Dumb Money?
Gamestop (GME) is a struggling company who's stock got a lift in the markets due to some recent good news. That good news didn’t change the bleak outlook for a company that suffers from money losing brick and mortar stores and a trend that favors digital video game sales. But that jump caused large multi-billion dollar short-selling hedge funds to short GME stock with the assumption that it would continue to fall after their bumps.
(Short selling is when someone borrows shares at a higher price then sells them immediately with the assumption that they can buy the shares again later at a lower price, give those shares back and then pocket the difference.)
Most of the time that works, especially when the hedge funds are getting help from short seller reports who publicly expose these shorted companies weaknesses. But this time a bunch of small investors, connected mostly through reddit got rubbed the wrong way by one of the short sellers report and decided to flood the stock with unexpected new money, causing the stock price to rise instead of fall. This causes the short sellers to lose money because they are going to have to give back those borrowed shares at some point.
As the short sellers watch the stock rise along with their losses, they start folding one by one and buying the stock in order to give the shares back and close their position. Buying those shares causes the stock to rise which in turn puts more pressure on the short sellers and more of them have to buy more shares. This is called a SHORT SQUEEZE and has resulted in the stock being up 10,000% at its high last week for the last 12 month.
This soon spread to a couple of other stocks and the newest targets are commodities (Silver). Many now celebrate the reddit group WallStreetBets as revolutionaries for sticking it to the big hedge funds. Personally I have a few issues with that since it’s still manipulation. In the end, many people and not just billionaires will lose a lot of money because a short squeeze usually ends with the stock collapsing.
But who can blame a bunch of small investors, celebrating winning over very large investors who have always held the exclusive rights for bending things in their favor. GameStop will most likely not be saved, no matter how high the stock price is flying. But maybe something good will come out of this. Last week’s clumsy attempts to regulate the little guy by restricting their ability to buy certain stocks will hopefully be replaced with looking into hedge fund shorting practices. Shorting itself is just an investment tool like many others but the extent of how it has been used by large players is more than unethical. At least we could stop calling small investors money dumb money, since it doesn’t look so dumb right now.
Falk Hampel
