This past week may have changed everything. Or nothing.
Regardless of where we go from here, the “GameStop Frenzy” is an incredible story. But, because of lazy journalism and biased media coverage (I’m looking at you, CNBC), you may not know the full story.
Here’s the TL;DR version:
- The so-called “GameStop Frenzy” started from a very detailed stock analysis performed by one individual investor based on fundamentals that identified GameStop as an undervalued company.
- Due to how quickly information can go viral via social media – in this case, an online Reddit message board known as ‘WallStreetBets’ – continuous screenshots of one user’s gains led to GME stock gaining serious momentum.
- This momentum quickly evolved into a symbolic movement pinning retail investors against hedge funds and Main Street versus Wall Street.
- Some of the investors in GME stock are very smart. They have millions of dollars and use sophisticated tools such as options trading and leverage to earn extremely high returns. Others are brand-new to investing and are simply chasing the dream of becoming rich. And, lastly, others don’t care about the money at all; they simply want to be part of something bigger than themselves and crave to be part of a revolution against the people and institutions who they feel have caused them to be unfairly disadvantaged throughout their lives.
- The people who got in early have already made life-changing money. As the stock price reverts back to reflect GameStop’s true valuation, the latecomers to the party will get obliterated and will likely lose 95% of their money. The hedge funds who are still short will make billions.
There’s a lot to unpack with this story and it’s filled with many interesting characters.
Here’s a timeline of events and what I think you should know.
2012. WallStreetBets.
WallStreetBets is a (sub-reddit) group within Reddit that was founded in 2012. It’s a place for investors, speculators and gamblers to share their high-risk/high-reward bets along with screenshots of their huge gains and losses as proof. Some of the conversation is extremely sophisticated, but much of it is like the back of a bathroom stall door in a high school boy’s locker room. At the beginning of 2020, the sub-reddit had ~300k members (or degenerates as they call it). The member base grew to 2M in early 2021 and then rapidly jumped to 6M.
2013. Robinhood.
Robinhood, an online stock broker, was founded and set out to “democratize finance.” That’s a fancy way of saying that they wanted to launch a sleek mobile app and eliminate trading fees in an effort to attract a younger demographic. They succeeded. By the fall of 2019, Robinhood was gaining more users than every other online broker combined which forced the entire industry to pivot. In the span of a few weeks, Charles Schwab, TD Ameritrade, E*Trade, Ally Invest, Fidelity and Merrill Lynch all eliminated fees for most trades. A huge win for consumers. Kinda.
June 2019. DeepF**kingValue.
Keith Gill, a frequenter of the WallStreetBets forum that goes by the name ‘DeepF**kingValue’, is a 34-year-old dad who holds a Chartered Financial Analyst certification (he’s smart) and a passion for analyzing stocks. The Wall Street Journal and New York Times did great pieces on him.
Between June 2019 and September 2019, Keith invested $53,000 of GameStop call options as a result of extremely deep security analysis.
Keith, aka DFV, also goes by Roaring Kitty on YouTube and has posted several videos over the last year explaining his thesis on why he sees GameStop as an opportunity as well as explaining his general investment strategies. You can view those here. In them, Keith explains that he owns 150 individual stocks, but GME is his largest holding. Those videos have aged extremely well and it’s fascinating to watch with the advantage of hindsight. Based on GME’s stock price, the company was being valued at $240M; but based on Keith’s detailed analysis of the company’s cash flows, he found the company to be worth at least $400M, but probably more. On the low end, Keith expected to make 2x his original investment, but probably more like 4-5x.
As of this writing, Keith’s GameStop investment is worth $46M. I repeat, he turned $53k into $46M in 18 months.
Every month, Keith would share a screenshot of his GME bet in the WSB sub-reddit forum. Initially, everyone made fun of him and told him he was crazy. He was so nice about it and accepting of opposing viewpoints because it strengthened his thesis and highlighted potential blind spots. Even when his investment lost half it’s value, he stayed the course and didn’t sell. Or as they say on WSB, he had “diamond hands.”
August 2019. Dr. Michael Burry.
