Readers Write In #335: Gamestop

Posted on January 31, 2021


(by Shiva Prasad)

There is significant outrage, the social media is going crazy about what GameStop thing really is? As someone who has relied heavily on investments to make my ends meet for the past two odd years, I’ll admit, even for me there was still a lot of learning I had to go through, to understand what is really going on. 

A lot of what is happening now owes its origin to the depression caused during the housing market crisis of 2008. A bunch of greedy companies in the wall street wanted to make a quick buck. They started selling mortgages to people who couldn’t pay it back. They ensured to take out all the regulations around low risk investments and played them for higher rewards. When the risks went higher, they made sure the regulations wouldn’t be put back in place. 

This could only be attributed to one of two things, their extreme Greed or their extreme Stupidity. Either way, those companies were to be blamed and they were to take this hit. They  had no interest in the people who put their life savings believing in them, they had no interest in the future of the economy. Their only interest was in making money for themselves, and they did that at the cost of everybody else in the world. They couldn’t care less. So they let the individual small investors, tax payers, other governments, and the entire freaking world take the hit, and they walked back with hardly any scratch, sipping champagne from the terrace top, looking down on the whole world.

Lafayette – Circa December 2016: GameStop Strip Mall Location. GameStop is a Video Game and Electronics Retailer V

There were a lot of people who lost their entire life savings and pushed to deeper debts, with no likelihood of recovering for nearly decades. They lost their houses, they lost their jobs, they lost their health, they fell into addictions, they lost hope, they lost the trust in the government, they lost the trust in banks, they lost the will to live, some lost it all. Their mistake was their belief in succumbing to their middle class morals – to work hard, provide value to the society, earn enough money through it, trust the governments and the banks to provide for their basics and save a little for their rainy day futures.

Was it entirely wrong to dream to live life a little better? To dream of having security? What do you do when there is a health issue? Well, you won’t have enough money to pay hospitals and doctors, so let us put it in medical insurance. What if you can beat the system by studying harder and getting ahead in the next generations!? Well, you won’t have enough money to pay for the schools and colleges, so let us make student loans. What if you want to have a decent or dare-the-damn-dream of a bigger house, so you don’t have to worry about being homeless with your family and kids? Well, your money won’t be enough and your earnings won’t keep up, because the prices sky rocket, because of supply and demand, so let us make a housing loan.

If a government can’t even promise the basic necessities like shelter, education and health for all the citizens (or at least subsidize it so the average person could afford it), how do they call themselves as advanced civilization? Because it is a free society, your life is based on what you can do to achieve in your life? Because, that is your destiny or you are plain lazy to not climb up the ladder? But what if, whatever you do, is not sufficient in a rigged system? What if the wheel of fortune is just a hamster wheel, and no matter how hard you try, how many attempts you have at it, you could never climb to the top, or the middle or really go anywhere. Isn’t it every middle class in all the world? The people that benefit the most from all of this are the top 1% who are majority shareholders of all these establishments. Shouldn’t we be angry at them? Shouldn’t their existence make us sick from the stomach? Shouldn’t we be demonizing them? 

Apparently not! In all ridiculousness, we are consistently dreaming of a delusional future to become them! We are taught to cheer for them, we are engrained to feel envious about their glorious lives. We are spending all our lives’ energy to get into their system, and one up our level of hierarchy in our generation, beat our friends, relatives, neighbors and peers, so our kids could have a slightly better edge, a higher position to start their game.

Before these tumultuous times, there were repeated warning signs the wall street chose to ignore. And, there were people who looked at their data and started to predict where this is going. One of those people was Michael Burry (The guy Christian Bale played in The Big Short). He, with his investment firm Scion Capital, noticed this trend in Wall Street, where the big guns were gambling with people’s money and calling it low risk. He shorted (bet against or in simpler terms betting the price will become lower in the future) the mortgage bonds, when everybody around him laughed. What happened next was history and he was right eventually. 

Fast forward to 2019, Michael Burry has a significant stock position (about 3% of the company) in GameStop. GameStop is a company which has brick and mortar retail outlets around the country, that is in the business of selling everything related to video games. But, like in the home movie industry, the physical discs are quickly becoming digital. They had the choice to become like Blockbuster (the retail giant that lost their business to digital movies and streaming) or become Netflix (I don’t have to explain what they do, that’s how successfully they have pivoted their business model). But the management was more aligned with the Blockbuster like behavior of living in the past. 

So, Michael Burry sent a letter to the management of GameStop, disappointed with their management and their recent decisions. GameStop was in a unique position because, unlike Blockbuster which had Netflix rising in competition, GameStop had no direct competitors. But, Michael Burry was insisting that Amazon is making giant steps in funding and flooding the digital market with products that were catering to the Gamers, which he considers as a lost opportunity for GameStop. He also mentions that now GameStop had more cash in their assets than their stock market value at that time (August 2019). Now would be a great opportunity to buy back their own shares which were open to the public market. Take more control of the company and make amends to their falling business.

