Experienced investors may be feeling stirred, envious or dismayed over the GameStop share revolt.
The phenomenon of young rebels battling hedge funds and Wall Street has certainly captured the world’s imagination during this grim pandemic.
But though the insurgents struck an early victory in sending GameStop stock sky high and the ‘hedgies’ packing, the story will likely end with a few smart winners -who got in early and out fast after the story hit front pages – and the rest nursing losses and learning hard lessons.
Stock bubble: Regulators are concerned about the GameStop revolt getting out of hand
In the UK, the City regulator has already sounded the alarm over market abuse and high-risk trading.
Meanwhile, investing experts are pronouncing scathing judgment on the spectacle, and warning stragglers off trying to buy GameStop now. We round up their comments below.
What happened with GameStop, and what’s next?
If the millennial mob are angry now, wait until they lose their shirts
‘Extreme speculative excess is all too apparent,’ says Albert Edwards, the renowned – and permanently bearish – global strategist at Societe Generale.
‘The madness has now taken a novel twist with a new warrior class of retail investor roaming the equity savannah.
‘This loosely organised retail mob is gaining strength feasting off each hedge fund kill. Intoxicated with success, they will seek out bigger and more powerful prey. This farce is of the Fed’s creation – which should hang its head in shame.’
Edwards explains the GameStop phenomenon as follows: ‘A semi-organised mob of retail investors has piled into heavily shorted names to drive up the share price, in essence, to force the shorts out of their positions and “punish” them with huge losses.
‘I use the word “mob” advisedly to describe this group of investors because many of them are clearly very angry.’
On such investors using debt to finance their trades, Edwards says: ‘One of the surest signs that a bubble is close to bursting is when the retail investor piles in with leverage.
‘And if the retail warrior millennial mob are angry now, wait until they lose their shirts in any market collapse.
‘But of course, they and indeed virtually all professional investors believe a 50-60 per cent equity market decline like we saw in the 2001 and 2008 bear markets is impossible!
‘The Fed have investors’ backs after all, or rather the Fed have become trapped by a monster of their own creation as the financialised economy would implode if stocks collapsed.’
Edwards adds: ‘The father of value investing, Ben Graham explained that in the short run, the market is like a voting machine – tallying up which companies are popular and which unpopular.
‘But in the long run, the market is more like a weighing machine – assessing the substance of a company.
‘The message is clear: What matters in the long run is a company’s actual underlying business performance and not the investing public’s fickle opinion about its prospects in the short run.’
Regulators will investigate market manipulation on investor forums
‘Few people are shedding many tears about large scale hedge fund losses,’ says Michael Hewson, chief market analyst at CMC Markets UK. ‘After all if you play with fire, be prepared to get burned.’
But he warns: ‘The market turmoil is highlighting a number of areas within the market that might prompt regulatory scrutiny in the future, namely the monitoring of retail trade chat forums and message boards, and how they drive markets.
‘With large numbers of small investors swarming over heavily shorted stocks in what looked like a coordinated move, the frenzy raises all sorts of questions with respect to possible market manipulation.
‘It is already illegal for institutions to coordinate in the manner currently being seen in moving prices on these stocks, raising questions about the legality of what is currently taking place right now on these forums.
‘Regulators have already said that they are monitoring what is going on, raising the possibility of further action if it causes further market instability.’
We need short sellers to play the role of market vigilante
‘The meteoric rise of GameStop’s stock – which is seen by professional investors as having a business model appropriate for a bygone age – has been widely celebrated as a kind of “peasants’ revolt” of retail investors against the self-styled “masters of the universe” hedge fund suits,’ says Barry Norris, chief executive and fund manager at Argonaut Capital.
‘If sceptical short sellers could be broken on the wheel of a popular buying frenzy, then this would not only be symbolic of a redistribution of wealth, but also power.
‘While this is a seductive narrative, unfortunately it is deeply flawed. Although the price of any asset can be manipulated in the short term, ultimately an investment made solely on price momentum requires incremental buyers at ever-higher prices.
‘When inevitably these dry up – with no commensurate improvement in the company’s trading prospects – then the stock will eventually collapse. Caveat Emptor.’
Norris adds that many hedge fund managers are industry outsiders, whom he characterises as a motley crew of egotists, studious odd-balls and entrepreneurs.
