GameStop, Blackberry, AMC: How “Dud” Companies are Suddenly Worth Billions

As shocking as the whole GameStop/Blackberry/AMC activity felt…in the world of commerce it’s actually nothing new.

 

Today’s investor would call this type of trading “meme stock” – “a stock that has seen an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums like Reddit. For this reason, these stocks often become overvalued, seeing drastic price increases in just a short amount of time.” (Source)

 

The truth is this type of “irrational exuberance” (a phrase coined by esteemed economist Robert Schiller 20+ years ago) has probably been around since the beginning of time.

 

Don’t believe me? Look up the Dutch Tulip Bulb Market Bubble of the 17^th century. And before that…who knows? There could have been a run on oil lamps and chamber pots.

 

What’s Happening Now

 

Back from checking to see if there was a chamber pot crises at any point in history? Good. Let’s talk about what’s going on now.

 

If you’ve been watching the news, you’ve likely heart the terms “short squeeze” and “short selling.” And if you were paying attention to the news during the 2008 housing bubble, you probably heard the same.

 

While there are some similarities between the housing crisis and the runup in meme-stocks, namely leverage, the housing bubble was caused by a variety of factors including easy money, high leverage, complex financial instruments, and governmental incentives.

 

Meme-stock-mania is quite a bit simpler.

 

Most people buy stocks because they believe the value of the stock is going to go up over time.  Conversely, if you wanted to profit from your conviction – you don’t want to short on “just a hunch” – that a stock was overpriced/overbought, you could short the stock.   As you don’t own the stock (and there’s no profit to be made in going out and buying it just to then sell it), you’re looking to borrow shares from someone else, and sell them.  When/if the stock goes down, you’ll repurchase the shares at the lower price and return them to their rightful owners.

 

How Does that Cause the Price of a Stock to Rise?

 

As a financial advisor, I’m occasionally asked why the market fluctuated on any given day.  The simple – if caustic – answer is always this: There were more buyers than sellers or vice versa.  Simply put, a stock goes up when demand is higher (more buyers) and goes down when demand is lower (more sellers).

 

Short sellers are selling stock they don’t own – creating more sales in the marketplace than otherwise would exist.  When they repurchase the shares (cover their “shorts”) to return to the rightful owner, the reverse happens and the price rises.  As stock prices rise, more short sellers who are losing money want to get rid of their shares.  This creates a spiral of buying and runs the stock up.

 

Here’s something important to remember: for an investor who is “long” a stock can “only” lose 100% of their investment; there’s no theoretical limit for how high a stock can go (and how much a short-seller can lose).

 

How Did GameStop Get Involved?

 

In the case of GameStop, Blackberry (yes they still exist), AMC (yes they still exist), and others, users on the popular site Reddit began discussing a way to unite against what they perceived as “the bad guys” – namely hedge funds and corporations profiting from the suffering (decreasing stock price) caused by the pandemic (or in the case of Blackberry just dated technology).

 

Whether there was a catalyst for the buying is unclear.  Some point to a well-known entrepreneur buying a stake and joining the board of GameStop, while others looking to “save something” from the greed of Wall Street point to the number one hit on a list of least-likely-to-survive the digitization of the gaming industry (okay, that’s just my opinion).

 

Regardless of how it happened, it put trading apps like Robinhood front and center in the media, which then attracted a different kind of investor (and in this case, I use the term “investor” very loosely).

 

In the next blog, we’ll discuss why this type of trading could be dangerous to your bank account…and your mental health.