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Wall Street frenzy: Who won the GameStop saga?

Last week I had to stop and think about GameStop. For anyone who missed it, GameStop has been at the centre of a battle between small (retail) and large (hedge fund) investors, initiated by a forum on Reddit r/WallstreetBets.

GameStop was one of the most shorted companies on Wall Street, so a group of WallStreetBetters set up a short squeeze manoeuvre by advertising it on the forum and thus moving capital to the stock en masse, catapulting it upwards.

The growth in the share price, along with a generational class struggle rhetoric (Gen X vs Boomers), led to an increasing number of followers encouraged by a ‘value’ story based on the unlikely digital transformation of a brick & mortar retailer.

This interest created a bubble, which resulted in the value of the company going from $300 million to $27 billion to $6 billion in the space of a couple of weeks. Hedge funds, among others, lost tens of billions of dollars.

The difficulty in managing the sheer volume of trades forced Robinhood, a broker that has popularised free stock trading, to raise $3.2 billion in capital. This was in order to avoid failing capital requirements (i.e. close shop) by urgently blocking the trading of the stock with several thousand customers remaining stuck in the trade.

Beyond making hedge funds lose a few billion, it seems absurd to celebrate this saga as a victory for small investors against the establishment. On the contrary, the story highlights a dangerous and distorted mindset that puts a lot of people’s money at risk who, in the last year, have turned to online trading. Historically, this usually happens in prolonged periods of bull market.

Of the many different facets of the story, I would like to underline three in particular:

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Firstly, investing, speculating and betting are three different things. The actions of the funds and some of the professional traders on the forum are understandable; these are people fully aware of what they’re doing. 

However, the vast majority of people on the forum have been swept up by the same kind of mass misinformation that we’ve seen in other sectors (i.e. politics). A lot of people made a poor decision betting their savings on leverage without understanding the risk. “Considering YOLOing entire ROTH IRA balance into GME” – a proven recipe for getting to retirement without any money.

Secondly, the market is a zero-sum game. For every Euro someone earns, a Euro comes out of someone else’s pocket. For once, the funds were on the losing side of this dynamic, not just retail investors. It’s a tidy narrative, but are we sure we can accept such a simplistic outcome? 

How many Redditors, for example, jumped on the bandwagon too late, when the stock was worth $469 before dropping back to $90? Between $469 and $90, more than $20 billion worth of value was burned, – some were lost earnings but, in any case, a large amount must have been money lost. Just as you wouldn’t compete in the swimming at the Olympics, it makes little sense to compete in the markets without the resources and technical nous of the competition. This is a lesson that every bear market eventually gets round to teaching, and there is a lot of historical evidence to support that.

The final point concerns the role of social media. In the last year, we’ve noticed a growth in the demand for ‘information’ online, which has inevitably come with the proliferation of alleged experts on social media whose best advice is ‘buy low, sell high’. The result has been the popularisation of trading as one of the solutions to the problems for a generation which has, unfortunately, been badly treated economically. 

When I get multiple contacts on Linkedin from people I consider intelligent, who ask themselves if it makes sense to trade crypto to pay the mortgage, I can’t help but think that current financial education is not enough to stop people making big mistakes. We need properly apportioned responsibility, along with the regulation of information platforms to reduce their undoubted power of persuasion. Also, financial institutions (i.e. fintechs) that ultimately exist to make money when people trade must act more responsibly towards their users’ savings.

The short answer is no, I don’t think this is the way to pay the mortgage. It is certainly not the way to maintain and grow the real value of your assets over time. It is just a way to have a little fun when things work out but never bet a big part of your savings on it.  

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