The Digest #62
So, What's Up With GameStop?
“If a shoeshine boy can predict where this market is going to go, then it’s no place for a man with a lot of money to lose.”
— Attributed to Joseph P. Kennedy, Sr.
Supposedly Joseph Kennedy famously avoided the 1929 stock market crash when he heard a shoeshine boy opining on the stock market. Although this story is apocryphal and may never have happened, there’s an element of truth in it. Today, we might call it the “Uber indicator” … if your driver is discussing Bitcoin or GameStop, perhaps it is time to be wary.
This sounds elitist, but the point is that when a stock or other investment vehicle reaches popular consciousness, experienced investors hear bells ringing. And these days, everyone is talking about GameStop and the handful of other stocks that were targeted last week by amateur investors who demonstrated that coordinated action could drive up stock prices and cause a short squeeze.
What is going on? I’m not a speculator and I have never shorted a stock. I have never followed GameStop and have no special insights to offer. But like everyone else who follows markets, I have been reading about this story and thought I would send out a newsletter with links to the best material I’ve read so far.
The Storming of the Bastille: The Reddit Crowd targets the Hedge Funds! by Aswath Damodaran, January 29, 2021. I recommend reading this article first, before anything in the mainstream financial media, because Damodaran does an excellent job of presenting the background needed to understand what took place last week, including the mechanics of short selling and the vulnerability shorts have in the form of “short squeezes”. He then goes into quite a bit of detail regarding GameStop specifically. If you prefer to listen to Professor Damodaran, check out the video below that accompanies his article. (Musings on Markets)
The Real Force Driving the GameStop Revolution by Jason Zweig, January 30, 2021. It is always worthwhile to read Jason Zweig’s Saturday Wall Street Journal column. This week, he provides a historical perspective — that this is the latest phase in a long evolution and is unlikely to disrupt markets overall. (WSJ)
GameStop Promoter Keith Gill Was No “Amateur” Trader by Pam Martens and Russ Martens, January 30, 2021. Keith Gill is the man credited with driving the GameStop mania but he appears to not be a naive amateur trader. Pam and Russ Martins investigated Mr. Gill’s background and found that he has significant industry background and certifications. Additionally, his personal trading during this period, which he has documented on YouTube videos with screenshots of his brokerage account, could land him and MassMutual, his former employer, in legal hot water. (Wall Street on Parade)
Keith Gill Drove the GameStop Reddit Mania. He Talked to the Journal by Julia-Ambra Verlaine and Gunjan Banerji, January 30, 2021. The Wall Street Journal published a profile of Keith Gill that includes excepts from an interview. “Mr. Gill said he wasn’t a rabble-rouser out to take on the establishment, just someone who believes investors can find value in unloved stocks.” (WSJ)
When They Start to Lose, They Change the Rules! by Nick Maggiulli, January 29, 2021. Robinhood was at the center of the GameStop drama since it has become the broker of choice for many day traders. As GameStop shorts, notably including several well-connected hedge funds, were being pounded, Robinhood restricted the ability of its customers to buy shares of GameStop and a handful of other stocks. Maggiulli provides his perspective on what might have really motivated Robinhood and casts a skeptical eye on the idea that the brokerage firm was simply looking out for its clients in a benevolent manner. (Of Dollars and Data)
As a quick aside … on the topic of Robinhood, the firm’s actions this week have attracted bipartisan scrutiny and rare agreement across the aisle. Let these tweets sink in for a moment … if Rep. Ocasio-Cortez and Sen. Cruz are able to agree on anything, the target of their outrage should be very worried. At a minimum, Congressional hearings are certain.
Why It’s Usually Crazier Than You Expect by Morgan Housel, January 28, 2021. It’s all about feedback loops: “I want to try to explain why Gamestop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions. It’s a force that can explain a lot of baffling trends lately, and it’s so easy to underestimate and overlook.” (Collaborative Fund)
GameStop: Intentionally Dying by Chris Arnade, January 28, 2021. Many of the amateur traders who organized on Reddit explicitly wanted to “stick it to the man” when they bid up GameStop. For many, it was not a matter of making money but making a political statement. I thought that Arnade’s commentary rang true in many ways, especially his belief that many of the traders consider the system to be rigged: “… if you are not going to be allowed to win a rigged game, you might as well ruin it, and extract just a tiny moment of joy from that.” (American Compass)
Steer Clear of the Short Side by Mohnish Pabrai, August 13, 2003. This nearly eighteen year old article has nothing to do with GameStop but serves as a good reminder that the game of shorting is fraught with peril. It is difficult to feel sorry for the hedge funds caught in the GameStop drama and the fact is that they are run by professional traders who should have understood the risks they were taking. One of the lessons every investor must learn is that going short is NOT the opposing of going long on a stock … these are very asymmetrical bets. Pabrai’s old article clearly explains why this is the case.
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