The GameStop Short Squeeze, Financial Independence, and Other Related Matters

This blog is primarily about financial literacy and getting people 25 years old and younger to learn about financial independence. And I gotta say, this insanity with GameStop brings to light exactly why I strive for financial independence in the first place.

The Basic Story

First, let’s make sure we understand what exactly happened in the first place. There are a lot of stock market terms that the average Joe doesn’t know the meaning of. Shorts, calls, positions, it’s all jargon unless you’re amassing capital to make the rich even richer. My glossary on investing terms doesn’t include these; there’s no need to know them if you’re only investing in index funds. It does, however, include some information about what a hedge fund is: an investment option only available to high net worth individuals (i.e. multi-millions at minimum) that’s only open to investors with special certification.

Oftentimes these hedge funds will make a lot of money by “shorting” a company’s stock. Shorting, or short selling, is a different stock market strategy than just buying stocks. It’s not even about holding them long-term or choosing to sell them off. No, shorting adds pizzazz to the mix!

It’s more fun!

Hedge fund managers will look at a company and might exclaim “hey! Their stock is overpriced and will totally be cheaper in the future! I’m willing to bet real money on this!” And then they do by short selling. Said managers will borrow these stocks from a broker and immediately sell them for the current price. This comes with the promise to return said stocks to the broker at a specific date in the future. No matter what price those stocks are when that specific date comes, the managers must return the same stock amount to the brokers that let them “borrow” it; there is inherent value in owning part of a business, after all.

Here’s a quick example: if my evil twin “Darvid” was a hedge fund manager, he might see a $50 dollar stock and short sell it, believing that stock will go way down in value in 30 days. If that stock does fall in value in those 30 days, Darvid can repurchase those stocks, give them back to the broker, and keep the difference. If the stocks are worth $10 at the end, he’s just made a $40 profit. On the other hand, the stock could rise to something like $80. If that takes place he has to repurchase the stocks and lost $30 more than he wanted to.

Notice that short selling practices are solidly NOT my own strategy and not one I’d recommend. You’d be hard-pressed to find people in the FIRE movement who would. Unlike long-term investment options like index funds, short selling is a wildly speculative endeavor. It still is even with a lot of energy poured into industry research.

And it definitely is when there’s both a lack of research and an abundance of arrogance.

Enter: The $GME GameStop Short

GameStop has retail stores all over the United States. Its business model caters to the gaming community by selling consoles, video games, and related collectibles. You might see it as nerd paradise based on the previous sentence alone. Before this week I knew GameStop as the place where you could bring quality games for a trade and get maybe two dollars back for your trouble. End consensus: it’s the place to go that caters to gamers, but kinda sucks when you want to do a trade-in.

Like most retailers, GameStop’s profits are down with the COVID pandemic thing going on. Remember that? Its 2020 stock price reflected the struggle as did many others; for months it hovered in the single digits before crawling to a $20 high during the holidays.

Then came a hedge fund called Melvin Capital who decided to short GameStop shares ($GME on the stock ticker). On the surface that’s understandable. The holidays are over, we’ve still got several months ahead of coronavirus crap, and GameStop doesn’t have that great of a reputation thanks to their trade-in shenanigans.

But they didn’t just short it. Melvin Capital managers claimed it’d lose 100% of its stock value, effectively making it worth $0. For short sellers like Darvid, that is the dream scenario because you don’t have to repurchase the stock at all, netting you a 100% return. For everyone else, especially the now-worthless company, this is a nightmare. If GameStop actually did lose all of its value that would’ve meant thousands of employees would have lost their jobs. Their retail cashiers would have suffered the most, especially these days in a global health crisis. The finance world is far removed from most GameStop employees, let alone the tools and resources needed to protect their jobs or reach financial independence.

But there’s more trickery going on.

Melvin Capital, and other $GME short sellers, have been borrowing more GameStop shares than what actually exist. If GameStop actually did lose all of its share value – a road rife with bankruptcy, closing all retail stores, and thousands of livelihoods wiped out – these sellers would have gotten even more money than should have been possible. Very unethical and ruthlessly manipulative, but hey! Who’s going to do anything about it? The rich people are in charge, after all. No one would really face consequences for what such an extremely risky bet.

Which it did turn out to be, thanks to short positions being public information. This manipulation did not go unnoticed on a certain Reddit forum dedicated to, well, betting on Wall Street valuations.

Wait, Reddit?

Yes, Reddit! One of the most visited websites on the planet has forums (aka subreddits) for any topic you can possibly think of. R/wallstreetbets was, previously, a place to post your massive stock market gains (or massive losses) after putting tons of money on some particular stock. Since the beginning it’s thrived on people making fun of their own stock choices and sharing tons of memes about their progress. It’s not uncommon to encourage others to buy specific stocks because it’s “GOING TO THE MOON” or otherwise exploding in value.

At least two months ago, WSB began urging others to buy GameStop shares to either,

1. Support the company, believing the short sellers are undervaluing it, or
2. Get back at the ultra-wealthy 1%, believing this will show them the less fortunate can still kick back.

Momentum since then has risen to a fever pitch. Thousands of Reddit users bought in on GameStop, causing the stock price to skyrocket into the triple digits. That’s also caused Melvin Capital to lose billions of dollars, money that was entrusted to them by the nation’s wealthiest individuals. They had to buy those shares at a much higher price so they’d actually have the amount the brokers required them to give back; this buying sent the prices even higher, adding extra juicy insult to injury.

And it’s an entertaining gift that keeps on giving.

