If you have spent any amount of time on social media or news outlets recently, you probably have seen the news about Gamestop and the stock market. You have also probably recently learned about the Reddit discussion board known as WallStreetBets and how it caused bailouts of several hedge funds.
This event, however, now categorized as a “black swan” (an event of extreme improbability), goes deeper than most realize. And the true history of it, spanning more than a decade, needs to be uncovered.
Wall Street For Dummies
First, before any events can be discussed, there needs to be a bit of background. Since many people, especially newly minted Gen-Z investors, are in the dark about what makes Wall Street tick, some very basic terms and education is needed.
The first key is understanding what makes a stock price rise or fall. A stock price is typically a reflection of a company's overall performance and outlook. If a company has solid financials and strategies for the future, the price per share will rise. And as more money is being put into the stock, the higher it will go. The inverse is true as well: if a company is failing and has bad publicity, investors will want to take their money out of that stock, causing it to fall.
The second key is knowing what short selling a stock is. When you short a stock, you are making a bet against that company. For example, if Apple’s stock has a value of $140 a share, and you believe it is going to go down in the near or distant future to $130 a share, you would bet against it and sell the shares to a buyer at a lower price. The lower it goes within the time frame you bet on, the more money you make. The main downside to shorting is that it carries unlimited risk. Say instead of going down to $130, those same shares of Apple skyrocket up to $200 a share. Now, to stop the bleeding and cover your losses, you are forced to buy the stock at a much higher price, losing a ton of money.
The final key is learning about market volatility. In chemistry, when a reaction is said to be volatile, it can be unpredictable, borderline explosive. The same principle applies to trading. If a stock or the market itself shows massive price swings from weekly or monthly highs and lows in a single day or few days, that stock is considered volatile. The graph would look like a series of hills, or peaks, followed by shallow troughs, and the more volatile a stock is, the higher the profit potential could be, and the loss potential can be just as severe.
Now that you are caught up to speed on the fundamentals of trading, and the key financial components of this story so far, it’s time to examine where the beginnings of the Gamestop saga originates: a black swan event that occurred over a decade ago.
Burry, Gill, and Gamestop
Back in 2008, one of the worst financial crises in history led to millions unemployed, millions foreclosing and defaulting on their homes, and some of the largest bank and financial bailouts in U.S. history. The person who benefitted the most from betting against Wall Street’s greed was Michael Burry. After betting against the housing market and the shady banks at the time, when it was all said and done, he made over $750 million in profit.
Contrary to popular belief, Burry never liked shorting any investment. From 2008 and on, Burry invested in the long term, especially in companies that he believed could make a comeback from hard times.
And that is where Gamestop comes in. For years, Gamestop was the go-to place to purchase video games, hardware, and gaming equipment during the 2000s and the early to mid-2010s. This started to end as Amazon and digital media began to take hold in the video game world. With two-day shipping and other incentives, more and more people purchased the physical copies of games or controllers through Amazon, and once consoles like Xbox and Playstation began to offer downloadable titles, the need for a physical video game retailer began to falter. And as the period from 2017 to 2019 saw Gamestop go through 5 interim CEOs, many believed that it was only a matter of time before the distributor went bust.
Everyone except two people: Michael Burry and Keith Gill. In August 2019 Burry announced that his investment fund had purchased 3.3 percent of Gamestop, a $16.56 million stake in the company, and had written a personal letter to senior management on strategies to save the firm for the long term.
Not long after, a user on Reddit decided to post that he was investing a large sum of his money into Gamestop for the long term. Keith Gill, a 33-year-old chartered financial analyst (one of the highest and most difficult certifications in finance) living in Massachusetts, father of two, saw very similar potential in Gamestop as Burry did. Through his technical analysis, he deduced that the value of around $4 a share at the time was undervalued and that it would rise in the future, especially with Burry’s endorsement and moves to transform certain Gamestop’s in more interactive stores, such as PC building shops or more hands-on demos of new games and systems. As a result, Gill invested around $53,000 into Gamestop in September 2019.
Cohen to the Rescue
As the COVID-19 pandemic created massive amounts of volatility in the overall stock market, Gamestop was greatly affected. Any revenue that it had gained over the 2019/2020 holiday season was wiped out as all brick and mortar stores got shut down throughout the summer and into the fall months. Hope, however, seemed to be on the horizon for Gamestop in late 2020. Ryan Cohen, co-founder and ex-CEO of Chewy, in August bought a 10 percent stake in Gamestop, valued at about $79 million at the time, believing that the once-grand video game giant could come back stronger if it took a more digital approach to its strategy.
