053: What Happened with GameStop and WallStreetBets?

Everyone loves a David vs Goliath story. The little guy sticking it to the bully, the underdog getting the win. It’s understandable that many people got excited about the crazy market activity in stocks like GameStop and AMC. These companies, seemingly hanging on by a thread after Covid, looked like they were doomed. But then, seemingly out of nowhere, these stocks started to see their price jump to mind bending levels. 

Join Financial Advisor Tim Russell, CFP® and Rev. Drew Gysi as they discuss what really happened with GameStop and WallStreetBets.

See the show notes here!

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Transcript

Everyone loves a David vs Goliath story. The little guy sticking it to the bully, the underdog getting the win. It’s understandable that many people got excited about the crazy market activity in stocks like GameStop and AMC. These companies, seemingly hanging on by a thread after Covid, looked like they were doomed. But then, seemingly out of nowhere, these stocks started to see their price jump to mind bending levels.  

• What was behind this odd market behavior?
• What should we think about what happened? 
• Is it wise for a Christian committed to biblical stewardship to get involved in this kind of investing? 

In this episode, we are going to explore one of the most interesting investing stories in recent memory and discuss what lessons we can learn from what took place. 

The Setting

Do you remember back in 2009 when a group called Occupy Wall Street tried to disrupt the markets? They held rallies near the NY Stock Exchange calling for more regulations and higher taxes. They claimed that the top 1% of wealthy Americans was stealing from the rest of the 99%. This group exposed a deep seated distrust for the “Wall Street Elite” in our culture. There were several factors leading to this movement. 

1. Envy Politics at play. Envy Politics is when you want what (i.e. wealth) someone else has and you seek to take it from them and shame them for having what you want.  Second, there were real excesses and abuse happening in some parts of the system. There were fat cats getting rich through exploiting others. 
2. Technological advances now made investing much cheaper and easier. Smartphone apps like RobinHood, made investing much simpler for the average person. Costs of trades were reduced or eliminated

Social Media has developed with Facebook and Reddit allowing everyday small investors to rally together around common investment themes and make an impact on the price of stocks.

The Characters

To understand what happened to GameStop, you have to understand some of the players or characters making predictions on the future value of the company. 

1. Sophisticated Investors - These are mostly large institutional investors who are scouring the market looking for a company that they could potentially make money from.  These typically trade in the multi-million dollar range and have lots of credentials and training.  They may have gone to school for business or finance. These are smart people who are good at making money. In the case of GameStop, there were several hedge funds involved. Citron Capital and Melvin Capital are two examples. 
2. WallstreetBets Investors - This is a loosely associated group of investors who also seek to make a lot of money in the stock market. They go back and forth with different ideas and options. Many of these strategies involve insane amounts of risk that make me, as a financial advisor, cringe.

How The Markets Work 

To understand what happened next, you really have to understand some basic concepts of investing in stocks and the markets. The following description is for illustrative purposes only. 

1. Buy Long - When you believe that a company’s stock price is undervalued, or that it is likely to increase in value over time, you would buy that stock. In wall street talk that is called being “long” the stock. In this arrangement, you exchange money for shares of the company. There is no future obligation to sell those shares. 
   • The risk in this kind of transaction is that one could lose the entire investment. 
   • On the flipside, the investment could theoretically grow many times the original investment.
   • Limited downside, unlimited upside potential.
2. Short Sell - When you believe that a company's stock price is overvalued or that it is likely to fall over time, investors could “short” the stock. This means that they essentially borrow shares from their brokerage company, sell them at today’s price and then repurchase those same shares and give them back to the brokerage company at a hopefully lower price. They seek to sell high, buy low and pocket the difference. 
   • The risk in this kind of investment is that one could potentially have unlimited losses. If 1000 shares of stock are sold for $10/share, the short seller receives $10,000. But if the price jumps to $1,000/share, the short seller would be forced to repurchase those shares costing them $1,000,000 (loss of $990,000). 
   • On the flipside, the price of that stock could drop to next to nothing allowing the short seller to keep almost all of the $10,000. 
   • Limited upside, unlimited downside potential.

Wall Street’s “Smart” Bet

The sophisticated investors found what they thought was a “no lose” kind of opportunity with GameStop. This company predominantly sold physical video games, gaming consoles, and gaming accessories in its physical store locations all across the nation. With the advance of streaming technology and the success of online gaming platforms like Steam, the need for physical games and physical stores is declining fast. Add to this trend the impacts of COVID shutdowns causing revenue to drop like a lead balloon and you have the recipe for a company that seems likely to go out of business. Can you say Blockbuster Video? 

