The Lessons of GameStop

I’m sure many of you were watching with some fascination (or horror) as the markets for three unprofitable companies—GameStop, AMC and Blackberry—drove their share prices up nearly 1,000 percent, collectively.  You may also have noticed that Bitcoin has exploded in the last year.

The story may be the best illustration yet of the difference between gambling and investing—even though you can do both in the investment markets.  Hedge funds, which engage in very sophisticated forms of gambling, made very logical bets that the prices of these three companies—one of them seemingly outmoded the way Blockbuster was some years back, another decimated by stay-at-home restrictions and the third an increasingly wayward competitor of industry giant Apple—would be more likely to fall than rise dramatically.  Au contraire, said a group of amateur investors who engage in online conversations on subreddit r/wallstreetbets (does the name suggest gambling or investing?), and they promptly ganged up to raise the price, particularly of GameStop, by raising each others’ bids and defeating the short positions.

This, of course, is a classic short squeeze; what made it newsworthy is the fact that the people at the gaming table were not big Wall Street firms, but a bunch of amateurs, and most newsworthy was the fact that the amateurs seem to have beaten the stuffing out of the professionals.  But it seems obvious that the amateurs at the stock market gaming table were oblivious to the long-term consequences of their actions.  It’s hard to know what the intrinsic price of any stock is, but one can reasonably surmise that it is not one thing one day, and 1,000 percent of that number a few days later.  What happens when your coterie of vagabond investors runs out of money, and can no longer bid up the price of each others’ shares?

But I think the bigger story here—which seems not to have occurred to the media outlets who are breathlessly covering this David and Goliath struggle for supremacy—is what it tells us about the mindset of many retail investors.  When their goal is to gamble, and destroy other gamblers at the table, the game for everybody else becomes increasingly dangerous.  I remember back in 2000 when people were getting stock tips from their hairdressers—and we know how that ended. 

This is not a prediction of the day and the hour when we will experience a bear market; I remember many financial planners in the runup to 2000 scaling back their tech exposure, and scaling it back again, and discovering that a bull market can run on irrational fumes for far longer than we can imagine.  But I do think that these are red flashing light kind of signals that we are entering some kind of market top.

I also think that this whole incident might be a warning sign for other gamblers at the table—and I’m looking at you, hedge funds.  It’s hard to see how these expensive blood suckers on our capitalist system can tell their investors, with a straight face, that they have some kind of edge in a marketplace where they’re outnumbered by newly-empowered retail investors.  I sincerely hope there is no appetite in our government for bailing out the hedge funds that lost hundreds of millions of dollars making highly-leveraged bets that they couldn’t cover.

My best guess is that the patient investors will end up winning the kitty at the investing table and the gamblers will end up with losses—in the long run, when we get through the bull and the bear.  But as the frenzy continues, as the headlines talk about investing like a game, I think it is going to become difficult over the next year or two to keep clients playing that long game when they see fortunes being made and lost and made again in the last frothy bubbles of the current bull market. 

A prominent advisor in the financial planning space once told an audience the story of a client who, for years leading up to the Tech Wreck, would impatiently ask when his portfolio would finally go all-in on the tech boom.  The investor finally left and did the all-in thing on his own—right before the crash, and the advisor told the audience that he wished he could be a big enough person not to feel some sense of satisfaction in the story.

I hope all of you will work hard not to have to experience that same feeling, because in the next year or two your clients are going to need you more than ever.