Gamestop or: Why short sellers win

So far, another gamestop-related view of how retailers have ruined small retailers and the cost of a hedge fund of 23 23.6 billion is probably the last thing you want to read. Don’t worry, this op-ed is a little different, because I think short sellers have won and retailers have lost.

Let me explain why.

Everyone knows the story. Gamestop has been in trouble for a long time and thus one of the main goals for hedge funds is to sell short shares in the hope of making a death profit for the company. Then, how retailers on Subreddit WallStreetBets made money by betting on GameStop, and by coming to platforms like Robinhood, retailers pushed stocks even further, creating a frenzy, resulting in short pressure and a gamma on the options market. Now retailers who went to the gamestop are celebrating their victory. In 2021 the stock rose 1,642%.

There is only one problem.

A successful trade consists of two actions. First, you need to buy a stock that then increases in price. Then you have to sell that stock at a profit and lock in those profits. The beauty of investing is that it is a race with no finishing line. There is no point where everyone can evaluate their profit and loss and compare themselves with others. The market continues all the time and you can stay ahead one day, you can easily lose everything next.

This is a particularly important lesson for focusing on bubbles. There is no doubt that GameStop is one at the moment. But there are different ways to define bubbles. Marin O’Hara, a 2020 winner of the CFA Institute Research Foundation’s Vertin Award, has recently provided insightful analysis of various funds. The Washington Post Columns.

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To me, the most interesting thing about bubbles is what John Kenneth Galbraith calls a “bezel”, or “when the snatcher gains and the person who embezzles doesn’t feel strangely enough damage. There’s a net increase in mental wealth.” We’re now at Gamestop Bezel. : Short sellers have already won, but retailers feel no loss.

Undoubtedly, hedge funds in short positions in Gamestop have lost a lot of money. But there is an interesting observation in the trading volume of Gamestop shares. Towards the end of last week, it was down nearly two-thirds between January 26 and 27. Then, when Robinhood and other platforms briefly block traders from buying Gamestop, the stock is down more than 60% before the recovery begins. During that time, the volume of transactions has also decreased significantly.

This is not proof, but it does indicate that the brief stress is over. So far, GameStop shares have been entirely the domain of traders and speculators. No short sellers or self-respecting institutional investors are still in stock. We have entered the bubble stage when traders can only make money if they find a bigger fool who is willing to buy the shares they are trying to sell in the hope of finding a bigger fool to sell later.

Sorry for the sarcasm, but at some point, this GameStop will stop playing the bigger fool. Every bubble in history eventually comes to a point when not enough fresh money is flowing to sustain it. And no social media can stop it.

I started my career as an investor in the late 1990s when tech bubbles. After that, Reddit didn’t exist, so people increased their stock on Yahoo! Finance boards and other platforms. The mechanism was the same, even if only a small number of people had access to the internet and so the bubbles were small. We know how the story ended. And we know it’s not the short sellers who have lost their money. In the end, the losers were the last fools in the line, who had bubble stock who didn’t have big fools to sell them to.

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If you own Gamestop shares today, you’ve already lost most of your money, you still don’t know it. Small sellers have left the market. But don’t think for a minute that they are licking their wounds in defeat. They are re-grouping and probably already circling the gamestock again, waiting for the right time to sell it at a much higher price than their original shorts. And when the bubbles burst, they will gain billions and retailers will lose billions.

The downside of all is that in order to sell Gamestop shares briefly, these traders have to take an orrow from their current owners. And many retailers are unaware that they have signed terms with their custodians that allow them to lend securities in their portfolio to other investors for a fee, none of which ends up in the merchant’s account. So these traders are going to give their shares to those who will eventually bankrupt them.

Be sure to learn more from Joachim Clement, CFA Geopolitics: The interaction between geopolitics, economics and investment, 7 Mistakes Every Investor Makes (And How To Avoid Them), And Risk profiling and tolerance, And sign up for it Clement on investment Comment

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: Cropped Image, courtesy of Keith C. License.

Joachim Clement, CFA

CFA Joachim Clement, a trustee of the CFA Institute Research Foundation and provides regular commentary here Clement on investment. Previously, he was the CIO of Wellarshof & Partners Limited, and before that, the head of the UBS Wealth Management Strategic Research Team and the Head of Equity Strategy at UBS Wealth Management. Clement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland and Madrid, Spain, and earned a master’s degree in mathematics. In addition, he holds a master’s degree in economics and economics.

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