The GameStop Corp (NYSE: GME) stock price adventure was without doubt the most fun story of the year. What with stonks and r/wallstreetbets and giving the short sellers a damn good hiding – even to the point of forcing a hedge fund to sell itself off – there’s nothing more amusing out there other than perhaps whatever Elon Musk has been doing to dogecoin.
However, GameStop is more than just a parable for our times, it’s also an important lesson. Investors do in fact change reality through their actions – or we change reality through what we do with our money. Contrary to all the Warren Buffett and Benjamin Graham objective value stuff about investing there is no such thing. What matters is what everyone else in the market is doing. On the fairly obvious grounds that stock prices are the balance of supply and demand for them. If people change their mind about what they think something is worth then that value has changed.
The story of GameStop is well known but just to amble through the high points again. The company was pretty much a dog. It was undercapitalised and in the wrong market. GameStop was a physical store chain selling computer games – something now largely sold online as downloads. Objectively the question was when would they throw in the towel and liquidate the operation?
Hmm, well, there were vague ideas that maybe it could be turned into an online seller but who would start to do that from here? So, the stock was massively shorted and that seemed to be that, ride GameStop down to zero. Except, as we know, r/wallstreetbets and the like demurred. Or perhaps someone saw the opportunity for a really fierce short squeeze – they’re not mutually exclusive options. At one point – given that lent shares can then be reborrowed – it was calculated that more than 100% of the stock was short sold.
At this point all that’s needed is a little – a leeetle- rise in the price to get folks scrambling to cover. Which is what that self-organising (we must call it self-organising because organised could be an illegal concert party) buying of GameStop started. And that short squeeze made the GameStop stock price soar. From $4 and $5 to one intraday of $325. Those shorts – to the extent that one hedge fund sold itself off having lost 50% of its capital – really did have to scramble to cover.
So far so good but short squeezes end, right? Prices return to some objective reality. But the GameStop price is today at $150 and the like. What happened was that the soaring price – driven by short covering – allowed GameStop to issue more treasury stock, recapitalise, then pursue those plans to move the operation online. Sure, that might work, might not.
But our important point here as a lesson from investing in 2021 is that the actions of investors do in fact change reality. GameStop really was a dog, the shorts were right. Until everyone else decided upon that short squeeze and it was that technical operation which then changed the reality for the newly recapitalised GameStop.
There is an objective reality out there, apples do fall down out of trees. That objective reality is usually the way to bet in stock markets too – dogs do die. But it’s not always true and we must be careful about when it isn’t. For the actual prices in stock markets are determined by what folks think they should be and human belief isn’t one of those objective realities.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.