Dr. Michael Burry, whose name may sound vaguely familiar, is the guy portrayed in the movie, The Big Short. He famously recognized the excessive risk taking on Wall Street during the mid-2000’s and bet that everything would collapse. He was right. Fast-forward to August 2019…Michael Burry and his company, Scion Asset Management, coincidentally own 3,000,000 shares of GameStop because, like Keith Gill, they view the company as being undervalued. Dr. Michael Burry wrote a letter to GameStop’s Board of Directors instructing them to get their sh*t together in August 2019.
February 2020. WSB God.
I first heard about WallStreetBets in February 2020. A user by the name of “Wall Street Bets [God]” shared predictions of how he thought the pandemic would unfold. The things he listed were unfathomable at the time, but they played out just as he predicted.
With an eye on China and the coronavirus, he forecasted a short-term dip and long-term gain. He shorted Carnival, Royal Caribbean, American Airlines, Disney, Virgin Galactic and the S&P 500. He went long on Tesla and Nvidia. He called this The Big Short and said that he would hold until 80% of these occur:
- 1000 US deaths
- Celebrity cases
- Major events canceled
- Every US city infected
- US City quarantines
- Trump/US caught lying
- World cases pass China
- Mutation
- Major supply chain issues
- Democrats attack Trump over virus
- Bad Q1 results
Each of the bullets above look obvious in hindsight, but the foresight at the time, when there was so much uncertainty, was incredible.
The most recent screenshot from his portfolio shows a balance of $33M at Vanguard.
WSB God has little to do with the story (although he did make a fortune on GME), but I bring it up to share the profile of another WallStreetBets member because he’s probably not what you pictured when you first heard of the “GameStop Frenzy.”
March 2020. CoronaVirus.
When the pandemic shut down most of America in early Spring 2020, an interesting thing occurred. Increased market volatility, stay-at-home orders and the aforementioned elimination of trading fees drove a lot of first-time investors to actively trade stocks on Robinhood. Dave Portnoy, founder of Bartstool Sports, became a General of an Army of new Retail Traders and quickly branded himself as “Davey Day Trader.” DDT optimistically proclaims that “stocks only go up.” And, in the last year, he has been right.
June 2020. Ryan Cohen.
I read an article about a fascinating guy named Ryan Cohen, who is the billionaire founder of online pet retailer Chewy (which was sold to PetSmart for $3.3B in 2017). The article claimed that Cohen, the 35-year-old, put his entire investment portfolio into 2 stocks: Apple and Wells Fargo. I remember thinking, “this guy is interesting and clearly doesn’t mind taking some risk.”
A few months later, in August 2020, Ryan Cohen, now an activist investor, invested $76M into GameStop for a stake of about 13% of the company.
By December 2020, with a vision and a passion for what GameStop could become, Ryan Cohen lobbied for 3 board seats on GameStop’s board of directors, one for himself and two for former Chewy Executives. This news provided a boost to the stock price of the brick-and-mortar gaming retailer.
January 2021. The Big Short Squeeze.
Shorting stocks is very common. Hedge funds will often be “long” a few companies and “short” a few companies. This puts them in a position to make money when things are good or bad, hence the term “hedge.” When someone shorts a stock, they are borrowing a share of stock from someone who owns it today with the obligation to buy the stock at a later date. Assuming it goes down, they’ll buy it back at a cheaper price and make money.
Many companies who primarily operate brick-and-mortar retail locations have suffered. The pandemic accelerated a trend towards ecommerce that was well underway. About 29 retailers filed for bankruptcy in 2020, including recognizable brands like J.C. Penney, J. Crew, Neiman Marcus, Pier 1, GNC and the list goes on. Many investors, including some experienced long/short hedge funds expected GameStop to end up just like every other retailer listed above.
The pessimism was so deep that the percentage of shares shorted actually exceeded the total number of shares available. At one point, the “short float” reached 140% which shouldn’t be possible and isn’t legal. This is known as a naked short.
The ultra-clever group of Reddit investors who aren’t afraid to take risks recognized this anomaly and banded together to buy GME stock and call options in an effort to drive up the price of GameStop’s stock. It worked. GameStop’s stock rose 1,625% in January 2021 causing the short sellers to lose billions of dollars.
If you looked at the comments within the sub-reddit, you would’ve thought it was war.
Hold the Line!
If he’s still in, I’m still in!
We love this stock! (this is not financial advise)
You’ve literally changed my life. Every time I get scared, I think of your brass balls and my resolve strengthens. Take us to the moon, Captain!
We can stay r*tarded longer than they can stay solvent.
