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The Gamestop phenomenon

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Cashing in: Jaydyn Carr, 10, who sold ten Gamestop shares his mother had bought him for $3,200
Ground zero: the stock of struggling retailer Gamestop became a battleground between retail investors on social media and short-selling hedge funds (File photograph by Jeff Roberson/AP)

Reminder: The Bermuda Islander Financial Planning Primer Book One :The Dawn of New Beginnings is being published weekly, step by step, 1-18 https://www.royalgazette.com/bermuda-islander/

The image captures it all. There is ten-year old Jaydyn Carr, a delighted grin on his face, holding his home-made Gamestop (GME) stock certificate - his ten shares sold for $3,200!

According to the New York Times, Ms Carr, whose army combat medic husband died in 2014, began early on teaching Jaydyn financial responsibility: saving, earning, and investing long-term. In 2019, she had purchased GME stock at $6.19 per share as Kwanza gift for her son.

How did this relatively obscure stock achieve such an astronomical share value in the space of a few weeks? Described as Gamestop versus Wall Street, small day trader investors, incented by social media chat discussions, powered the stock in overwhelming buying waves to the stratosphere, decimating short-seller losses to an estimated $20 billion.

The general participants

Individual small (generally, younger) traders (buyers): collectively linked by interactive social groups with names such as r/WallStreebets (that says it all)

versus

Short sellers: hedge funds, options traders, other capital markets establishment investment managers.

Online investment firms: Robinhood appeared to be the popular focal point for these day traders, featuring no-transaction fees, ability to own fractional shares, ETFs, options, and cryptocurrency, and a easy, fun-type phone trading app, although other online brokerage firms offer similar services.

Social media gatherings: Reddit, primarily - according to insightful Bloomberg - that actually encapsulated several Gamers’ social media comments, providing the rest of us bewildered bystanders some light on their crowd-gaming reasons and rationalisations.

Remarkably it appears, r/WallStreetBets forum and like-minded social investing groups, are playing / betting the market in personal attitude terms: spelling out their feelings in memes, multiples of emojis, chat forums, acronyms (“YOLO” – you only live once), touting rushes better than gambling (isn’t this gambling, too?), excitement of belonging to special group interactions (Redditors), taking on the establishment, doing a good thing while professing not to care if they lose it all.

The critics

Gamestop commentary was not limited to the GME day traders. Others, seasoned investment veterans, regulators, politicians - of course, never wasting a chance to attract publicity - have opined on the fray:

• Possible market manipulation

• Defies logic

• The bubble will burst

• May change market dynamics forever

• Unsustainable

The short-selling process

Example of a short sale from Investopedia:

• Say, Tesla (TSLA) stock appears overvalued at $625 per share, and an investor thinks that it is going to drop in price

• The shortseller investor may "borrow" ten shares of TSLA from their broker

• The broker then sells the ten shares for the current market price of $625

• If the stock drops to $500, the investor could buy the ten shares back at this price, return the shares to their broker, and net a profit of $1,250 ($6,250 minus $5,000)

• However, if the TSLA price rises to $700, the investor would lose $750 ($6,250 minus $7,000) or far more of a loss, if the price escalates because the investor must replace the borrowed stock

Short selling a company stock can be a profitable tactic, but also possibly damaging to a company’s financing relationships.Business corporation contracts are often collateralised/guaranteed based upon the valuation of a company’s shares – such value stipulated within a specific parameter window. A serious drop in share value may place corporate loans in jeopardy, or actual default in precipitating creditors’ calling loans.

Elon Musk, chief executive officer of Tesla, who has been publicly clear about his dislike of short sellers who have barraged his company stock value, reiterated in a January 28, 2021 Tweet: “u can’t sell houses u don’t own

“u can’t sell cars u don’t own, but

“u *can* sell stock u don’t own!?

“this is bs – shorting is a scam

“legal only for vestigial reasons”

Takeways

When Ms Carr bought Gamestop for her son at $6.19 per share, she could not have had any idea, whatsoever, that the Reddit WallstreetBets crowd would astronomically escalate the price a year later.

Jaydyn and his mom decided to cash out, taking profits, a good judgement decision – before inevitably such unsustainable prices begin to move downward, exacting losses for those investors who (again) bought at the high.

Behavioural finance specialists will analyse this extraordinary social investing disruption for years. It has been conjectured as possibly “groups may be mostly young men, lonely, bored, looking for the next game of thrills, while intent on turning a profit, somewhat indifferent to consequences, eg YOLO (you only live once).”

Such a comment is just that – conjecture. Going forward, research papers will be written. Documentaries will be made.

Oh wait, some movies are already in production – for those always profit-attuned to the new, new thing.

At publish deadlines, Gamestop price value, already down over 80 per cent from its high, may further drop to a price based upon its real company fundamentals:

• Short sellers will/have covered their positions.

• Many GameStop share owners will decide to sell, with buyers bidding price further down

• Meanwhile, crowd gamers have moved on to new targets, eg the silver market.

Last thoughts!

• A gain on paper is an illusion. Shares must be sold to lock in a profit-realised gain!

• Investing is a zero-sum game, for every “winner,” there is a loser who capitulated by selling securities for less than their original cost.

• Profits on US stock owned/held for less than one year are short-term gains subject to ordinary income taxation, not capital gain beneficial rates.

Next week: Financial health checklist

Sources

“A ten-year-old Gamestop investor cashed in. His return? Over 5,000 per cent”, New York Times, Christina Morales January 30, 2021, https://tinyurl.com/y5g437r6

“The ‘Roaring Kitty’ Rally”, New York Times, Nathaniel Popper and Kellen Browning, January 29, 2021, https://tinyurl.com/y4zllc2m

Investopedia, “Short Selling Explained”, https://tinyurl.com/yyh9ae2f

Bloomberg, “Gamestop mania Is delivering a dangerous rush to the Reddit mob”, Katherine Greifeld and Claire Ballentine, January 30, 2021, https://tinyurl.com/yybgysbw

Martha Harris Myron, CPA JSM, a native Bermudian, is an author, international financial consultant to the Olderhood Group Bermuda, and financial columnist to The Royal Gazette, Bermuda. All Proceeds from these articles are donated to the Salvation Army, Bermuda

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Published February 06, 2021 at 8:00 am (Updated February 05, 2021 at 2:34 pm)

The Gamestop phenomenon

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