Game Stop Fun
Game Stop, I trust you know what I am talking about. For those who don’t, all you need to know is that it is a bricks and mortar seller of video games and associated paraphernalia. It had a huge, almost ubiquitous, presence in the malls of America. Then everything moved online. Streaming became the norm. Game Stop slid on its way to probable oblivion. It lost $1.6 billion over the few quarters leading into early 2020; fired a boatload of people and managers; its stock plummeted downwards; and the future looked very bleak. At $18 per share there seemed to be sufficient downside for Wall Street short sellers to pile in and make a bundle. So, right on cue, a couple did. The smart money, which Wall Street likes to think it has a lot of, was betting on Game Stop’s inevitable demise. It was the closest thing to a dead certainty since … well since Wall Street was high on all those “can’t miss” mortgage backed securities back in the day.
Was this a Eugene Fama moment? Or was this a Robert Schiller moment? (I still can’t get over them both winning the ersatz Nobel prize in the same year!)
Then something funny happened.
Game Stop’s demise and the shorting of its stock came to the attention of an obscure backwater of the internet where people gather to watch Wall Street activity and make their own bets on stocks.
Yes, I know. “Make their own bets” is not technical language for what Wall Street does, perhaps I should stick with the formalities and point out that the short sellers were backing the fundamentals. That’s the word they all use to describe the bits and pieces of information that they pick up and glue together to paint a picture of the future.
In any case those fundamentals were grim.
But the denizens of the internet don’t see stock prices through that Fama-esque lens. They see it through a more exuberant lens. They like to play games and take bets. At least they’re honest about it and don’t slather themselves with the hubris of a typical Wall Street banker.
So what happened when fundamentals clashed with exuberance?
The stock price shot up.
From the starting point of $18 per share it rose at a dizzying pace, hitting a high of $380. It was true mania. A wonderful thing to watch and confirming everything skeptics like myself think about the stock market. The short sellers were caught in a vicious squeeze and eventually they caved in. They cashed out and took very large losses. One was even motivated to launch a verbal attack on the internet gamers saying it was unfair and vindictive. Poor thing. I hope his hedge fund survives.
Quite what happens to the gamers now they’ve driven the Wall Streeters to the sideline is anyone’s guess. I imagine they’ll be taking their losses too as those fundamentals assert themselves. Who knows?
It does make me chuckle though.
I always thought that the entire Fama fantasy about the efficiency of market prices was an absurdity. Wild gyrations in price are supposed to signify information being assimilated into the market, every single price is supposed to be a correct reflection of this steady drip of information. Prices are never wrong. Ever. There can be, in the land of Fama, no bubbles. I remember discussing the topic with a former Federal Reserve bank chairman. No, I was told, there are no bubbles. The market knows how to price. I was young, how could I argue?
Back to the drawing board. Efficient market theorists now have to take into account the oddities of investors who see the stock market as something of a game — unlike the professionals who, we must all remember, “invest” they do not “bet”. No not at all. No doubt somewhere in Chicago they already have their response lined up. Perhaps they can add another circle or two to their Ptolemeic geometry.
Meanwhile those of us who live in the real world and accept the vagaries of uncertainty and limited knowledge, don’t have to adapt a thing. We know the answer:
It’s a complex world. Stuff happens.
Like Game Stop’s stock price.