This is the longest I’ve ever lasted f**king somebody.
Person 1: what’s your exit strategy?
Person 2: what’s an exit strategy?
Reddit WallStreetBets forum
It wasn’t just your old, high school friends on Facebook who were participating in this “short squeeze.” On January 26, Elon Musk tweeted “GAMESTONK” to his 44M followers and linked to the WallStreetBets forum. Billionaire CEO, Chamath Palihapitiya, tweeted that he was buying shares. Billionaire Shark and Dallas Mavericks owner, Mark Cuban, said that his kid bought shares and said that he loved what was going on at WallStreetBets.
On the opposite end of the trade, hedge fund Melvin Capital received an emergency $3B from fellow hedge funds Citadel and Point72. With short positions still above 100%, it was very clear that the Savvy Redditors had the hedge funds (or collective group with short interests) in Check with very few options but to write a very big check. How big the check would be depends on who is willing to sell and at what price. Theoretically, the potential losses for Melvin Capital could have been infinite (or, more likely, going bankrupt). If this were to happen, the brokers would have to cover the potential losses.
January 28, 2021. Here’s when things get sketchy.
Since Robinhood offers its services for free, they have to make money from something. So, the company gets paid to route trade orders through a company called Citadel. That’s right, the same company that bailed out the hedge fund on the opposite side of the trade with a lot to lose. With the GME stock price soaring, Robinhood, ironically, suspends trading on GME stock along with other “meme stocks” like AMC, Nokia, etc. Robinhood only allows users to sell their GME stock (but not buy it) which causes the stock price to plummet from a high of $469 to a low of $132 within a few hours. Meanwhile, institutional investors are able to continue trading and, since the stock price has fallen dramatically, many take the opportunity to close out their short positions (by buying the stock at the now cheaper price).
Robinhood has spent the last 7 years building their brand around helping the little guy – much like the character who infamously steals from the rich to give to the poor. Ironically, when retail investors “needed” Robinhood’s services the most, the company wasn’t there for them. This is just one of many blunders for Robinhood.
- Robinhood launched what-they-called a checking and savings account in late 2018 and claimed that the deposits would be insured, just like any other FDIC account. But, since Robinhood is a brokerage account, user’s deposits would be insured by the SIPC, securities investor protection corp. The only problem is Robinhood never actually spoke to anyone at the SIPC. Their deposits weren’t insured and they weren’t allowed to call their product a checking or savings account. You can read about the blunder here.
- March 2020. Robinhood suffered an outage on the biggest one-day point gain in Dow history preventing Robinhood users from enjoying in the gains.
- In June 2020, a Robinhood user committed suicide after seeing a negative $730,000 balance in his account. That was not his actual balance. It was a product error.
The decisions of Robinhood and other brokers, while likely legal, looked reeeeeeally bad and had a lot of people up-in-arms.
- Dave Portnoy told the Mets Owner Steve Cohen (also from Point72) that he should go to jail over Twitter.
- Elon Musk rejoined the conversation insinuating that shorting stocks should be banned.
- Democratic Rep. Alexandria Ocasio-Cortez called for an investigation into Robinhood’s actions and said it was unacceptable and Republican Ted Cruz agreed. The first time we have seen a Democrat and Republican publicly agree in a while.
On Friday, January 29th, Robinhood and other brokers allowed restricted trading on GME and other meme stocks. GameStop stock quickly rebounded back to $326.
A few days removed from these events, things have not calmed down.
- The co-founder of Nowadays Media hired a plane to fly around San Francisco and over Robinhood’s headquarters pulling a banner that read “Suck My Nuts Robinhood.” His words, not mine.
- One billboard in Oklahoma said “We’re Not Leaving! $GME” with diamond hands and rocket emojis.
- A plane flew over Santa Monica with a banner that read “WE ARE ALL GAMESTOP. WALLSTREETBETS.”
- An ad in Times Square in NYC said “$GME GO BRRR.” I’m told that brrr refers to the sound produced by a money printing press.
Power to the Players.
That’s GameStop’s slogan and it couldn’t be more fitting.
Aside from some people making money, some people losing money and the government pretending to do something, I’m not smart enough to predict what will happen from here. But, I am confident that there will be a movie.
Leo. Christian Bale.
The Big Short Squeeze: Power to the Players.
