The GameStop Incident

OK, I’ll admit it. Until last week I had not heard of Gamestop – the company or the stock.

Of course, I have now heard of Gamestop and more including Reddit, wallstreetbets, Webull and Keith Gill (Keith Gill was called the “Original O.G.” by one trader*). And as a financial professional I am knowledgeable about what short-selling is and how “the shorts”, as they call traders who sell short stocks and other securities, can get “squeezed”. Gamestop brought shorts, short-selling and short squeezes to an entirely new level.

As Brett Danko, the founder of my firm, recently described it, “the Gamestop incident of last week transcended the world of stock trading… both for major institutional traders and individual traders”. Keith Gill and the individuals trading off chat board messages transcended stock trading similar to how Michael Jordan transcended the sport of basketball and even Muhamad Ali transcended the sport of boxing. These people and events became larger than real life – for a time.

Emotion is nearly impossible to control in trading – especially when video and social media are added to the equation.

There is SO much to say about the Gamestop “event” – and it is possibly not over. Here are a few thoughts:

  • Concept of FOMO (Fear Of Missing Out) – traders of all kinds jumped in to get a piece the action.
  • YOLO (You Only Live Once) – even the “greenest” of traders, at huge financial risk, gave it a go and bought and sold into the frenzy.
  • David & Goliath – Little Guys and Gals vs. Big, Sophisticated Traders, banks, and hedge funds.
  • Market rebellion – Societal woes of our time weaved in with the above.
  • Class warfare – Similar to the above.
  • Breakdown of all kinds of social and financial norms.
  • Pure boredom and/or frustration created by the coronavirus pandemic.

Even Elon Musk figured prominently into the scene. On the other hand, Janet Yellen, now the US Secretary of the Treasury, has barely spoken up publicly. As reported by several major news services there are various dots that could be connected regarding Secretary Yellen. Prominent hedge fund Citadel is a major source of revenue for Robinhood. Robinhood is the trading platform founded for the “little guy trader” that on January 28th restricted trading in Gamestop – arguably hurting thousands of “little guy” traders and, less so, larger traders. Citadel LLC paid Janet Yellen over $700,000 in speaking fees after she stepped down as US Federal Reserve Chair, some as recently as Fall 2020.**

The conflicts, emotions and even entertainment do not get much larger. Consider Gamestop, a stock once in the S&P 500, traded between $3 and $4 in early 2020, then at $19 to start off 2021, then traded to an intra-day high of $468 (133 TIMES the $3-$4 prices and 23 TIMES the $19 price) by January 28th, only to trade between $70 and $90 the past five days (and falling). The dollar values are stunning. And the surrounding powerful financial forces are stinging mad – with “little guy traders” and certain TV personalities publicly mocking the carnage at the hedge funds.

Where does all this drama fall in the priorities of investing? For sure, not within the basics of asset allocation, risk management and long-term financial goal setting. The biggest factor I can highlight is that emotion is nearly impossible to control in trading – especially when video and social media are added to the equation. And that individual investors and their emotions may have just gotten a major upgrade – for a time. The next chapter is yet to come.

*Julia-Ambra Verlaine and Gunjan Banerji, WSJ.com, January 29, 2021. Referring to O.G., the Original Gangster.

** Trevor HunnicuttDavid Lawder, Reuters.com, February 1, 2021.

Thank you for reading, stay safe and TGIF!

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