A subreddit community takes on the Wall Street elite. The battleground? A struggling brick-and-mortar games retailer. What does the GameStop short squeeze saga reveal about the changing investment landscape… and investing in a market where powerful, internet-driven trends can make seemingly worthless assets explode higher for no real reason?
Make no mistake; The GameStop story runs deeper than a group of investors collaborating on Reddit to push a stock to all-time highs for the sake of it.
ICYMI, GameStop, a video game and consumer electronics company floundering in recent years amid failed investments and the rising dominance of online retail, rocketed from $US17.25 to $US325 in the first month of 2021.
Why?
Because the users of r/wallstreetbets orchestrated a massive ‘short squeeze’ in a bid to push GameStop’s share price up to $1,000.
For some, the mission appears similar to a ‘crypto pump’, where investors band together to drive a tiny, cheap cryptocurrency’s price higher so they can cash out for massive, quick profits.
For others, however, the GameStop short squeeze appears to be about more than getting rich quick.
Because if the internet raiders can continue to push the stock’s price higher, they’ll cause the hedge funds and Wall Street elites trying to ‘short’ GameStop to lose large sums of money.
In other words, this is like the stock market equivalent of the people rising up against the vastly more powerful individuals whose wealth traditionally dominates the stock market and whose influence and power traditionally rakes in the biggest profits — often at the expense of everyday investors.
What Is A Short Squeeze?
To understand what a short squeeze is, you need to know what shorting is.
In simple terms, short selling is when you borrow shares from a broker and sell them for a given price, under an agreement that you will buy those shares back at a given point in the future.
If you borrowed $5,000 worth of shares in a company you thought was going to be trading 50% lower in three months — and your prediction proved correct — you’d be able to buy those shares back for $2,500, return them to your broker and pocket the other $2,500.
That’s the basic idea of short selling.
It’s a way to potentially profit from prices falling instead of rising.
A short squeeze is when upward price movement puts pressure on short sellers whose shorts are nearing expiry.
GameStop is a prime example.
Investors buy up the stock, driving the price higher. This pressures the short sellers to buy too, since they are trying to protect themselves against the losses they’ll incur if the stock doesn’t fall to their target price by the agreed date.
Another way to think of a short squeeze is that it’s a battle between those wanting to profit from higher prices, and those wanting to profit from lower prices.
Veteran Trader: Beware Ego, Bias & Thinking You Can Resist The Trend
Jason McIntosh is the founder of Motion Trader, an algorithmic trading and stock market advisory service.
Jason’s been investing and trading professionally for three decades.
Here, he shares his thoughts on short selling, the GameStop story and a dangerous idea many investors grapple with.
“Short selling is a dangerous game, even for the professionals.”
— Motion Trader’s Jason McIntosh
It’s a situation where there is unlimited downside and limited upside i.e. the most a stock can fall is 100%, but it could rise many times more (as the short sellers of GameStop experienced).
It’s basically the opposite to what investors should be looking for.
I target set-ups where I have “asymmetric” risk/reward. That is, I need the potential of making much more than I’m risking.
While short sellers can get this dynamic, it’s nowhere near as good as when you buy shares.
Before I invest in anything, I ask the question: Could I make a multiple of what I’m risking?
“No matter what your numbers say, all that matters is what the market does.”
— Motion Trader’s Jason McIntosh
Another thing to bear in mind is around following the price action.
I’m sure there was ego involved with the GameStop short sellers.
They did their numbers and they were sure they were right — this probably made resistant to taking an early loss.
But no matter what your numbers say, all that matters is what the market does.
It’s more important to exit and stay in the game, than fight on and risk being wiped out (something many retail investors experience).
“Simple lesson: Don’t fight the trend…”
— Motion Trader’s Jason McIntosh
The final point is that markets can run further than just about anyone can imagine.
This is why investing with the trend and letting winners run is so important.
GameStop, Tesla, Bitcoin, and many others had huge gains amidst widespread disbelief.
Many people have lost large sums of money fighting the trend. Others left big sums on the table by exiting too early.
Simple lesson: Don’t fight the trend and let your profits run.
Buy The Hype? Or Ignore The Noise?
The conflict between fundamental value and market behaviour has always been a point of contention for investors.
The GameStop story — still unfolding at the time of writing — shows you two things.
First, the power of the market to make investors abandon ideas of fundamental value and pile in on a trend.
GameStop isn’t Tesla. It’s a beat-up traditional retailer that probably would still be trading flat were it not for r/wallstreetbets.
Second, the power of the internet to challenge the financial establishment.
As Jason points out, Bitcoin and GameStop aren’t that different.
One could take the view that they’re junk assets devoid of any meaningful fundamental value.
Or, one could look at the gains and accept that when a trend takes hold and creates events like these, you’re better off being in to win than sitting on the sidelines.
Whichever way you prefer to view it, the reality is that the GameStop short squeeze is going to make (and lose) a lot of people a lot of money.
