It was a powder-keg 2 years in the making and a sign of what is to come. Many in the media, your CNBC, your WSJ will decry it as an act of chaos – a sign of the market gone mad, of irrational exuberance, but that’s only because it is their
(very private) world that is burning. The events of last week which saw GameStop ($GME) rise 84%, leaving short funds with in excess of $3 billion in losses, are a cultural moment where retail traders humbled the ‘Market Wizards’. My aim in this short diary is to give you a counterbalance to the main stream narrative that will inevitably rage after this ordeal is over.
In essence, what happened last week was good. What happened last week was fair. What happened last week was the functioning of a proper shareholder democracy.
Michael Burry, the Big Short guy, saw the low hanging stock and spotted a mis-pricing, at ~$3 the stock was trading far below its book value, the net price of its assets and hence could be trading much higher than it was. It was beaten down for sure but who isn’t. He started purchasing and by May 2019 owned 2.75 million shares (3.04% of the company).
One of the greatest value investors of our generation had thrown his weight behind the company. Suddenly there was a resurgence of interest and many other investors started looking under the hood; Rod Alzmann who popularised the stock on Twitter, u/DeepFuckingValue aka. Roaring Kitting (check out his YouTube Channel) also took what would be a monetarily small
for now but culturally significant stake with $50,000 of call options. With a renewed enthusiasm we had a potential comeback story on our hands. The stock started trending up. This was bad news for short sellers whose money printer had just hit a jam. But they persisted, battling it down through increasing their short positions, which kept getting larger and larger.
Enter Ryan Cohen – he is a poster CEO, your girlfriend would leave you for him and your father wished he was his son. He had bootstrapped Chewy, an e-commerce pet food retailer, into a $4 billion behemoth, beating Amazon at their own game. Through his activist fund Ryan started building a substantial stake in GameStop through the summer of 2020 and speculation of his involvement sent the stock surging. With a talented CEO on board, GameStop could transform itself from a BlockBuster style retailer into an Amazon style e-commerce company, creating a powerful niche in the online gaming sector. Hope was rising, shorts were hurting, Hans Zimmer comeback music had started playing.
This is when the first significant wave of retail investors started taking interest. u/DeepFuckingValue’s audacious investment had started generating interest in GME on the online discussion forum, ‘WallStreetBets –
its as if 4Chan found a Bloomberg Terminal’. Some of the top ranked posts on the forum are as follows:
· ‘Gold Standard < Big Mac Standard’
· ‘I will invest $100,000 into whatever is the top reply’ – its long term chairs in case you were wondering.
· ‘I said if SPY (a popular stock index) closed green today, I would drink my pee. Here is the video’ – the guy lives in a basement where he pees into a drain a metre away from both his desk and bed. Into a martini glass though, gotta keep it classy.
· ‘Upvote to Ban all of Canada from the Internet’
The most common fear in the forum is of appeasing their wife’s boyfriend & CCP infiltration. There is also a cyclical passion for investment in gourds.
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Historically markets have been hideously unfair for an average wage investor. They must pay high fees placing a barrier to entry and are priced out of market research reports limiting their insight. A Bloomberg terminal, the toolkit of every Wall Street trader costs in excess of 20,000 GBP annually. However over the last 5 years this inequality has been reduced.
Robinhood, for all its faults, has allowed retail to trade commission free and the nodes of decentralised knowledge networks such as Twitter & WallStreetBets has allowed the spread of sophisticated, well informed analysis. Whilst it is up to the individual investor to separate the cash from the trash, the fact that high quality analysis is now easily accessible for free has enormously levelled the playing field. Moreover through these same social networks, people can discuss their fears, temper their wild dreams and collectively come to more informed decisions regarding their investments.
This is troubling for Wall Street. It has thrived and lived off ‘dumb money’. When ‘dumb money’ gets smart their jobs get hard. When ‘dumb money’ gets big, they start getting scared. What was remarkable about the GME phenomena is that millions of small investors stuck to a thesis through thick and thin; the price volatility (instigated by the short sellers to create fear) could have scared off the
paper hands but the collective security of a reassuring community turned that paper into diamond. Every single day a barrage of fresh memes were published reassuring the community of their thesis and quelling fears. Remarkable videos, voice overs, mix tapes, novellas were all written to keep the community spirit. Half of the success in a trade is having the conviction to see it through and the online communities provided exactly that.
It fundamentally changed the playing field. It made ‘dumb money’ smarter, it made retail collectively powerful and it gave them the conviction to see the trade through. It violently upsets the status quo and makes Wall Street traders work harder. It reduces their edge and hurts their bottom line. This will not sit will and there will be a reckoning. Accusations of market manipulation, of paternalistic concern will be made. They are PR speak for
‘they took our money and we want it back’.
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The blow up of hedge funds following this disaster will also have long term ramifications for the industry. For the last ten years the majority of funds have continued to underperform the simple S&P 500, for these last ten years they have consistently lost money to passive funds. More concerning for them, every day they get ridiculed by teenagers online they lose the mystique that gave them their power.
This is not to side sweep at all of them – many people in the industry are the smartest people I have ever met but the industry is too large, too full of average people looking for prestige validation, every day they linger, retail will eat their lunch.
