Kingsmill's Investment Miscellanea: Friday, January 29, 2021

Jan 29, 2021 | Joshua Kingsmill


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Key Takeaways

  • The David and Goliath nature of the participants in the volatile share price of GameStop has been fascinating.
  • Is this “online activism” a sign of the future?
  • Certainly, more investors see buying a stock as a “game” than ever before

For those that have been following this GameStop stock saga, it’s been a fascinating and shocking story: (LINK). It’s to my mind that a divergence of online communities' power to disrupt and a reflection of the times. In a nutshell, this company GameStop, a close to a bankrupt company with an antiquated business model that sells video games through their store network, has seen its share price rise from a few dollars to over $400 per share (with incredible inter-day $150/share price movements). Their business model is akin to Blockbuster, not too long ago. Netflix and other online content providers completely displaced this market. Similarly, today, everyone downloads video games directly to their game console/computer.

GameStop’s volatility is the result in no small part of an online forum of Reddit users, in a community group called WellStreetBets, who have “bet” the opposite of what several large institutions are “betting.” It’s truly a David vs Goliath saga and something that the market has never seen before. Basically, large institutions have “shorted” the stock, predicting its demise. When you short a stock, you have to at some point buy back the shares. If the trade works, you buy them at a lower price and get to keep the difference. But if the stock price goes up, they lose money (and in this case, so far, a lot of money).

WallStreetBets Reddit Red Fist

 

What’s unprecedented is the collective and coordinated role of individual investors making the opposite “bet”: They have been trading at incredible levels, resulting in a massive upswing of the stock. Even Elon Musk got into the action, tweeting out his support for the stock and the renegade group who have been buying the shares.

The bottom line is that this is being treated like a game, which can obviously be dangerous. While no one knows exactly how it ends (I suspect badly), from my perspective, it’s hard to root against them. The interesting thing with GameStop is that it would appear for many of these participants, the fear of losing money seems to be missing. Many participants on these online chats highlight purchases they made at the high as a badge of honour and are cheered on by other members. The purchase is made as part of a ‘contribution to a cause.’ It’s argued that plenty of hedge funds, short sellers, billionaires, and institutional investors treat investing like a game, too. And every once in a while, they’re bound to lose, too, even to these little guys.

Back to the original premise: we don’t know what this means long-term, but if these online forums gain more momentum, it’s not hard to imagine other companies falling prey to the same set of circumstances. The implication of this to the broader market is unknown. GameStop is not any different from a month or two ago in terms of its fundamentals. By any conventional measure, its share price has moved wildly for reasons other than changes in the company's fundamentals.

This week, in a first, I’m going to predict that a prediction made by GM is going to be wrong!: General Motors Co. promises to go green by making all of its global operations and vehicles carbon neutral by 2040, including selling only zero-emission models by 2035 (LINK). Things certainly are evolving, and this is a good initiative, a further reflection of innovation, but by 2035 (when I turn 40: haha!), they won’t get there entirely.