The GameStop Saga has dominated the financial news of late and for good reason...it has been insane. I will attempt a thumbnail sketch with as little jargon as possible to summarize the madness:
GameStop, a retail seller of video games and a business that is much the same as Blockbuster Video was just before it went belly up, has been a favorite short sell target of hedge fund guys on Wall Street. A short sale is when you’re betting that a stock is going to DROP in value. Anyway, a large group of retail day trader types at a Reddit site figured out a way to hype the stock among its 2 million or so subscribers over a period of months with the strategy of bidding UP the price of the stock. The purpose of this strategy was two fold, as best I can figure. First, if the price shot up as they hoped it would A. Make them a fortune in a very short period of time and B. Force the hedge fund guys to buy more shares of GameStop to cover their mounting losses, thus driving the price up even more...rinse and repeat...in so doing cause the hedge fund hot shots to lose a boatload of money. Call it a victory of the little guy over the Wall Street fat cats.
Ok, although I totally understand and appreciate the value in a healthy market of the short sale, at least in theory, I generally detest short sellers. They are the guys who I consider vultures, dudes who only profit when something is dying. So the fact that these renegade day traders have brought many of them low gives me vicarious pleasure that I’m not exactly proud of! If you hear suggestions that these day trading millennials are some sort of brand new and unique threat to the stock market, fear not. There is nothing at all unique about this except for the fact that now a bunch of nobody’s have figured out how to do what hedge fund managers have been doing for decades...front running a bunch of worthless stocks and then profiting through put options.
But here’s my problem with all of this. It’s not investing. It’s stock manipulation and trading. Nobody is buying anything, nobody is making investment decisions because of the products or services of the underlying companies. Nothing at all is being produced except ginormous profits and staggering losses. It’s the exact same thing that happens every weekend in Las Vegas.
I own a reasonably diverse portfolio of stocks and mutual funds that have been put together with an eye towards, yes...profit, but also sustainable growth. Every stock I own was invested in because I believed in the product or service they brought to the market. Further, I thought that they were well run, and in a position to be profitable many years into the future. By taking partial ownership of those companies I was rewarding them for their well made product or service, and helping them remain so. Now, I’m not a freak when it comes to this socially responsible investing thing. My portfolio is not a philanthropic enterprise. A company that makes the most socially responsible product in the world still has to be well run and profitable or I’m not interested. However, there are many companies that are both of those things that I would never invest in because I object to the product or service on moral grounds. That’s my right as an investor. What I will never do as an investor is seek to profit on the collapse of a business, in others words, I morally object to the implications of short selling anything. It’s just not in my DNA.
Does that make me a sucker at times? No doubt. But as far as I can tell, it hasn’t hurt my results long term. What this GameStop episode is doing is undermining the confidence that many ordinary retail investors have in the fairness and transparency of equity markets. How can a rag tag collection of dudes on the internet drive up the value of a company with very little prospects by 400% in just a few days? It seems shady and dangerous. And if two months from now billions of dollars have been gained and lost and GameStop stock is back to what it was before all of this started the question will be...What was the point? If it feels like manipulation, smells like manipulation, and looks like manipulation, its probably manipulation.
What it’s not is....new.
Here’s an idea. Only buy things you can believe in. Only buy things that you can explain in less than two minutes to the kid down the street.
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