Meanwhile, a reddit user named deepfuckingvalue, a security analyst, reads this letter Michael Burry sent to GameStop. He does his own analysis and due diligence. He opens a long position (betting for an increase in the stock price in the future), risking a major portion of his portfolio (YOLO – You Only Live Once kind of gamble). In August 2020, he released a YouTube video (people didn’t really find who he really was until a couple of days ago, this Youtube video was not linked to the reddit profile) on his security analysis on this as a value investment. 

Deepfuckingvalue argued, acknowledging the risks that change to digital might be taking over the entire industry, he still believes that it hasn’t happened as yet. Maybe that will happen in the next 5 or 10 years, but the physical disks still have some value and people are still purchasing them right now. The gamers still valued their discs and it isn’t as obsolete as movie discs are. The company still was making Gross Profit even if their revenue has declined. There is a new management which took over and is making steps in the right direction. And he mentions that he believes the company is still significantly undervalued and stocks significantly underpriced. 

Anybody who remotely knows anyone who is interested in gaming, that the PlayStation 5 consoles were due in 2020. This was their major update in 7 years, and people were more than willing to sell their wellness to get a hand on it. GameStop also has a major part of the retail stores dedicated to selling the console and the electronics. And deepfuckingvalue sees that as a part of his analysis, comparing it to the last time the console refresh happened. There were boxes that weren’t checking out and he started buying more call options (think of it like buying insurance, where you don’t have to put in a lot of capital to buy a lot of stocks, but if you made the right call you could massively benefit from it. If not, the premium you paid for the option is the only thing you lose) and starts posting his positions on the reddit forum wallstreetbets.

All this while, the big wall street guys have a huge short position in GameStop. Their logic  could have (don’t know for sure, but it is just everybody’s guess and mine) been, here is a very divisive opinion on physical discs and existence of video game retail stores during these digital times. So, if the stock is severely undervalued nobody would really question the validity of the inference, because it is already heavily debated. During the times of pandemic, this brick and mortar store is going to fail during the pandemic. So they shorted the stock of GameStop. 

Not only they shorted the GameStop stocks, they shorted 140% of the existing float stocks. That is 40% of shares that don’t even exist. They borrowed the stocks that were borrowed already and they shorted it again. They went shorting it in loops, manipulating the market into believing that this stock is worthless and is losing money, and making money off it at people’s expense. 

The loophole with shorting is, there is a risk of not knowing how high the stock price can go. Say, if you bought a stock and held a long position on it, if the stock goes bust, you lose your initial investment as it goes to 0. The most you can lose is 100%. But, with short you have no idea about how high the stock price could go. If you short a position and the stock price doubles you lose 100%, but it moves 10 times, 20 times, you then lose 10 and 20 times of your money. As Bob Marley legendarily said, “Money is numbers and numbers never end”. So their risk is multifold, The wall street guys knew this, but still shorted 140% of the floating shares. Again, attributed to their extreme Greed or extreme Stupidity.

wallstreetbets is a subreddit which was originally formed to share memes, and funny anecdotes of the users’ wall street investments and their outcomes. Primarily formed to have a place to laugh at their losses when they could do hardly anything else. They were individual traders and investors who had a laugh when they ended on the wrong side of their trades. Attributed either to wrong timing, luck (or lack thereof), missed calculations, even ignorance sometimes, but also were victims to market manipulation by big shot wall street guys. These guys were never new to losing, they understand their risks and take it in their stride. They are there to learn and they are forming a community. In recent times, they got to understand that GameStop is an unprecedented opportunity and learnt if they stayed together they could all benefit out of it.

Deepfuckingvalue repeatedly posts his position on the subreddit, that he is still long on this stock. He wasn’t a millionaire before, he is just another normal middle class guy who risked a lot to buy GameStop stocks when it initially sold for $4. His investments right now are worth in two digit millions and he is still not selling it, even when the daily fluctuations are in millions. That is life changing money for anybody, and he might be losing millions, but he is still in this. The community has taken his investment as inspiration and a lot of guys are not selling their stock together, so the demand for the stock would drive prices up and the wall street would need to pay more and more. Right now the stock is trading around $320 which is 80 times their price since August 2020. 

So, now at the very least the wall street guys have to start paying like 80 times for 140% of the floating stocks to buy back the stock and close their short positions. But, the real value could be much much higher and it is attributed to something called a Short Squeeze. If a stock is bought, the demand for it goes up further and further, pushing the price of the stock further and further up, creating a feedback loop of sorts. This demand to the stock is created by the need to purchase their stock quickly before it escalates even higher, and the more they buy the higher the prices go. 

Then there is a gamma squeeze possibility, which with my limited understanding, I am not able to communicate properly. But, in simple terms, it involves not the buying of shares themselves, but the buying of options (remember the insurance kind of thing with low capital from earlier). But, the main inference is this, it is much more volatile and much more prone to higher moves and erratic price action, which could drive the price to crazy highs, if and when this happens.

