stonk: A term to express a financial decision that resulted in financial gain. Mostly used ironically.
For those of you not familiar GameStop is a brick and mortal video game retailer. Its stock had been heavily shorted by hedge funds. I heard that hedge funds were at one point short 150% of the GME stock in existence. How that is legal or possible is beyond me. That was the background. If the hedge funds had not been so short GME, this would not have happened.
But that is just the scene. Enter the main actors: a group of people on the reddit forums decided, for various reasons, to buy GME. The result triggered a massive short squeeze and stock price melt-up. In the course of 10 trading days GME went from around $30 to as high as $513 per share. It has cost hedge funds a lot of money as they’ve been forced to cover their short positions and buy the stock at the higher prices.
Several brokers halted GME trading or placed restrictions on the types of trades that could be made, angering (rightfully so) their “customers”.
I don’t know the reason reason why trading was halted by some of these brokers. It could have been for very innocent and good reasons on the part of the brokers to limit their risk. Other theories alleging nefarious intent abound. Did some of these hedge funds call in a favor? Was trading halted to tank the price so the hedge funds could cover their shorts? Who knows?
The volatility seems to have spilled into other markets as well. Major indices were down on the week–seemingly because hedge funds had to liquidate other holdings to cover their short positions.
It’s been a crazy week.
Here is an anecdote: I was in a company meeting (at my day job which has nothing to do with finance or investing) and the CEO was talking about GameStop. One employee mentioned a friend who was up over $100,000 in GME gains.
I hope they know when to sell.
Is the GME situation an extreme example of the broader trend?
While the GME stock melt-up, and even the other “reddit stocks” like AMC are extreme examples, I think they are indicative of the times: a lot of unemployed people at home, bored, angry, frustrated, armed with stimulus checks, low interest rates, and margin accounts buying up stocks. I think that is a bad sign. The rampant speculation devoid of fundamentals isn’t a good thing. A large number of unemployed people isn’t a good thing. Rampant speculation isn’t a good thing.
Of course it isn’t just retail investors. Institutional investors have low interest rates, are seeking returns, and have driven up asset prices beyond what I think the fundamentals would otherwise warrant. Sure, the institutional investors are supposed to be the “smartest folks in the room”. But they were also behind the dot com bubble and the housing bubble. So don’t tell me they don’t chase returns or make irrational decisions.
I have many reasons for believing assets are overvalued. I’ll just share one at this time, the Shiller PE ratio for the S&P 500 (shown below). The only time it has been higher is at the peak of the dot-com bubble in 2000.
I do think this short squeeze is a healthy thing. Some of these hedge funds are getting beat at their own game and getting taught an important lesson in risk management. It’s also got to be humbling for these hedge fund types to get beaten by the retail investors that they seem, in general, to have a lot of contempt for.
The GME Price Rocket is Still Absurd
On the flip side it is absurd. As of writing this GameStop now has a market capitalization of $22.6 billion. The market cap was just $1.3 billion on December 31, 2020.
The rapid increase in market cap has nothing to do with GameStop as a company. As billionaire hypocrite Warren Buffet once said: “In the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.” So what we’re seeing right now is many people voting for GameStop. But the “weight” of the stock has not changed.
Maybe people start buying more video games at GameStop. Maybe GameStop issues more shares at these high prices to raise capital, revamp their business model and they become a company whose fundamentals support a $22 billion or more valuation. I think this is unlikely.
But maybe none of that matters. People can subjectively value whatever they want. I don’t think that Bitcoin’s market cap of $645 billion makes sense but the market disagrees with me. Those buying into bitcoin back when it was just a few bucks and held to this point are sitting on tremendous profits. Bitcoin means a lot of different things to different people and as long as there is demand for BTC the price will be what it will be. If there was a special kind of dollar bill, people might be willing to pay $2 for it. Maybe GameStop will represent sticking it to the man and people will buy it just to participate in that movement. Maybe people will just buy it “for the lulz”.
As long as people value GameStop it can stay high.
What Does it All Mean?
In the short term fundamentals don’t matter. GME is exhibit A. People can subjectively value whatever they want. But in the long term I believe fundamentals do matter. What we are seeing, and have seen, is a lot of price action devoid of fundamentals. GameStop is an extreme example of this price action, but I think the same principle applies in a variety of markets and assets.
But for someone blessed enough to have assets to invest, what can you do?
Cash and even bonds are going to get destroyed by inflation over the long term. I like gold and silver as an asset and I think having a 10-20% allocation to these assets makes sense but they don’t provide growth or income in the way stocks do. Real estate, particularly residential and farmland, could be a good play, but there is a high cost of entry. There are REITs, but a lot of the tax benefits from investing in real estate come from directly owning the property and you can’t buy $10,000 worth of an apartment complex. (Although if there is a way with WITH the tax benefits please let me know!)
I think there is a place for cryptocurrencies although it is still a very young and volatile market segment.
The “big three”: S&P 500, Nasdaq and Dow Joes are all negative for 2021. There is reason for caution. But I’m looking for opportunities to buy into stocks. I think stocks are overvalued. But I don’t think avoiding stocks is a viable option. If stocks do tank, I believe the Federal Reserve will print as much money as possible to prop up prices, even if it means it destroys the value of the dollar.
Although it might sound trite, the best investment might be in yourself and those around you. There is a lot an individual can’t control but you can do a lot to learn, grow, and take care of your physical, mental, and emotional health.