If the company goes bankrupt, the stock would obviously take a big hit. This led several hedge funds to take a short position (short sell) in GME. Based on their thinking, this was as close to a “sure” bet as you can get. All they had to do was sit back and “let nature take its course.”

WallStreetBets Sees An Opportunity 

There are those in the investing world who happen to think that GME was actually underpriced and was primed to surprise everyone. One particularly passionate investor was on a Reddit message board called Wallstreetbets. He was eventually able to convince enough individuals to give GME a chance. As more people bought shares, the price of GME started to rise.  Other investors saw that there was a HUGE number of shares which were being shorted, many times the normally trading volume of the stock. This presented an amazing opportunity to create a “Short Squeeze Rally.” 

A short squeeze rally is when the price of a highly shorted stock goes up causing some of those who are short the stock to have to exit their position by buying their shares back at a loss. The more people who buy the shares, the higher the price goes, the more the shorts trip over themselves to exit the stock, the higher the price goes. These rallies are intense and amazing to watch. 

Since the majority of investors who had shorted GME were institutional investors and hedge funds, the Wallstreetbets community became excited about the narrative of “sticking it to the man.” They felt that they could cause massive damage to some of these old elite firms through GME. They thought they could make them pay for all the harm Wall Street caused during the 08-09 market crash.  

In the end, many of the sophisticated investors lost billions of dollars. The early investors into GME became overnight millionaires. Many of the later investors who jumped into GME are now experiencing losses as the stock is well off its highs.

What is the Moral of the Story? 

There are several lessons to be learned from this story. I really enjoyed watching all of this transpire. The markets are fascinating and exciting. 

1. Investors have every right to short a stock that they believe is overpriced. At the same time, investors have every right to take advantage of a short squeeze opportunity. This is not right or wrong, it's just how the markets work. The “big boys'' knew the risks they were getting into. 
2. Investing is not the same thing as gambling. It is believing in companies that can produce value and investing in them for the long-term. 
3. Biblical Stewards should be concerned about Greed. Greed from the Wall Street “Insiders.” Greed from the WallStreetBets community. And most importantly, greed in their own heart. Do not turn investing into a get rich quick scheme. 
4. Slow and steady wins the race. At the end of the day, neither side of GME were looking for “safe” or “slow and steady” options. They wanted to find the next thing that would make them rich(er).

Biblical Application

In this section, we will review several verses/passages which address greed, get rich quick schemes, and how to build wealth.

GREED:

• He who increases his wealth by exorbitant interest amasses it for another, who will be kind to the poor. Prov 28:8
• Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income. This too is meaningless. As goods increase, so do those who consume them. And what benefit are they to the owner except to feast his eyes on them? The sleep of a laborer is sweet, whether he eats little or much, but the abundance of a rich man permits him no sleep. (Ecclesiastes 5:10–12, NIV84)
• Woe to you who add house to house and join field to field till no space is left and you live alone in the land. (Isaiah 5:8, NIV84)
• For of this you can be sure: No immoral, impure or greedy person—such a man is an idolater—has any inheritance in the kingdom of Christ and of God. (Ephesians 5:5, NIV84)
• People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs. (1 Timothy 6:9–10, NIV84)
• You know we never used flattery, nor did we put on a mask to cover up greed—God is our witness. (1 Thessalonians 2:5, NIV84)

GET RICH QUICK SCHEMES:

• Dishonest money dwindles away, but he who gathers money little by little makes it grow. (Proverbs 13:11, NIV84)
• Do not wear yourself out to get rich; have the wisdom to show restraint. Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle. (Proverbs 23:4–5, NIV84)
• “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much. (Luke 16:10, NIV84)
• An inheritance quickly gained at the beginning will not be blessed at the end. (Proverbs 20:21, NIV84)
• A faithful man will be richly blessed, but one eager to get rich will not go unpunished. (Proverbs 28:20, NIV84)

HOW TO BUILD WEALTH:

• He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty. (Proverbs 28:19, NIV84)
• All hard work brings a profit, but mere talk leads only to poverty. (Proverbs 14:23, NIV84)
• A sluggard does not plow in season; so at harvest time he looks but finds nothing. (Proverbs 20:4, NIV84)
• In the house of the wise are stores of choice food and oil, but a foolish man devours all he has. (Proverbs 21:20, NIV84) 
• But seek first his kingdom and his righteousness, and all these things will be given to you as well. (Matthew 6:33, NIV84)

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The topics discussed in this podcast are for general information only and are not intended to provide specific investment advice or recommendations.  Investing and investment strategies involve risk including the potential loss of principal. Past performance is not a guarantee of future results.

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