Over the last few weeks, the financial press has been riveted by GameStop’s wild ride. The David vs Goliath narrative draws a lot of attention, but how much have things really changed?
First, a quick recap: some hedge funds bet against GameStop stock and a group mostly of small, retail investors banded together to drive the price up. The staring match over when (not if) the price will drop continues as of now.
Despite all the noise, public battles over a stock’s price are not usual. In recent years, we’ve seen “short squeeze” battles over Tesla, Volkswagen, Herbalife, and other companies. What makes this story different is the involvement of retail investors in a world dominated by giant hedge funds.
What really stands out is that the short sellers had a huge failure of risk management. Shorting a stock brings potentially infinite downside. And when a stock is shorted as heavily as GameStop was, that only increases the danger. These professional investors clearly failed to understand how technology is changing their game.
It has never been easier for retail investors to participate in the market. Everybody has access to more information and high quality analysis than ever before. No-commission trading has become the norm. And most importantly, social media platforms and investment forums now enable groups of like-minded people to find each other, communicate, and coordinate like never before.
The retail investors don’t have a moral high ground, they just have easier access to information and markets than they used to. Their ability to organize online has created a new player with different incentives, AKA the mob. Wall Street needs to adapt to that reality.
This story has not fully played out yet, but I think it’s fair to say that the more sensational takes are going too far. The rise and fall of GameStop did not break the markets, invalidate economic theory, or reveal a corrupt conspiracy.
What we’re witnessing is the normal volatility you get when people with money disagree about what an asset should be worth right now. The rest is largely entertainment.