Tiffany Hagler-Geard | Bloomberg | Getty Images
The stock market is known to be unpredictable and volatile, and any sense of normalcy was exploited during the recent GameStop rally.
Most of us already know the story: after discovering that several hedge funds had opted for the video game retailer to lose value, people joined the Reddit WallStreetBets forum to increase their stock price by 1,500%. During the month of January, the price of GameStop shares rose to a high of $ 483, from a low of $ 17.
It looks like the bubble is already popping up, with GameStop shares at about $ 55 starting Friday.
Still, the event is unlikely to be forgotten any time soon, experts say.
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The Reddit retail investor forum that promises to take over Wall Street still has more than 8.5 million subscribers (or as they call themselves, “degenerates”). And Netflix is already in talks to make a film that dramatizes the real battle between giant hedge funds and a group of everyday marketers.
In addition, experts say the event tells us what people are bringing to the market right now and what it can mean to invest in the future.
More bubbles
In many ways, the GameStop rally resembles the bubbles of the past, but it also has some unique features, according to experts.
“What’s new is the scale and speed of the event,” said Veljko Fotak, an associate professor of finance at the University at Buffalo.
The ubiquity of smartphones in which people can download investment applications, the availability of cheap or free trade and “a pandemic with a lot of restless energy” are factors that contributed to the rally of the video game retailer, he said Dan Egan, vice president of finance and investing at Betterment.
Fotak said populism spreading around the world is one more factor that fueled the bubble. “Some investors were motivated not only by pure greed, but also by the desire to‘ stick it to the man, ’” he said.
These days a lot of people are also brought to market when they see friends or people following you on social media promoting certain actions, said David Sekera, Morningstar’s American market strategist. Some of these posts are very compelling: Reddit users, for example, exchanged high-level analysis of GameStop’s finances.
“The days when equity research was limited to the big Wall Street companies were long gone,” Sekera said.
All of these events that drove the GameStop bubble could spur many more.
“I think to some extent, this Reddit herd movement will continue,” said Jason Reed, a finance professor at the University of Notre Dame. “We’ve already begun to see the movement toward other equities and assets, such as AMC, Blackberry and Silver, gain momentum.”
As GameStop shares fell on February 2, many Reddit users claimed to hold their shares or even buy more, writing that it was not a loss until they ran out.
Source: Reddit
There are more people who invest is positive, but only if they do it right, experts say.
Those who buy shares based on social media posts, for example, often risk money they can’t afford to lose, Egan said.
“One of the biggest concerns is that newer investors see‘ hot ’stocks, but they don’t fully understand the ramifications of investing in them,” he said. “Many retail investors could lose the shirt.”
Fotak said he read from a recent law school graduate that he said he was excited about his victories at GameStop.
“He could now afford to repay his student loans,” Fotak said. “Yes, there is a lot of greed at stake here.
“But there is also a lot of despair,” he added. “I really hope it sold out right away.”
Less short?
Hedging funds that had reduced GameStop suffered huge losses as the group of day traders on Reddit bought the shares en masse, raising their price. Melvin Capital, for example, lost more than 50% in January.
These setbacks could make other investors more disconcerted about short-circuiting or betting on stocks, experts say.
“After seeing other funds being taken off the field on bunks from these short positions, hedge fund managers will be much more cautious about the actions they will be willing to tan,” Sekera said.
Less short means a less healthy market, Fotak said.
Bubbles tend to be less common in countries where short sellers are less restricted, he said. This is because the pessimism of short sellers can balance some of the optimism about a particular sector or stock.
“And in this climate, with market valuations at record levels, we need more than ever the opposing views of short sellers,” Fotak added.
Another advantage of short sellers is that they often expose serious problems to companies that other investors and regulators have lost, Fotak said.
“Because they are looking for overrated companies, they are always on the lookout for fraud,” he said, adding that they often publish investigations into corporate malpractice.
That’s why it’s unfortunate that the GameStop debacle could slow the short circuit, Fotak said.
“To the extent that it delays the release of negative information, we all suffer from a less efficient market,” he said.