Since their bets failed, or suffered from a short squeeze, they were forced to buy back GameStop shares at a much higher price than they bargained for. A lot of influential people, media pundits, and industry titans have started howling over this CLEAR manipulation of the stock market by the evil redditors who might be foreign powers or clearly encouraging warfare. It’s reached the point of trading platforms like Robinhood straight up refusing to let people buy more shares. Which is also manipulative and is landing them in hot water with a class-action lawsuit.

What makes Robinhood’s refusal all the more intriguing? It happens to have some major financial ties with Citadel Securities, a company that has infused billions of dollars into Melvin Capital to keep it alive. It didn’t take much for folks to connect the dots and heap even more drama on this absurd comedy.

My popcorn is salted with the tears of rich people, and my snacks have never been this salty.

The Deeper Analysis of the GameStop Short Squeeze

Everyone knows investing in the stock market is a risky endeavor, which quite a few hedge fund managers seem to have forgotten or disregarded. Now they’re panicking over what they believed was a no-brainer bet.

And this is a bet. Shorting very much overlaps with the definition of gambling. If I go to a casino I can bet thousands of dollars on a roll of the dice or shuffling cards. If I go to my brokerage account I can do the same thing. Nothing is stopping me from betting thousands of dollars on an outcome that is, ultimately, completely out of my hands.

But the stock market has been a rich man’s game for so long that the players entered a bubble of their own. Our previously-poor pandemic management drained more wealth than ever to the elites, seemingly cementing the United States as an oligarchy instead of a democracy. We’ve been technically/formally classified as an oligarchy since 2014, which means the wealthy hold the true power. If they hold all the power, why not jimmy the stock market into giving them more and more? They’ve gone untouched and unchecked for so long that they think they’re truly untouchable.

Well, as Mike Tyson famously quipped:

Everybody has a plan until they get punched in the mouth.

This is what I mean when I say the ultra-rich are actually terrible at money management; they don’t know how much is enough. They’re taught how to gameify the system, but not the actual point of it all is. They’re like worker drones who robotically continue on their paths of trading, unaware and uncaring of the purpose behind their programming beyond “make more money”.

Make more money… for what?

Money is a tool you do not ultimately use. What’s the point of a wrench or a screwdriver if you just look at them in your toolbox? Maybe you like them there if you ever need them, but the time they’re in there means time you’re not building something grand, meaningful, or even functional.

Now there are more stock amounts being sold than actually exist, because why would anyone keep track of how many there are of a “failing” stock? Especially when there’s more money to be made if you ignore the real numbers?

How Financial Independence and Literacy Play Into This GameStop Craze

The New York Times, and other publications, are calling this a class showdown between the ultra-wealthy and the small-time middle class. It’s ultimately a tale of elitist greed getting suckerpunched by the very people they’ve routinely disregarded. This is the very first time so many non-wealthy people have, as a group, toppled a giant company so quickly and thoroughly.

And you know what? This is only possible because of financial literacy and education being accessible online. Enough regular people now have the understanding needed to extrapolate what shorting a big retail company could possibly lead to, let alone what terms like “short selling” even mean. Imagine if these hedge funds actually succeeded in shorting GameStop and wiping out its entire value. There is no debate here, especially with a company that still sees a profit: this would not have provided a benefit to society as a whole.

This GameStop episode is perfect for framing why financial independence should reach more of the masses. In a capitalist society it’s those with capital that hold the power; if you yourself hold capital, then you automatically have power too. Those that have reached financial independence would have learned enough about investing and trading practices to know when stocks like GameStop are being short-changed. Financial independence gives you options for everything in life; this can, of course, include investing in companies like GameStop you like and believe in. (But please, only some of your investing.)

Best of all, financial independence lets you see all of the craze surrounding GameStop and make clear-headed decisions about whether or not you should buy in. FOMO is huge in the investing world and exactly why so many people are drawn into speculative investments. Without investing knowledge, too many of them lose out in the end.

Should Short Sellers Be Regulated? Punished? Burnt at the Stake??

My own pursuit of financial independence has gotten me to read up on all kinds of history related to finance. This includes the history of short selling, which reveals the practice has actually done good in the past.

The timestamped video should start at 12:30 where they touch on short sellers uncovering massive cases of corporate fraud. Around the time of the dotcom bust in 2001, a short seller claimed behemoth company Enron had fraudulent financial statements, eventually leading to Enron indeed claiming bankruptcy just a short time later. We saw a repeat performance in 2008 when short sellers brought the subprime mortgage situation to light despite CEOs crying “fake news!” This all goes to show short sellers can, in fact, be a force for good in the often-lawless world of stock market trading. Unfortunately, not so in the case of GameStop.

After this whole debacle I wouldn’t be surprised to see some kind of government action in response. We’ve been academically classified as an oligarchy since 2014, after all; they don’t take lightly to the “wrong people” playing the market in their favor. What I’m hoping is for this to inspire financial education programs across the board so everyone can understand the going-ons of the finance world. Money is what makes the world go round after all. And the population being ignorant of how it works is what made hedge funds so confident their scheme would work in the first place.

Work towards holding investment managers like Melvin’s and Robinhood’s responsible for blatant market manipulation. Encourage those around you to start learning about money management and personal finance. Heck, point to GameStop as an excuse to bring up financial independence to more people. Let this have a silver lining that’ll lead us to more improvements.

Along with cool new stories about the power of investing.

I always like the good success stories.

Cover image credit: Ser_Amantio_di_Nicolao via Wikimedia Commons