This large stake in the company caught the eye of many retail investors who started to buy in at the low stock price at the time, but a few WallStreetBet users caught something slightly off with Gamestop and decided that the information that was found, needed to be known.
Melvin And The Shorts
Many retail investors, including two Reddit users by the names of “ronoron” and “StarSwitch”, began looking into who were the biggest investors in Gamestop, as well as which firms or individuals were betting against it since they had noticed that a lot of trading had been transpiring recently. And they found a move meant to crush Gamestop into near oblivion. Melvin Capital, a hedge fund that had made huge gains during the 2020 volatility, disclosed some of its investment holdings and documents in late November. Looking through them, users noticed that they had taken out a massive short position against Gamestop, as much as 139.57 percent, a dollar value of around 100 million.
To many, this made little sense how anyone, regardless if they were a financial institution or a retail investor, could short a stock 39 percent more than the number of total shares available for trading. What’s more, they noticed that there had been some help from the rating agencies. Just like the kind of rating agencies we saw in 2008, rating agencies have three different classifications that they can give to a company's stock: buy, hold, or sell. Often, when a certain rating is given, it greatly affects the actions of retail investors. If a company was suddenly given a buy rating, you would expect more people to invest in it purely because of the rating. This also holds for both hold and sell. In recent months, several rating agencies had changed their position on Gamestop, from a hold rating to sell, coincidentally right around the same time that Melvin Capital began shorting Gamestop.
This didn’t sit right with many investors on the subreddit, who believed that these were deliberate acts by both hedge funds and rating agencies in order to drive the price of the stock down far enough that Melvin’s position would be profitable. Many of these retail investors were already investing in Gamestop as well. A sudden return of sentiment from the Great Recession as well, as many users were children, teens, and young adults when the Great Recession occurred. Many on WallStreetBets recall their parents losing their jobs, their families being forced to move or live on couches for months. Some remember counting spare change in their homes just to scrape together for groceries, and even more recall marching during the Occupy Wall Street protests and seeing hedge fund managers drinking champagne in their offices.
These revelations fueled a sudden surge of interest in investing more into Gamestop on the subreddit. From that point forward, it was the biggest talking point, and Keith Gill became the unintentional guiding force. The catalyst that would turn into one of the biggest short squeezes on Wall Street.
The Squeeze
This revelation in November of 2020 began what investors call a short squeeze. Think of it like popping a pimple: as you apply pressure to both sides of the pimple, the center rises under the pressure until it reaches a certain point and it pops. This visual is exactly how a short squeeze looks on a graph. A sudden rush of positive investor interest would suddenly make anyone who shorted the stock in debt, forcing them to buy the stock at that higher price. And because they had to buy more stock, the price rises higher and higher.
And that is exactly what started happening with Gamestop. Throughout December and early January, the price of Gamestop stock gradually rose. From $11 to $16, to $20. The positive news also kept on coming for the retail investors. On January 11th, 2021, Ryan Cohen struck a deal with Gamestop and increased his ownership to 13 percent. By doing so, he solidified his position on the company's board of directors while also adding on ex-Chewy CFO Jim Grube and ex-Chewy COO Alan Attal. This news more and more users hyped up for the stock, which sent it up to $40 a share in just two days. The squeeze was beginning to heat up. But a second wave was waiting in the wings.
As more news on the Gamestop phenomenon rolled out, more and more users began to invest in Gamestop, and soon the interest in the company grew outside of just WallStreetBets. Instagram stock accounts and finance “gurus” began urging their followers to look into Gamestop and to “get in before it's too late”, and a chorus of TikTok users began discussing the stock as well. Soon, users of both social media apps, whose curated For You pages and feeds most likely never had investment posts before, were flooded with users, both experienced and novice, urging them to open a brokerage account through Robinhood, Webull, or TD Ameritrade and buy into the stock. And when many heard about how some hedge funds were losing money because of the rise in stock value, they felt financially and emotionally powerful. And the fever over Gamestop was about to hit critical mass.
Peak of the Mountain
On January 25th, as the stock price soared into the triple digits, Reddit’s original goal of making the hedge funds feel their presence was finally brought to fruition. The sudden squeeze that Melvin was in meant it was losing money hand over fist. Things got so bad that two other hedge funds, Citadel and Point72, bailed out Melvin Capital for a whopping $2.72 billion. The hedge fund had lost nearly 30 percent since the start of the new year, and 50 percent of the fund’s value alone went away due to its Gamestop position. And the best day was still to come.
