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What Could Happen to GameStop’s Retail Investors?

GameStop, inversionistas, acciones

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Organizing Reddit users to buy shares en masse in companies that were going under – like GameStop – was undoubtedly an out-of-left-field move that no expert, from either Wall Street or the big investment management firms, or hedge funds, could have foreseen.

That’s why a perfect storm was created making it possible for a group of analysts and small investors -first-, added to the great mass of enthusiasts and more inexperienced people -later-, to deal a hard blow to several of the most knowledgeable agents in the world of stock market investments.

The Reddit forum analysts who spotted the possibility of hitting the market by buying shares en masse in companies like GameStop did a fantastic thing, but, at the same time, the success or otherwise of the many people who invested in the companies that went belly up remains to be seen in the coming months.

A few days ago I spoke with someone who knows a lot about the stock market and market values, and he commented that there were two important factors in this situation: positivism overcoming financial negativism and the speculative quota within the avalanche of people who rushed to buy stocks.

The bottom line is this: GameStop stock went from being worth $18 to over $300 within hours and then peaked at approximately $469. An impressive increase in a matter of days. But is that enough for those who bought shares to gain from it? The answer is: it depends.

There are those who bought cheap shares at the beginning, after that they sold them and made a lot of money in the process. There are others who can lose money, precisely the most inexperienced, who joined the media noise and didn’t measure or analyze the possibilities that GameStop shares may fall.

Investors in GameStop: an out-of-context element

As mentioned, what happened was that an out-of-context event -small investors buying shares en masse- caught short brokers by surprise who had bet on these companies going under, since they were potentially bankrupt.

GameStop, Nokia, Blackberry, AMC, all of them, had been going down for a long time due to various factors. So logic dictated that betting short was smart.

For example, GameStop’s board of directors didn’t get it right by not adjusting to the needs of today’s society – how do you justify the largest physical video game company in the U.S. not having an online platform for customers to purchase its products?

To this bad decision, of course, the pandemic added its toll, but the point is that it had been losing money for a long time.

Go and look at Blackberry’s stock performance over the last five days. It hit a five-year high in a matter of a few days, but it’s back down again, and that’s simply the real value of that company. Unfortunately, whoever invested money in Blackberry is running the risk of losing some money, as the stock did not go up much and went down in days. They went from $6 to $25 and from $25 to $14.

The same goes for AMC. Its value is going up and down in a volatile way. Same case with Nokia, but with smaller values.

So, the question arises: is the value of GameStop -the most famous case of all and where the most money is at stake- really supported or is it the product of market speculation?

That remains to be seen. What is certain is that if GameStop’s future earnings do not warrant a valuation of $28 billion -which it reached last week- eventually its shares will fall again and, with them, all the small investors who bought it after the media frenzy.

It is already happening, in fact. According to an article in Semana magazine, one young man risked his home mortgage to invest in GameStop, all under the motto “live for the moment.” He’s losing a lot of money, but he’s feeling optimistic.

The boy’s bet took a hit just after Robinhood and other brokers halted purchases of GameStop shares. Clearly, the young man, like thousands of users, charged against these platforms that allow buying and selling shares in the market.

There are those who have claimed that these brokers have gone against the free market by slowing the flow of purchases, even suing Robinhood for it. And this is a quite respectable opinion when you consider that it benefited, regardless of everything else, short brokers, so that their losses would now not be so excessively large.

This is an undisputed fact.

However, legal experts say that brokers have ample room to prevent stock purchases in the face of special situations of high volatility. At the same time that stock purchases have been curbed, considering the high risk involved in investing in GameStop at this time, it can also be interpreted as protection for less investment-ready users.

Yet, at the end of the day, people have the right to use their money as they please and no one should prevent them from doing so. Although this ideal has never been applied in reality.

The main problem is that, in the world of finance, in situations like GameStop’s, there are a series of “safeguards” so that volatility does not liquidate all the players -short brokers, regular brokers, brokers on the slide- so that transactions can be carried out in an orderly fashion while maintaining financial harmony.

Juan Ramón Rallo, Ph.D. in Economics, explains this very well. He uploaded a couple of videos on his YouTube channel breaking down the whole case of the GameStop stock surge and the subsequent stoppage by Robinhood.

The economist mentions that, despite the fact that he himself believed in the market manipulation hypothesis, it is a bit unfair to fall all over Robinhood, as it was not the only broker that blocked the purchase of GameStop shares. And if these platforms decided to stop stock purchases, it was because the clearing house, that is, regulators, asked them for a large sum of money to ensure that all trades could go through without a hitch.

Juan Rallo’s video explaining the Robinhood case. (YouTube).

According to an article in The Wall Street Journal, “Robinhood Markets Inc. last week blocked trading in volatile stocks such as GameStop after a clearinghouse asked for $3 billion to back the trades.”

Information that comes from statements by Robinhood CEO Vlad Tenev, who spoke on Sunday with Elon Musk, CEO of Tesla and SpaceX, who had also joined the swarm of small investors who bought GameStop stock.

But the question remains: why were stock purchases only prevented for a few hours? Long enough, by the way, for GameStop stock to drop in price and short brokers to liquidate their less expensive shares. Until that point all this is clearly explained by regulators, and the market manipulation hypothesis will continue to be on the lookout and gaining popularity.

What’s safe, then?

At this point in the movie, several situations are clear: short brokers, located in hedge funds, lost fortunes. And a number of smaller investors beat them to the market by imposing the value of long possitivity over short negativity.

Despite this, the fact remains that GameStop’s stock looks like a bubble. We’ll have to see if the physical video game company can pull off a miracle economic recovery riding the momentum, hype and revitalization of the business, but the truth is that, even so, it can hardly ever be worth what it’s worth now.

So where does this leave us? If GameStop’s stock is a bubble and it bursts at some point, a lot of people who invested in the stock will lose money. And no one will send down a life preserver.

The difference between hedge funds and small investors is that the former have the backbone to wait for the stock to go back down and prove that their bet is the winning one. Although that, too, is yet to be seen.

And, remember, at GameStop there are not only small investors, there are also big firms with money at stake.

It’s not only small investors who are behind GameStop shares.

Likewise, we will have to see the legal outcome and what will happen to brokers such as Robinhood that have been battered by public opinion; although it is not all their fault, as regulators also put the brakes on to stop the purchase of shares.

Emmanuel Alejandro Rondón is a journalist at El American specializing in the areas of American politics and media analysis // Emmanuel Alejandro Rondón es periodista de El American especializado en las áreas de política americana y análisis de medios de comunicación.

Contacto: emmanuel.rondon@elamerican.com

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