WHAT DROVE GAMESTOP STOCK PRICE TO IRRATIONAL LEVELS? {IS IT TOO LATE FOR YOU TO GET IN?}

Last week listening to the OVERPAID talking heads discussing GameStock Corporation was more exciting than some Apple TV shows (Actually, Apple’s performances are getting better.  Try – Defending Jacob}.  Everyone has an opinion on GameStock!  The Whitehouse was asked on Friday if President Biden would comment.  {I have a good joke, but my editor-my own flesh and blood will delete it!}

GameStop is a brisk and mortar retailer selling new and pre-owned video gaming consoles, accessories, and video game titles, in physical and digital formats.  The company has been facing the same pressures as other brick and mortar stores, with more people shifting to the convenience of shopping from their bathtub’s comfort!  Last year was a fatal blow for many stores as more people moved to buy goods online due to COVID-19. Wall Street investors, smelling profits, started betting heavily against GameStop and other companies (AMC, Blackberry, etc.) months ago, believing that the brick-and-mortar business model is doomed.

Hedge Fund Billionaires (NO SYMPATHY!) were short-selling GameStock with the assumption; the stock price would continue to go down, lower than Trump’s ratings.  They were right, BUT (NOT the word you want to hear when talking about your money) the stock suddenly begin climbing to new highs and forced Hedge Funds to buy the stock at hundreds of dollars per share.  And these Hedge Funds and Short Sellers lost BIGLY!

LET’S FIGURE OUT SHORT SELLING 

When I buy a stock, I am betting (based on my brilliant analysis) the price will go up, and my shares will be worth more money in the future.   Short sellers do the opposite. Short-sellers borrow shares of stock from their Broker (for a fee) and sell the shares because they believe the shares will drop in price, and they can make a tidy profit by buying the shares later at a lower price and returning the shares to their Broker. 

Sounds complex and like a lot of work, but when a short seller is right, they make millions or even billions of dollars! When wrong, they can lose more significant sums than they could have gained.  Short Selling is a high-risk strategy.  

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An investor can deploy Short Selling if she thinks a particular stock is overvalued and is headed lower soon. Short selling allows investors to profit from stocks when they go down in value. Here is how it works.  PLEASE DO NOT TRY THIS AT HOME!

  • The investor selling the stock does NOT own the stock
  • To sell short, an investor has to borrow the stock through their brokerage company from someone who owns it for a fee.
  • The investor then sells the stock, retaining the cash proceeds
  • The investor, now a short seller, hopes {Hope is not my preferred strategy!} the price will fall over time, providing an opportunity to buy back the stock at a lower price than the original sale price
  • After buying back the stock, any money left over after buying back is profit to the short seller.

Short selling is an advanced strategy that should ONLY be utilized by experienced traders and investors. Note- I do NOT short trade due to the high risk.

GAMESTOCK 2021 SHORT – A TRUE STORY!  – COMING SOON TO NETFLIX 

The above is a five-year stock chart for GameStop, Corporation.  As you can see, from July 2016 to early January 2021, GameStock high pricewas in April 2016, selling for about $32.80/share.  Notice the stock price line is slightly downward sloping, showing the stock has been declining in price.  On December 21, 2020, the stock closed the day at $15.53.

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GameStop had not been above $20.00 in over 12 months. 

HEDGE FUNDS WERE SHORTING GAMESTOCK FOR SEVERAL YEARS, AND THE LAST ONES STILL IN THE TRADE, JANUARY 2021, WERE FINALLY WRONG.  THEY LOST BILLIONS OF DOLLARS!

With a short sale, the Hedge Funds borrowed Game Stock shares from a broker and sold the shares on the market, hoping the price will decrease so they can repurchase them at a lower cost. Regardless if the stock price goes up, down or sideways, the Hedge Fund still owes the Broker shares.  

When GameStock started rapidly increasing in price, Hedge Funds had to minimize losses by repurchasing the shares at higher prices than planned.  The Hedge Funds Managers had no idea how high the stock could go and WANTED OUT!  Here comes the problem – When the Hedge Funds started buying large quantities of GameStock shares, this pushed the shares even higher.  The Hedge Funds became their own enemy.  Some firms lost billions of dollars.  And some declared bankruptcy.

TECHNICALLY THIS IS KNOWN AS A SHORT SQUEEZE

You might have read or heard the term short squeeze. “A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall to buy it to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock’s price.”  

REDDIT ENTERS THE PICTURE

I had heard of Reddit but had no idea what it was.  A group of smaller investors on sites, like Reddit, learned that some hedge funds shorted GameStop’s stock.  (You can find which stocks are heavily shorted on the web.) These small (Small is a relative term.  Some of these “small” investors are multi-millionaires) investors knew if the stock price went high enough, hedge funds would have to buy the stock to avoid even worse losses.  In other words, their actions were deliberately designed to punish the Hedge Funds. 

In a WallStreetBets, Reddit Chat Room, Users Pushed GameStock Upward!

  • Monday, January 25, 2021 GameStock – GME, closed at $76.79.
  • Tuesday, January 26, 2021, posted, “Guys, we need to pump $GME. Everyone buy 1000 shares in exactly 60 seconds.”
  • By the end of Tuesday, the stock closed at $147.00 per share. 
  • By Wednesday, January 27, 2021, $347.00 per share. 
  • At 2:10 p.m. on Thursday, January 28, 2021, GameStop peaked at $492.00 per share.

REALITY CHECK

GameStop is the same company it was in 2019 and 2020.  It has not suddenly become the new Microsoft. People are purchasing games online in larger numbers. The long-term outlook for brick-and-mortar retail video-game stores is weak. GameStock’s stock price will eventually return to a reasonable price. 

SHOULD YOU TRY TO GET IN ON THIS GAMBLE? 

Shorting is, in my opinion, gambling.  If you want to short GameStop or other heavily shorted companies, recognize you may lose 100% of your savings, investments, house, clothes!   I strongly advise you to consult a fiduciary financial professional. A majority, if not all, will tell you HELL NO! 

As for buying the stock, thinking/hoping it will go up, that is your call.   Eventually, this stock will return to its average price, which is closer to $10.00/share.  And the last buyers will be harmed.

CONCLUSION

Short Sellers lost over $40 BILLION betting against Tesla, in 2020,  Ouch!  As the Hedge Fund Managers kept buying stock to cover their losses, they pushed Tesla’s stock to all-time highs. Tesla stock, increased 700% in 2020! As a Tesla shareholder I thank these Short Selling IDIOTS!  This is the equivalent of me playing Michael Jordan in basketball for $100,000.00/game, and I keep saying just one more!  Until I am BROKE!

When the market works, short sellers do play an essential role in the market’s price-setting process. When prices become too high, short sellers, selling actions, helps bring the price back to earth. While GameStop is entertaining to some (including me) it is not unique. We do not know when and how this story will end, I guarantee you; it will end poorly for some.

When short selling goes wrong, it has at least one thing in common with a Ponzi scheme.  The last in – LOOSES MONEY.

One last reminder – NEVER, EVER TRADE MORE MONEY THAN YOU CAN AFFORD TO LOSE! Just like casinos, The House never looses! 

 

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ABOUT ME

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an NC. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.

I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life.  It is my time to serve and give back.

DISCLAIMER

I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate, and happy to share my finance and investment lessons learned with you.

However, I am NOT a licensed financial advisor.  Please do not construe my suggestions on this blog as recommendations for your situation.  Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.  

I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.

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Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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