It was Wednesday, January 27th, 2021. Tesla, Apple, Facebook, and Boeing all had their earnings releases that day. You would think that those would be the talk of the town that day, but no. Gamestop’s massive price climb and constant headlines made it the focal point of the day. In the pre-market hours of January 27th, from 4:00 AM to 9:00 AM EST, Gamestop had jumped from $246 a share to a whopping $354 a share.
Meanwhile, on WallStreetBets, the party was just heating up. New users were flocking to the subreddit in droves, with the number of subscribers to WallStreetBets growing from 2.03 million on January 23rd to nearly 5 million as of the 27th. The growth and influx of new users were so overwhelming that it caused moderation tools like Modmail and banning privileges to no longer function. As a result, at 6:00 PM EST, WallStreetBets went private to properly resolve the issues.
And as the stock market closed with Gamestop at $364 a share, investors had one more present to be unwrapped. On the morning of January 28th, Gamestop stock peaked at the highest point in its history, at $513.12 a share. It was a moment in finance history for many. A moment where, to the average person, it felt as though they had beaten the house. And, to top it off, Keith Gill ended up with an account valued at over $47.9 million, and Michael Burry had sold his position to make about $270 million. It was the peak of the hype, of the momentum, of the movement. It was the peak of the mountain.
The House Always Wins...
And in just an hour, it would all come to a screeching halt. The buck stopped with the brokerages, who made it impossible to buy shares of any company or equity they deemed “too volatile” at that time. The only options people had was to either keep their position the way it was or to sell. Robinhood famously even made it difficult to search up Gamestop and other companies on their platform. This, they hoped, would deter people from trying to invest in these companies in the first place; however, the stop on trading was the bigger story.
Many saw the restrictions put on investors by the brokerages as a deliberate act to make the stock price fall back down again and for other retail investors to lose interest or become discouraged with any losses and sell. Because it wasn’t just Melvin that had lost big.
One of the secrets of Wall Street is that it can be a very small industry. People who work at the big banks like Bank of America, JPMorgan, or Deutsche know each other and talk about either their current positions or markets that they are looking into. Additionally, hedge fund managers will often piggyback off of other hedge fund’s positions and ideas to profit on them as well. This means that the short squeeze affected Melvin, Point72, Citadel, Citron, and several others that all decided to go along with Melvin’s lead months prior. Point72 alone lost 15 percent of its entire fund value because of the squeeze. So in one fell swoop, one short squeeze affected several prominent hedge funds and billionaires on Wall Street.
...But The People Sent Their Message
And for the original investors of Reddit, that's all that they wanted. To many of them, money wasn’t the reason for investing in Gamestop. In almost the ultimate form of protest, a group of average retail investors caught hedge funds making a dumb gamble to bankrupt a loved company, and garnered enough support to punish them into learning from their mistakes. For many, it was a vendetta against big Wall Street billionaires and individuals who have so much capital that they can move entire stocks or portfolios in any direction that they choose.
The calls for investigation into Melvin’s massive short position and Robinhood were heralded by people on all sides, from all political and financial viewpoints. Elon Musk, Alexandria Ocasio-Cortez, Elizabeth Warren, Ted Cruz, Dave Portnoy, Jordan Belfort, Chamath Palihapitiya, and Jim Cramer all agreed that not only did the hedge funds involved had it coming, but that they each wanted to see Robinhood and other institutions to testify in court.
And the money some of the users made didn’t all go right back into their pockets. On January 23rd, 2021, the subreddit r/WSBGivesBack was created. A WallStreetBets user by the name of “mpwrd” used their profits to buy ten Nintendo Switch consoles and donate them to the Medical City Children’s Hospital. Another user, “kds0321” used $1,000 to buy his entire local hospital’s staff coffee and donuts to support the healthcare professionals that were on the front lines against the coronavirus. “Csoi2876” donated his entire $1,020 profits to St. Jude, and one user even used the profits he made to rent out a giant billboard in Times Square to say “$GME GO BRRR”.
As of February 1st, the stock has begun its plunge back down to previous levels. A class-action lawsuit has been filed against Robinhood, an investigation into the entire matter is being carried out by the SEC and the White House, and Keith Gill himself will be brought in to testify in any future hearing. But, for now, we have reached the current end of our story. The end of the saga, about how Main Street finally beat Wall Street.
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