‘They often regard the rest of the investment industry as staid career “beta jockeys” – cheerleaders of easy money and parasites of higher asset prices.
‘Short selling in a bull market is not an easy living. Although widely seen as malicious, in fact it only succeeds if an unpalatable truth is discovered.
‘Short sellers often unmask fraudulent management, as well as exposing poor business models.’
Norris warns: ”If there are no short sellers to play the role of market vigilante, we would inevitably have a more dishonest stock market. In the absence of shorts, capital would be allocated less efficiently, and economic growth would suffer over the long-term.’
Should you buy GameStop now?
GameStop holders need buyers and booking profit might not be easy
Any investor tempted to join in to buy GameStop now must be aware of the risks as well as the potential rewards, warns Russ Mould, investment director at AJ Bell.
He urges people to ensure any purchase or sale they make fits with their overall strategy, target returns, time horizon and appetite for risk.
‘Departing from those key disciplines can lead to trouble, especially as financial markets are often at their most treacherous when making money looks easiest (just think of the peaks in 1999 or 2007).
‘Fund manager Neil Woodford took a slating after the failure of his go-it-alone money management venture and one reason put forward for the poor returns here was that Mr Woodford had changed his style and approach.
‘If an experienced market practitioner such as Mr Woodford can come a cropper changing styles, then there has to be a big risk that private investors can do so too.’
Mould also points to the challenges the current holders of GameStop stock might have in realising their gains.
‘The whole point of the short squeeze was to force the price higher by refusing to sell to shorts who needed to close out but holders of Gamestop now need to sell and find a buyer for them to lock in their profit.
‘Who is going to do that, in the knowledge that the share price has been wilfully ramped, there is hot money looking for an exit and the valuation looks lofty for a loss-making retailer?
‘Booking a profit might not turn out to be as easy as it looks, at least anywhere near the share price peaks.’
Mould also gives his verdict on whether joining in a ‘short squeeze’ is investing, trading or gambling.
‘The share price movement has nothing to do with the company’s business model, competitive position or financial strength and performance. As such it is trading at best, gambling at worst and has little to do with investment.’
On whether short squeezes are market manipulation, or just investors outsmarting hedge funds, he concludes: ‘There is no law against what has happened, although the co-ordinated nature of the buying via social media could be seen in a worst case as intentional market manipulation and America’s Securities and Exchange Commission is investigating.’
‘You can argue that the short squeezers were at least buying from pessimists when it came to Gamestop, but you do worry that a few optimists have piled on since, hoping to ride the share price momentum to a quick gain.
‘It does therefore make you worry that we are seeing a repeat of the sort of overheated markets seen in the late 1920s and late 1990s and (to a lesser degree) the mid part of the first decade of this century.
‘They all ended in tears and big market setbacks which hurt a lot of investors, traders and ultimately did damage to the wider economy, as money was misallocated and squandered.
‘Perhaps we should therefore all be heeding the warning of economist (and stock market investor) John Maynard Keynes when he said, “When the capital development of a country becomes the by-product of a casino the job is likely to be ill-done”.’
Buying one stock is incredibly high risk… and there is no free money
‘When a stock market story goes mainstream there can be a feeling of missing out,’ says Rick Eling, investment expert at Quilter
‘However, buying any one single stock is incredibly high risk and as this stock in particular surges you will more likely than not lose their money.
‘Bubbles always burst. This is as true today as it was in the US of 1929, the UK of the 1700s, or the Holland of the 1600s. Greed doesn’t change.
‘Familiarity with a company can give a false sense of its risks. If people once owned a Nokia, or shopped in a GameStop, they might feel more comfortable speculating on these firms.
‘However, when it comes to investing, that’s far from the best choice and there are much better ways to wade into the markets.’
Rick Eling says the GameStop story is far from being just about investment, but is bringing attention to the power of investing.
He notes Bank of England figures showing that excess savings of about £100billion have been built up by UK households during the Covid-19 pandemic.
‘The temptation for bored people stuck at home to “play the markets” on an app is real, but many will find out to their cost that there is no free money,’ he says.
‘Investing is powerful, but like most things, it only works for you if you know how to use it. If you wanted to get started investing then the best option is to choose a diversified multi-asset fund.’
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.