Here’s the boring bit.
GameStop is like a drab, run-down version of JB HiFi. It has approximately 5,500 retail stores worldwide and going nowhere.
Here’s the exciting bit.
On Monday, January 22, GameStop traded at $43.
And then one week later, it reached a high of $483.
A jump of just over 1,100%.
But here’s the rub. GameStop is losing money, lots of it. So why did its share price take off towards the stratosphere?
Ironically, because it’s losing money. Hence its attraction to hedge fund managers.
Stop! Hold it right there Suncow! Can you pleeeeease explain what a hedge fund is?
Sure. A hedge fund is like a library card. It borrows stock from an institution for a fee and promises to return it.
Ok, so why would a hedge fund borrow stock?
Simple. To profit from a falling share price.
What! That just made my head spin. How does that work?
Hello GameStop!
GameStop is on the verge of going belly up which means its share price will eventually go to zero.
So to profit from this, a number of hedge funds recently ‘borrowed’ a heap of GameStop shares and immediately sold them at around $40, with the expectation of buying them back at a much lower price, say $5.
This would have given them a tidy profit of around $35 per share and a return of 80-90% in just a few weeks.
After that, all they had to do was return their shares to the ‘library’ (lender) and pay any late fees.
“Yeah but”, I hear you say.
If GameStop was about to go broke why did its share price skyrocket to $483? That’s totally nuts!
Enter Reddit. A chat site with about 430,000,000 members.
Pump and Dump
About two weeks ago, a suggestion was made on Reddit to effectively, ‘…take the hedge funds on and beat them at their own game’.
And so they did.
And a wave of Reddit members bought a small parcel of GameStop shares each (approx. $1,000) through their Robinhood trading accounts and forced the share price up…way up!
Consequently, this forced the hedge funds to buy their shares back which forced the share price even higher.
I.e. the Reddit members ‘squeezed’ the hedge funds out of GameStop.
It’s a strategy known as ‘pump and dump’ and it works like this…
Social media groups take aim at a specific stock. First they buy it en mass, then they spruik it to ‘pump’ up the share price, and then they start ‘dumping’ while the crowd is still buying it.
Those who get in early win big, and those who get in late, good luck!
Pump and dump has become the new sport for a lot of millennials during COVID. And such is their unbridled hubris, they love to pump and dump stocks about to go bust because nothing turns them on more than a good game of ‘David vs Goliath’.
Hence all the noise last week when GameStop went from $40 to $483 in a week.
However, pump and dump is not new. But it is for all the muscled-up, hairy chested, young bucks in the market right now, strutting their stocks.
The last time I witnessed manic behaviour like this was at the peak of the dot.com boom between January and March 2000.
And then the market corrected in April, and the NASDAQ dropped 82% over the next two years.
GameStopper.
Have a great weekend!
Adam
Back paddock – play to your strengths, train on your weaknesses. Jack Gibson – ‘The Last Word’
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