6 takeaways from the GameStop drama
A blockbuster showdown between Reddit’s r/WallStreetBets and the Hedge funds
GameStop stock frenzy
Such a headline should be no alien to many, and especially if one is invested in the financial markets. The news recently had their headlines all over the company — GameStop (NYSE: GME). It was a rollercoaster ride for this brick and mortar company at the start of 2021, where its share price hit a ridiculous US$500 per share (including outside of trading hours) before diving towards US$50 per share within a week.
The most compelling was that $GME is a company that was heading towards bankruptcy, posting declining profits year after year within the last decade. It was so bad that it gained the attention of the hedge funds that shorted the company, and with a short interest of 140% at one point.
This is a story about how a group of people on an internet forum — Reddit, worked together to short squeeze the hedge funds, wreaking havoc in the financial markets, and here are 6 takeaways from this drama.
Do not underestimate the power of the retail investors
If you haven’t learned anything from this drama, the biggest takeaway — not to underestimate the retail investors. Few of the hedge funds posted huge losses as a result of this wild speculation, with 2 of the hedge funds in the spotlight, Melvin Capital and Citron both posting 53% and 100% loss respectively. Talk about huge losses!
Your broker plays an important role
While it was the brokers such as Robinhood that allowed the Redditors to wildly speculate on the meme stocks, it was also the brokers who slammed the brakes on the GameStop rocket. On the morning of 28 Jan 2021, Robinhood and several other brokers prevented retail investors from buying all the meme stocks while allowing them to sell. This led to a huge drop in stock price (about 50%) and it has never recovered since. The ban was changed into buying restriction and was later lifted a few days later, but by then, the damage has already been done as it left many retail investors uncertain about the speculation.
Fundamentals triumph speculations
While the brokers may have slammed the breaks on the rally of GameStop, they may not have changed the eventual outcome of the story. Instead, they fast-forward the story to the end as GameStop was never a great company to begin with. $GME has been posting declining profits over the year with profits going into negative territory in 2020 due to COVID-19. It was on the verge of bankruptcy before the drama. Luckily for them, this wild speculation brought in fresh capital for them and it is up to them to save their own company.
FOMO and greed
If you are late into the GameStop frenzy like me, chances are that you’ve seen people posting about how much money they made over this drama and you’re wondering how much you could have made had you invested in a call option at 20 cents. Well, that is what we call Fear Of Missing Out (FOMO). FOMO is a very powerful emotion that can influence us to make bad investment decisions. We should always practice risk management and try to be disciplined in our decision making.
Retail investors are the ultimate losers in this drama
Even though this is the story of how the retail investors worked together to bring down greedy hedge funds, the story is not by any means a fairytale. As I mentioned previously, the rally was unsustainable, and eventually, it will most likely fall back to around its initial price. Many of the retail investors are still encouraging others to buy while secretly covering their losses! Hence, we should always do our due diligence on any trade ideas that are floating around the internet.
This occurrence will not be the last
While short squeezing isn’t a new strategy of trading the market, this drama has undoubtedly brought this trading strategy to the spotlight. Currently, hedge funds are on high alert on shorting any stocks and most of them have quickly covered their short positions. However, I believe that this will not be the last time that we will see such drama happening.
Closing
At the time of this writing, $GME was traded at $82.77. While a rally is still highly possible, fundamentals suggest that the share should fall and eventually to a point where it is forgotten. While it may look enticing to join in the speculation, one will most likely lose money if you are late to the party. As prudent investors, we should not let the FOMO drive us to make bad decisions and always practice risk management.
