GameStop to the Moon!
Breaking down the GameStop timeline and why trading and investing are not the same thing.
2021 started with a bang — first an insurrection, then an impeachment in tandem with a presidential inauguration, and now a financial market uprising!
Over the last week, GameStop stole headlines. This time last year, it was trading around $4 per share. Since then, the stock has skyrocketed to a high of $483!
What is going on?
Wednesday, January 27, 2021
When GameStop looked to be a sinking ship, hedge fund managers took a bet that the stock would continue to drop and began “shorting” the stock.
Shorting is when someone borrows a stock from a broker and then sells it for a period of time, betting the stock will continue to lose value and drop in price. It is the opposite strategy of buying and holding for future gains.
If the bet pans out, the stock price drops, and the borrower buys a new share, which they repay to the broker to cover their debt, profiting the difference.
If the gamble doesn’t win, the short seller is essentially infinitely exposed as the stock price climbs to unknown heights.
In the GameStop scenario, hedge fund managers got caught in their own bet. They didn’t account for an onslaught of individual day traders buying the GameStop stock en masse, thus rapidly increasing the price. This purchasing wave wiped out the hedge fund managers’ profits from shorting. Hedge funds that were still exposed had to buy the inflated stock to cover their debt, thus driving up the price even higher!
This caused financial institutions to suffer billions of dollars in losses in what is known as a “short squeeze” while GameStop’s market value reached unprecedented heights.
This is an apt reminder — the stock market and the economy are not the same things.
Despite what the stock price is selling at, GameStop is not a financially healthy company. They closed over 400 stores and had a 30% dip in sales last year, even though video game sales overall peaked during the pandemic.
Thursday, January 28, 2021
After the price grew at record speeds Wednesday, Thursday morning showed continued momentum. Then, the growth took an abrupt halt and dive.
This occurred when Robinhood (and other broker-dealers) restricted and blocked additional sales of GameStop.
The day traders felt rebuked. They argued the terms of trading were changed, and the market was manipulated once the “sweatpants” started to beat the “suits.”
On the flip side, the brokers cited concern about the integrity of the market and claimed they didn’t have enough cash on hand to actually pay the traders who were profiting hand over fist. Robinhood took out credit between $500-$600 million from various banks and raised $1 billion from investors to meet the requirements.
However, by the end of the day, a class-action lawsuit was filed against Robinhood, and the House Financial Services Committee and Securities and Exchange Commission (SEC) were monitoring the situation.
Friday, January 29, 2021
Come Friday morning, the brokers re-opened trading, albeit limited. At market open, the price popped up 92 but settled some — ending the day at 66% above Thursday’s close.
Over the weekend, speculation continued. Would the rocket continue to soar, or would it combust mid-flight in a blaze of glory?
(Interestingly, streaming services removed popular Wall Street-related movies such as The Big Short, The Wolf of Wall Street, and Wall Street as the weekend hit. Was this to increase their profits by moving them to paid viewing? Or to disincentivize the emotional energy fueling the gamma-squeeze? Probably both, if you ask me.)
Monday, February 1, 2021
The Sunday Scaries were replaced with anticipation for the ringing of the Wall Street opening bell. As it struck 9:30am ET; the results were…tepid. There was a small initial dip with continued losses throughout the day.
Instead, what we started hearing about was silver.
Silver hit eight-year trading highs. Some speculated that it was driven by the army of individual investors who stoked the GameStop fires. Others suspect it is secretly being driven by Wall Street to change the narrative and focus traders’ attention elsewhere.
Tuesday, February 2, 2021
On Tuesday, GameStop shares fell 60%, taking a heavy toll on last week’s momentum. However, some of the top GameStop investors are still holding their shares and hoping for a rally again later on.
Whether that will happen depends on the answer to a variety of outstanding questions — how many shorted shares still need to be repurchased? Is Robinhood in cahoots with the hedge funds? Or has the uprising seen it’s brightest day?
Should I add GME to my portfolio?
The FOMO calls of the financial industry have been ringing across platforms all week.
While I am extremely curious as to how the David vs. Goliath display will play out, I did not hop on the rocket. For starters, last week’s stock price was 1,700% of what it was in December 2020. That’s one hell of a premium to pay just for hitching a ride on the momentum.
Second, I am an investor, not a trader. Trading is high-risk, limited in scope (single stocks), and focuses on the short-term. When trading, you have to be willing to lose it all. When you invest, you have a customized risk profile built across many companies that is designed to deliver long-term gains. While still uncertain, you spread the risk instead of going all in.
Although I have friends that got in before the rocket launched and I wish them luck, I do not recommend this approach. Successful momentum buying requires deep knowledge of markets and superhuman prediction skills. You have to be right twice — buy at the right time and sell at the right time.
How will it end?
Eventually, the demand for GameStop will slow. Whether this will be driven by regulation, trading restrictions, or the inability to find new buyers at the heavily inflated prices, we can only guess.
Then, we will see mass selloffs, and the stock price will plummet as owners (and potential future owners for those with stock options*) try to dump the shares before they lose more value. When everyone is trying to win, someone will lose.
Who?
When?
The answer remains to be seen.
While we can’t presume to know what will happen next, when Wall Street starts to resemble a casino, we can only assume “the house always wins.”
*Many of the individual retail traders are not trading actual shares. They are trading options — the right to buy (or sell) a share of the company at some point in the future at a pre-set price.
Have questions for Life’s Unsexy Toolkit? Send them to unsexytoolkit@gmail.com, and I’ll address them in future articles.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
