So much has been written about GameStop’s stock that it seems pointless to come up with another version of its saga now. It also seems unnecessary to guess what drove the Reddit crowd or why the short sellers hung on for as long as they did. All that is water above the dam, as the saying goes. At this point, the adventure has two important and secular investment lessons: one is that participating in a buying frenzy leads to at least as many losers as winners, usually more, as there is a lot in the game. Reddit crowd who enthusiastically bought at highs and suffered significant losses. The second is that short selling is a very risky business. Both lessons should now be clear, even when seen through the tears of those who have lost. What deserves attention here is that with a few notable exceptions, the media rushed to cover these events.
Aside from those few veteran financial journalists, most of the media coverage has been based on a silly and inappropriate story by David and Goliath. The story, it must be admitted, is powerful, the pivot point in the first book of the Old Testament or Samuel. Who does not cheer as the brave shepherd puts down his harp and picks up his slingshot to bring down the great tyrant? The problem with the media’s trust in this bible story is that it has very little to do with the stock episode of GameStop. No one was a bully, and the Reddit crowd weren’t particularly brave, in large part because many didn’t seem to realize the risk they were taking by raising the price of a stock in a company that had record highs. losses. Without intimidation and without courage, why bring up ancient history at all. Yet the media could not resist.
Some members of the Reddit crowd now realize they were taking big risks. From GameStop stock’s intraday high of over $ 500 per share on January 27 to its price at the time of writing, the stock has lost over 85% of its value. Imagine the feelings of a late January Reddit enthusiast who bought with so many at the end of last month and now finds himself in possession of the bag with most of his “investment” gone. He is hardly comforted by the gains of the few who came out on time and the media focused on as if those losers were just unfortunate collateral damage in a gallant cause. Perhaps these reporters find it difficult to consider the losses because their Bible story does not mention any casualties among the Gentiles.
Treating hedge funds like Goliath also misses the point. Granted, hedge funds sometimes seem to overlap with Wall Street. They are frequently accused of manipulating the markets. It is easy to see how many would like to see them humiliated. If only these arrogant managers were hurt, maybe the Goliath Association would make sense. But the vast majority of hedge fund losses lie with their clients, pension funds and 401 (k), universities and foundations, as well as charitable trusts. You could say that these people were stupid to leave their assets to such aggressive risk takers, but that is no reason to rejoice and triumph over their losses. Most media reports didn’t even mention these relative innocents, but that would complicate an account from a Bible story as well.
Then there’s the widespread, childish outrage that has accompanied anything that thwarted the Reddit crowd’s desire to push up the price of GameStop shares. For example, many enthusiasts have generated significant leverage on the price of GameStop shares by using options and buying on margin. Buying on margin requires a loan, usually from the broker. It is not uncommon for such purchases to reach large proportions for lenders to seek additional collateral to ensure that the buyer can repay the obligation. Yet rather than seeing it as a simple and common way for lenders to protect themselves, the Reddit crowd and many outlets saw it as an arbitrary decision to thwart all the fun. It wasn’t about them.
A similar outrage arose when the exchanges were halted. These business brakes have also been characterized as a sort of attack on Reddit enthusiasts. Rather, it was a defensive move on the part of people who wanted to avoid being drawn into a whirlwind of risk. Keep in mind that every merchant to make a purchase must find a seller. It’s not like brokers have stocks of inventory on shelves in the back room. GameStop also cannot speed up the making of its stocks (although during the boom, company management must have wanted to.) If the trader satisfies the purchase in the absence of an immediate seller, he must take what is effectively a short position in the stock. It is not fair to ask this person to do it for the enthusiasm of a buyer. To avoid such inequalities and risks, markets will stop trading until sellers can be attracted. Unfortunately, many media have shared the outrage of enthusiastic buyers as if no one else’s needs matter.
The popular pose of righteous indignation, though out of place in these areas, was limited at best when it came to suggestions of genuinely illegal activity. There is, for example, evidence that professional investors have encouraged the Reddit mob’s stock pumping in an attempt to get out before withdrawing their support. If this happened, it was a classic and illegal pump and dump system. It is also suggested that more GameStop shares have been sold short than there are, 40% more in fact. Since it is illegal to short sell a stock without owning the stock or the borrowed stock, it would be impossible, except that some short sellers ignored the rules. Such “nude shorts,” as these positions are called, are also illegal. If such things did happen, they received little mention in the media. There are other rumors of collusion and conflicts of interest. These at least have received wide media attention.
Aside from such questions, little in this entire episode deserves the moral superposition so loosely used to describe these events. There was a group of people who for some obscure reason wanted to buy large quantities of a small stock. There was a group of people who thought the purchase was in the wrong place. They bet against each other. Some have won and some have lost. Millions have been entertained. There is no right or wrong involved, unless mindlessly taking excessive risks is immoral.