The wallstreetbets community jumped in on the opportunity and drove the prices high, while providing solidarity and driving the importance of buying and holding (not selling) the shares. Between all this there was a growing lurking feeling of sticking it up to the big guys. There are posts in the subreddit from people who had to face the immediate consequence of depression in 2008. These people investing right now, have seen their father lose his entire life savings and turn into alcoholism. One person had their mother kill herself after the depression. They lost their houses, they have seen their entire community and neighbors go bankrupt and homeless. They have withstood years of turmoil, they weren’t able to pay for the loved one’s medical treatments, some weren’t able to pay rents, some are living a life only eating Ramen noodles. The pandemic, job losses and the incompetence of the government has made them even stronger. The stories and the support they provide each other, with self deprecating humour, is making them even more stronger together.  

With endorsements of sorts with tweets from billionaires like Elon Musk (whose Tesla was one of the most shorted stocks in recent times), Chamath Palihapitiya (whose Virgin Galactic is one of the most shorted stocks right now), and politicians from both wings chiming in, they have finally got something that they didn’t even know they wanted – Representation. The wallstreetbets started growing from a half a million people community to 6 million users, a lot of people who are entering now are mostly clueless about what investing is, but they are not people who don’t know their risk. It is amazing how much they are willing to risk to make these wall street guys pay. It is amazing to witness how much money they have at stake, but still unwilling to cash out standing in anonymous unanimity in making the wall street guys fall. This is personal, this is retribution.

The wall street guys haven’t anticipated this, they knew their risks, if they didn’t they have no business working there. But, they thought nobody had the capital to threaten their position. They got cocky, and that is making them pay. But, now they have the Media come to their support spreading misinformation about the short seller’s positions. They have made the brokerages and dealers force users to stop them from buying GameStop and other highly shorted stocks. They are willing to risk court cases, and willing to take it with the SEC, thank pay back. This caused much higher outrage as more celebrities, more representation and more people from other countries all over the world came to defend them. The price of the stock dropped from $400 to $100 in a matter of an hour. But, they kept standing by it. The people are flocking the forums, to seek validation and trust, they are pouring in more and more money on the stock and continuing to hold.

Now, the wall street is calling for something that it has consistently evaded since the 70s – Regulation! Now, the wall street is crying foul at something they have been doing all along in secret meetings – trading clandestine information, manipulating and abusing the market, and making it a Casino for short term and medium term traders. Now, the same thing is done to them by a group of normal people in an open forum as democratically as possible, and now they call it Market Manipulation. The irony of it all, is they control everything from the Media (spreading misinformation) to the Brokerage (forcing the hand on what you can and cannot do with your own stock and your own money). People have/are risking almost all of their life savings, and they want this to stop. Those people are not asking for a guaranteed full return of their capital, they fully understand their risks, all they want is a fair game and a level playing field. They want to beat suits at their own game.

What is happening is unprecedented! So many things aligned and now we have the ultimate underdog story. The long story short (pun intended), the system is rigged. The Government, Politicians, Presidents, Bureaucrats, Benevolent Billionaires (is there such a thing or is it an oxymoron? A discussion for another day, for now I hope there are some), Deans and Professors of Economics in prestigious institutions, Media Moguls, high integrity Journalists, International Monetary Regulators, even other Countries could do nothing about it. Nothing! Not One Thing! In fact they started becoming a cog in the bigger wheel. These wall street suits are willing to hurt millions of people just because they can’t stand the billions of dollars in their portfolio decreasing a meagre percentage.

What will happen? I am not sure. On whose side am I? I think the whole post makes it clear. How will this pan out in the future for the entire market? I am not quite sure as well. Even if the transfer of wealth happens, Not everybody who puts their money is going to make it. There will be some who make money, there will be some who break even, there will be some who will lose the money. But, there are good things happening. The Charity is blooming, the teachers’ pensions are funded, some medical treatments are being paid for, student loans are being repaid, people can afford rents, a lucky few can buy houses. The community is growing, they are in the thoughts of renting billboards, making short films to drive their message home. I am one of them now, trying and holding my small part in this, risking only what I can lose. The fundamentals are strong, the people are holding together strong. I don’t know who is going to come out successful. But, unlike anytime in recent history, now there is hope! A hope of a level playing field.

P.S #1: I am not a full-time investor, nor have I studied it academically. These are what I found because of my curiosity and this piece is my interpretation of what is happening. Given my limited experience and understanding, I’m more than willing to learn and correct myself if something I have said is wrong.

P.S #2: Hoping for the big bright future of decentralized finance and currencies. I believe, that’s really the level playing field.

P.S #3: Suggested movie watching – Big Short, Inside Job, Margin Call, Capitalism a love story (Haven’t watched it this documentary yet, but heard good things about it)