By now, you’ve almost certainly heard something about the rise (and by the time you read this, the fall) of the stock in the company GameStop.
GameStop is a “brick and mortar” retailer that sells video games, both for console systems like Microsoft’s Xbox and Sony PlayStation, as well as board games, puzzles, etc. They also sell collectible items like action figures and other game and movie memorabilia. They have an internet presence, but most of their sales are from people walking into a store and buying something. The company has been hurt badly by COVID, which has damaged in-person retail sales broadly, but they were in trouble long before that.
GameStop’s main problem is that everything they sell is available somewhere else at the same or lower cost. Video games are mostly downloaded from the internet today. Most of the console equipment they sell is available from larger retailers like Best Buy, Walmart and, of course, Amazon. As a result, the company’s sales have been in decline for years. Experienced and professional investors have noted this trend and reacted accordingly, by selling the stock from their portfolios, resulting in a stock price that has been in steady decline for some time.
The Short Squeeze
As a result of the steady decline in the company’s prospects (and stock price), a lot of professional investors and hedge funds were betting against it. In a nutshell, these investors were carrying what are called short positions, where you borrow a stock from someone, sell it, and hope to buy it back later at a lower price. You then give the stock back to the person you borrowed it from. The profit is made in the difference between when you first sold the stock and the price you pay to buy it back.
What’s happened recently is that a lot of individual ‘retail’ investors, folks who may not have much investment knowledge or experience, seem to have decided to try to punish hedge funds that were betting against GameStop’s stock. When these individual investors got together to start buying the GameStop stock, it pushed the price up instead of down, forcing the hedge funds to close out their short sales. In closing their short positions, the hedge funds are forced to buy the stock, driving the price higher still. This is called a “short squeeze” and is a fairly common occurrence, though rarely to this degree.
GameStop is a relatively small company, and its stock represents barely a rounding error on the value of the entire stock market: $10 billion out of about $50 Trillion. There is not systemic danger to the whole market here. Period.
The problem is that a lot of people who bought the stock thinking they were supporting a company they loved or ‘sticking it to the man’ are going to lose a lot of money. As I said, there’s a reason the company’s stock has been falling: it’s a failing business. Like Blockbuster (the video rental business), GameStop’s business model has come and gone.
GameStop’s stock price closed on January 27th at $347.51. A year ago, GameStop stock was trading around $5 per share. Without radical changes to the business, it is likely the price will return to that level in due time. The hedge funds that were forced out of their short positions will reinstate them at the higher price, and most of these individual investors will probably lose their shirts.
Investing is Serious Business
Fads like GameStop are interesting, but a lot of people will be hurt as the stock price comes back down to earth. Investing isn’t a game, even if apps like Robin Hood are trying to make it appear like one to entice more customers to their service. Investing is a great way to build wealth over time, and to keep your purchasing power ahead of inflation. Speculation is a very risky way to make (OR LOSE!) money very quickly. They are not the same thing at all.
At Blankinship & Foster, we believe investing should be done as part of an integrated plan designed to meet your unique goals. Contact us to learn more about our investment philosophy and how to Invest with Purpose.