What a week it has been.
For the past five trading days, the markets were dominated by just one counter that had by now became a buzzword. And within this short frame of time, a few results were seen: a hedge fund had to be bailed out, some traders (may) have become millionaires and even prompted a U.S. congressional query into the whole scheme of things.
And what is the underlying counter that created all these?
That’s right, it is GameStop (GME), a brick-and-mortar retail chain specializing in selling video games, game consoles and their accessories.
While I do not want to delve into the mechanics of whats and hows (e.g., short squeeze, gamma squeeze, etc.), since they were explained by a lot of sites and blogs recently, I would like to briefly focus on the whys, which are somehow related to one another, and my take on the whole thing.
Why #1: The Power Of Social Media
Influence by social media is nothing new. A number of people and groups are taking to social media platforms to spread and peddle their news, campaigns, causes, goods, services, hobbies, etc. Social media, with its ease of spreading the message to the masses, coupled with underlying and simmering issues and frustrations at hand, may easily create a change movement. These changes may be brought about by either through peaceful, violent or anything in between, means.
According to sources that I had read, the GME issue may have its origins on a social media platform Reddit, namely a subreddit forum called “r/wallstreetbets”. Like most social media, news spread fast and wide and before long, “r/wallstreetbets” membership had swelled to about 7.3 million members when I last saw it.
Why #2: Democratization Of The Markets
Granted that trading platforms had existed in the form of smartphone applications (or apps) for quite some time, the entrance of affordable brokerage services (e.g., low to zero commission, offer of fractional shares, etc.), reduced daily activities attributed to the COVID-19 and lower cost of borrowing (or margin) due to near zero interest rate had probably caused a huge interest in the stock markets.
Add in the power of social media ingredient in Why #1 to the whole recipe, this had created what we called “democratization of the markets” where the deemed “power” of the markets, once seen as the domain of institutional investors, is now “shared” with the ordinary folk on the streets. Imagine the abovementioned 7.3 million members, each with a trading account and executing in concert, is a force to be reckoned with, and we have not counted other iterations and/or clones of “r/wallstreetbets” which are springing up on other social media platforms.
Why #3: Us Versus Them
Again, based on what I had read, the GME issue had evolved into another cause, which to put it casually, the institutions versus the retailers. There were some posts and opinions that pointed to the hedge funds, who were blamed for allegedly causing the financial crisis back in 2008/2009. Others felt the markets were unfair as it tended to skew favourably to the large institutional investors rather than the small retail investors (hence the welcoming of the democratization described in Why #2). With these thoughts in their minds, some felt this was one way of getting back at them.
This point was further exacerbated with the decision to restrict or halt the trading of GME shares (and some others) by a number of brokerages on 28 Jan 2021, which fuelled further the feeling of biasness of the markets, though some brokerages explained that the restriction or halt was due to their required posting of additional collaterals with their respective securities clearing houses. Most brokerages, however, did lift the restriction or halt after one day.
The Bedokian’s Take
After seeing the events unfolding, the first question anyone would have asked oneself would be “why did I not go into GME?”. The second question would be “if I had known, I would have bought 1,000 shares back then and I would be semi-retired by now”. Last but not least, “will GME’s run continue?”
Frankly speaking, no one has the foresight to see it coming. Even if someone had seen it, some analysis and due diligence would have been done and the person’s “guesstimate” was accurate on this count. For GME’s case, the catalysts came in the form of new gaming consoles, namely the Playstation 5 and Xbox Series X, and an ex-CEO of an online pet supply store becoming a substantial shareholder. Even so, the price went up to about USD 18.xx on 31 Dec 2020. The later “discovery” of the number of GME’s shares being shorted more than its actual inventory had given some acute observers an opportunity. What happened next, as we know it, is history (last week).
The whole GME phenomenon led to some stating it as market manipulation, while some mirrored it to the Dutch tulip mania back in the 1630s. Shouting buy and sell calls over social media is not uncommon and they had been doing them for a long time, but this time the amount of concerted and unified effort, plus the massive numbers involved, made the big difference compared with the rest.
Now, as I had mentioned in Why #2, other platforms are trying to emulate “r/wallstreetbets”-like setups and calling on others to buy up other counters. However, putting into context of a mania in general, social media is but one of the means of transmitting information, albeit it is faster than word-of-mouth or print. As an investor, you must learn to filter out the noise while doing fundamental analysis, and this may assist you from being sucked into the mania.