Are you having trouble understanding the Reddit/GameStop/Wall Street story. Look at it this way: If a bunch of Reddit users can figure it out, you can too…maybe.
I often see cartoonists cover an issue and I can tell from their cartoons that they didn’t really understand it. Usually, those people are conservative cartoonists. Just label something “socialism” and put a big frowny face on it or drawing a sinking ship and write “debt” on the bow. I know one cartoonist who’s been doing the “debt” thing for 30 years and his readers swear he’s a genius. But with this GameStop investment thing, I don’t fully understand it and I’ve seen cartoons on it where I can tell its creators don’t either. But you need to read beyond the headline or a Facebook meme….which is actually how this entire thing started.
A year ago, stock in GameStop traded for $4 a share. Last Thursday, it got as high as $483 before closing the day at $193.
GameStop is a brick and mortar company that specializes in video games, and like many others during the pandemic, it’s been struggling. It was already in trouble before the pandemic with online competition from Amazon, Walmart, Best Buy, and other outlets. GameStop has closed 783 stores over the past two years. What do hedge fund people on Wall Street do when that happens? Do they swoop in to help the struggling business? HAHAHAHA. No. They bet against it. They bet the business is going to die. People on Wall Street don’t see people, their dreams, their investments, or what they spent their lives building. They see wagers to bet for or against. And that’s where the Reddit guys took them on.
I am the last person to explain how the stock market works. The extent of my experience with it is that I used to have a 401K where other people managed it and over the past year, I’ve been playing with an app where you buy pieces of a stock. So far, I’ve invested around $40 and today, I think my earnings add up to $8. I am no Jimmy Buffet…Warren Buffet? Doris Buffet? Either way, it’s all over my head. But, I’m going to try to lay this out the best I can. If I need to be corrected, you are free to do so in the comments.
First, here’s the gist: Amateur traders on Reddit beat professional hedge fund managers at their own game. The professional guys are out of a lot of money. The Reddit guys decided to go after the professionals on Wall Street, to stick a finger in their eyes and beat them at their own game, to beat them at their own system which they believe squeezes the little guy out.
It started with “short selling.” That’s when professional investors borrow shares of stock to sell and then buy back later so they can return them, which lets them pocket the profit if the stock price goes down. They’re basically bets that the company will fail. Understand it yet? Me neither. How do does someone borrow stocks? Is it like borrowing money? But I do understand that if the stock keeps rising, going against their bet, then the borrowers lose money.
This sounds like a system where the professional guys start playing the game without really investing anything. But if they bet wrong then they lose.
For example, these guys bet against Blockbuster (a company where I had a second job for a while) going down which I don’t think anyone at the time had to be a professional investor to see that company was going to destroy itself. Blockbuster had the business sense to reject an offer to purchase Netflix before that company took off. Duh! A lot of people made money when Blockbuster closed down. They did the same thing with my industry and William Buffett (oh, I know who he is), created his own chain out of newspapers he bought, said he loved newspapers so much, then ran them all into the ground, including my former employer. Since I left The Free Lance-Star, that company is on its FOURTH owner. Hey, Reddit, guys. I’m on your side.
So the professional hedge fund guys started betting against GameStop. If a stock rises after these short-selling managers buy it, then they buy more to cover their ass but they usually still lose money when they dump it. If it keeps rising, there are usually no more shares to purchase and they can lose millions. Thanks to these Reddit guys buying shares of a company that quite frankly, nobody shops at anymore, short sellers lost over $23 billion in January. Now, they’re targeting other companies like AMC movie theaters, which is suffering because people don’t go to movies anymore and they’re tired of spending $17 on popcorn. Now may be a good time to borrow stock of the Trump Organization. That company’s going down, baby. Have you seen the guy who runs it? He’s an idiot and he’s probably going to prison over some shady dealings he was involved with over the past four years or so.
Now Wall Street is talking about changing the rules…the rules that always worked for them and was not supposed to work for other people. What will the new rules be? Don’t ask me. I still don’t understand the old rules.
But Wall Street treats the stock market like it’s their casino. Every investment is a risk and for them, it’s OK to team up and borrow shares. If you want to play, there are fees. The Reddit guys used services that didn’t charge fees and they bought stocks together.
Now, do you fully understand how it worked? Me neither. You’re welcome.
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