Understanding the Gamestop frenzy

Wall Street bets against companies all the time, thinking that they are overvalued, destined to fail, or both. The reality is that at any given time, the big companies are usually getting a lot of attention from institutional short-sellers.

In fact, heading into 2021, the institutional short-sellers were betting that the stock price would fall for:

• Intel;
• Apple;
• Salesforce.com and
• Snowflake.

But Wall Street bets against smaller companies too and, GameStop was one of them. The company was a brick-and-mortar company operating in a digital world during a pandemic and had announced on December 8th of 2020 that it was closing 1,000 stores (after closing 783 over the previous two years).

GameStop executives were suggesting that the worst was over, especially after trimming losses to about $19 million in 2020, much better than the losses of $83 million in 2019 and $485 million in 2018. But Wall Street wasn’t buying it – especially two Wall Street hedge funds named Citron Research and Melvin Capital – as both took short positions expecting GameStop’s stock to fall.

Those two hedge funds (as well as others who shorted GameStop) were simply investing – betting – against GameStop’s success. And shorting is a risky position, especially since any positive news about a company can push up a stock’s price, eating into any profit for the short-sellers.

As it relates to GameStop, however, there is a lot more happening. Specifically, internet chatter from a Reddit community called r/WallStreetBets intentionally tried to push the stock price higher, which fueled more interest, which pushed the price higher, which fueled more speculative buying, which pushed the price higher. The result:

• GameStop is up over 10,000% in January alone and
• Short-sellers have lost over $23 billion on GameStop in January alone, according to S3 Partners.

Other stocks gaining traction within the same /WallStreetBets community are:

• Bed, Bath & Beyond;
• AMC;
• Nokia;
• BlackBerry;
• American Airlines; and
• Blockbuster.

What is the End Game?

That question is one that is not easily answered. There are lots of smaller investors that have made gains buying shares of GameStop. And there are some big hedge funds that are absorbing billions of dollars in losses.

What Should You Do?

While you might be disappointed that you missed a stock that went up 10,000% in a month, there are three things that investors should think about:

1. Make sure you know your reason for investing; and
2. Make sure any investment fits within your tolerance for risk; and
3. Make sure any investment fits within your investment policy statement.

Before you buy any stock, bond, mutual fund, ETF, closed-end fund, or any other investment product, go back to these three key questions. Make sure to talk to your financial consultant and together determine, what is the next step best suited for you.

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