Most City share-tippers would be unlikely, you might think, to recommend putting your money on a chain of bricks-and-mortar video game shops.
Lockdowns have ravaged the High Street, non-essential shops are closed in many countries — and electronic retailers such as Amazon dominate the online space with very competitive prices.
And yet if, a few weeks ago, you’d taken a punt on GameStop and bought shares when they were worth $17, you would have made serious money. Yesterday, they stood at $240 having gone as high as $469 this week.
One lucky investor even claims to have turned a $50,000 stake in the company into a life-changing $23 million.
Some ‘Master of the Universe’ in a Wall Street skyscraper? Quite the opposite.
Most share-tippers would not have suggested would-be investors to put their money into brick and mortar video game shops, such as Game Stop
For once the financiers aren’t popping the champagne corks, they’re howling in fury.
The winners in the most extraordinary financial story for years aren’t the big investment houses and banks that, in many cases, have done extremely well during the pandemic. (The hedge fund industry reaped $127 billion last year, while banking giant JP Morgan posted a record profit of more than $12 billion last quarter alone.)
Instead, they’re ordinary investors, including many in the UK.
Locked down at home, many have taken to trading stocks and shares — and decided, in anarchic online share-tipping forums, that it would be fun to shake up the markets and biff the noses of the most bloodthirsty ‘vampire squids’ of all: hedge funds.
Banding together on WallStreetBets, a rambunctious stock-market community on the popular social media site Reddit, an army of amateur traders decided to work against the financial professionals, who had bet that GameStop was about to collapse.
In scenes reminiscent of The Big Short, the 2015 hit film that told how scrappy investors beat the big banks at their own game after the 2008 financial crash, these ‘little guys’ have mercilessly punished the Masters of the Universe for their apparent misjudgment.
Using low-cost or even free share-trading sites such as Robinhood, the Redditors have been piling on to buy — or bet on —GameStop shares, driving up the share price to ludicrous levels for this 37-year-old company that had been laying off staff and closing branches on both sides of the Atlantic.
Youtuber known as ‘Roaring Kitty,’ AKA Boston dad Keith Gill, who was behind the Wall Street meltdown
Wall Street thought the share price would collapse. But, in fact, it went through the roof, up 1,000 per cent in the past month and enjoying an extra fillip when billionaire Tesla founder Elon Musk raved on social media on Tuesday about ‘Gamestonk!’.
The company is now valued at around $10 billion — more than American Airlines, the biggest in the country.
Hedge funds often make money by betting on failure. They are the ones that are failing now.
So how exactly did it work?
Well, as lockdowns hammered traditional retail businesses last year, many major investors bet against these companies’ share prices: ‘shorting’ in financial jargon.
This involves borrowing shares from a broker and then selling them on. If the price falls, investors can buy them back again at the lower price, return them to the broker — and make a tidy profit. But, if the price goes up, the bet backfires and the hedge funds and other institutions suffer.
In theory, if the share price keeps going up, there is no limit to the amount of money they can lose.
This has happened with GameStop, badly hitting two big U.S. hedge funds.
It’s clear from WallStreetBets that millions of armchair investors didn’t just want to make money but also cock a snook at hedge funds whose business is to profit from others’ misfortunes.
But the investment funds and their highly paid analysts who bet on GameStop’s demise didn’t just fail to anticipate the social media amateurs.
They also missed out on other developments.
As far back as August last year, Ryan Cohen, a billionaire 30something founder of an online pet-food seller, started buying millions of shares in GameStop. He and two executives later joined GameStop’s board, with plans to help the company move online.
Youtuber Roaring Kitty refers himself to Mr Wizard online and was behind the stock-buying frenzy
Added to that, late last year the two major games console manufacturers, Sony and Microsoft, released new versions of the PlayStation and Xbox: good news for a company that sells video games. GameStop even signed a deal with Microsoft that gave it a share of online Xbox earnings.
This all meant that the company didn’t look nearly so hopeless after all. As its share price rose, the hedge funds and other institutions that had predicted the company’s collapse fought back by shorting the company even more, hoping (in vain, as it turned out) to defend their original ‘positions’ by suppressing the share price.
In all, some 71 million shares were shorted. However, GameStop has fewer than 70 million shares in total, of which about a fifth are held by company executives who are prevented (under insider trading laws) from selling them easily.
Appropriately for a bunch of day-traders doing much of their buying and selling on a site called Robinhood, there is an anti-establishment aspect to the Reddit rebellion
Another 20 per cent are held by large financial institutions who don’t usually trade them. This meant that as few as 20 million shares were available to the hedge funds and other ‘sharks’.
This very messy situation was spotted by, among others, the mischief-makers at Wallstreetbets who spread the word to the forum’s two million subscribers (a figure that has since soared to 4.5 million) that now was a perfect moment to make some money and put two fingers up to the plutocrats.
Lots of these small-scale investors also cannily limited their potential losses by using financial instruments known as ‘options’, rather than buying the shares. But it’s important to see this drama in a bigger context.
In London and New York, this share-buying frenzy has now spread to other retail stocks that have been heavily shorted, boosting the price of companies including electronics manufacturers Blackberry and Nokia (makers of once-fashionable phones), UK education giant Pearson and Odeon cinemas owner AMC Entertainment.
US President Joe Biden’s economic team are monitoring stock market activity around GameStop
Meanwhile, appropriately for a bunch of day-traders doing much of their buying and selling on a site called Robinhood, there is an anti-establishment, even class-war aspect to the Reddit rebellion.
‘Let’s bankrupt these billionaires and hedge funds! They will not outlast the masses!’ wrote one WallStreetBets user. ‘Everyone buy in now! We aren’t done yet!’
Sayem Ahmed, a UK marketing expert who joined in the GameStop stampede, said: ‘Part of me got in it for the hype, but part of me did it for another reason. I hate billionaires. I don’t think they should exist.’
Last night, online brokerages Robinhood and Interactive Brokers restricted trading on shares in GameStop and AMC for amateur investors — controversially allowing hedge funds and their ilk to continue trading them.
The firebrand Left-wing senator Alexandria Ocasio-Cortez criticised the move, calling for a committee hearing in Washington. It was rumoured that law suits were being considered against the brokerages.
Critics counter that WallStreetBets’ activities amount to illegal market manipulation. And yet, others insist, isn’t that what the hedge funds do every day by shorting stocks — sometimes of perfectly good, viable companies — and then putting the word out that the businesses concerned are dead ducks?
The White House said yesterday that Treasury Secretary Janet Yellen and President Joe Biden’s economic team are monitoring stock market activity around GameStop and other heavily shorted companies.
However, in these straitened times, politicians aren’t necessarily saying what the finance world wants to hear.
‘We’re done letting hedge fund billionaires treat the stock market like their personal playground, then taking the their ball home as soon as they lose,’ said Ro Khanna, a Democrat congressman.
Even so, amid signs of a dangerous stock market bubble, commentators warn it may all end in tears.
The past few months have seen extraordinary movements in the markets, from shares in the aforementioned Tesla rising eightfold to the controversial cryptocurrency Bitcoin soaring from about £5,000 per ‘coin’ to more than £30,000.
This, of course, is all taking place against a backdrop of rising unemployment, multiple lockdowns, soaring public expenditure and (at least in Britain) the near-certainty of tax rises to come.
U.S. investor Michael Burry, made famous by the feature film The Big Short, described the latest developments as ‘unnatural, insane, and dangerous’.
The ‘short squeeze’ may yet become a lethal crush.