With the advent of the internet, social media, investment in research platforms, and investment in apps, accessing Wall Street has never been easier.
Hedge funds and stock market experts are becoming less relevant. The unknowns of the markets become common knowledge. It’s easy to keep track of your favorite stocks, business people, and even hedge funds. 13F registrations are available at short notice and provide information on the holdings and strategy of the hedge fund.
Collecting this information used to be much more difficult and tedious. if you could even acquire it!
As we have seen, retail investors are far more powerful than previously thought. As mentioned earlier, I believe this is partly because there are more and more apps like Robinhood being invested. Check out the growth in the user base.
This easy market access has allowed investors to be more in tune with Wall Street. All you have to do is tap your phone a few times.
This democratization of information and access has given retail investors power. Groupthink is powerful when focused. Good or bad, it has held Wall Street’s seemingly inviolable elite accountable. Better yet, scared them.
I think a world where there are more institutional checks and balances is not a bad thing.
Speaking of bad …
The bubble will burst
Nobody will make it out unscathed. Melvin Capital and other hedge funds have already felt the pain. Money will be lost; on both sides.
I can’t really think of many situations where the value of a company increases over 1,000% in less than a week. GameStop stock has seen a lot of price movement without fundamentally changing business. This is a classic bubble area.
Sooner or later the fundamentals of the company will prevail and the stock price will return to the mean. I don’t think many investors (including myself) really believe that GameStop is worth its current price of over $ 300 per share.
Hence, the stock price will crash. This could be tomorrow or a year from now. Nobody knows how long the group think will last. At some point, investors get nervous and take profits.
Those who bought above will feel the pain.
GameStop: The Real Loser
For the past several years, GameStop executives have tried to sell the company. You finally stopped in 2019 when no one showed any interest in buying a dying business.
If GameStop’s share price stays high for the foreseeable future, it will no doubt bring the company to its knees. If any other company were interested in buying GameStop for ~ $ 10 a share, they certainly wouldn’t be willing to buy it for over $ 300.
I don’t think this is a huge pain for GameStop as there weren’t any interested buyers. However, other companies (like AMC) had some serious acquisition candidates recently. These companies will definitely go away while the stock price is high.
Now for the ugly …
The ugly one
SEC / government participates
The news was so loud this week that the SEC would have been deaf not to hear it. It was also loud enough that it reached the floors of Congress. Politicians from both parties have given their opinion.
Oddly enough, the GameStop debacle is now a bipartisan issue. Since Robinhood stopped trading GameStop, politicians from both sides of the aisle have came to the defense of private investors.
Whatever your political stance, I think most of us can agree that the federal government’s focus on the stock market is probably not a good thing. Whether WSB practices market manipulation remains to be seen.
Regardless, the SEC is very likely to step in at some point, especially if things continue to spiral out of control. Right or wrong, we are now at risk of increased legislation on Wall Street.
The stock exchange casino
Let’s face it, most ordinary people don’t understand how the stock market works. To be fair, it takes some education to understand. You can get a PH.D. in finance and still don’t quite understand how the stock market works.
Many people think that the stock market is similar to or synonymous with gambling, or a casino. In my opinion, seeing such things on the news only confirms their beliefs. Right now the market is full of speculation and some people are actually getting very rich, very quickly.
Suddenly everyone is interested in the market. It’s hard to see your neighbors get rich overnight. People could jump on the train only to be kicked off immediately and break a leg.
In essence, I think this sets some dangerous precedents for people to make terrible behavioral funding decisions. Some people will download an app, buy a stock with all of their savings, all because someone else made 1,000% in a week.
For some people this is a mental minefield. Yes, the stock market can make you rich quick, as we’ve seen, but these events are outliers in a normal market cycle. It is not normal. If you want to play, be sure to go to a casino where you can have fun.
The stock market is not a safe place to get rich quick, but a safe place to get rich slowly.
What does this mean for value investors?
The value of a company
For value investors, the GameStop Short Squeeze doesn’t change anything. Just stick with it Warren Buffett’s Core Principles and if you stay away from quick speculation you will likely be spared this situation.
As mentioned above, GameStop is not worth more than $ 300 per share. A proper assessment shows this as a fact. If you shop now, you are buying Purley on Hype. This method has been shown not to work well.
If you had shopped at GameStop as a value play before this week, you would have set a price target and made a good profit. That’s all there is to it.
I think this is an important lesson for hedge funds and Wall Street experts. Not everything they do is as secret as it was, and retail investors have more power than ever, especially when they are unified.
While entertaining, I see this as a negative rather than a positive occurrence. I understand that most people don’t trust the establishment and enjoy “sticking to the man”. I get it. Watching rich people lose money can be fun.
However, I don’t like it when someone loses money unless it was won illegally or immorally. Some people think that hedge funds that sell short stocks are immoral, but I don’t. It’s just a big risk, and this time it backfired.
But it won’t just be hedge funds that are losing money. Many retail investors will lose money when this calms down. I don’t think that’s a good thing given our current economic situation.
We also have to worry about more regulation now. It remains to be seen who will be regulated and how it will be regulated. But I certainly don’t want any more.
However, as long as we stay true to our value investing principles, value investors have nothing to fear.