The Redditors’ GameStop victory will be short-lived
LOS ANGELES: For one brief moment, David slew Goliath. Not since “Caddyshack” has the slobs defeated the snobs in such an epic fashion. Charlie Brown kicked the football and spiked it in Lucy’s face. Some online Reddit investors punched Wall Street hedge fund managers in the face and earned a profit while doing it. (Online trading platforms see a surge in usage as Redditors take on Wall Street)
The Redditor stock traders should savor their victory and their profits because both will be short-lived.
What these amateur traders did was completely legal.
In a bizarre way, it was also an act of love. Online Redditors love gaming. Hedge funds were placing big bets against GameStop, a gaming company. If GameStop and other gaming companies go out of business, that could cause irreparable harm to people who like to spend their lives online playing games. Gamers are a passionate bunch, and they love a good online competition. From “Pong” to “Madden” to “Sonic the Hedgehog” to “Fortnite,” the last four decades have seen an exponential increase in online video games. While it may seem foolish to let sentimentality drive stock purchases, these traders ended up being on the right side of the trade.
All stock market action is based on the factors of fear and greed.
In the world of investing, fear will always be more powerful than greed. This does not change when traders become bigger or wealthier. The hedge funds were short-selling, a strategy that bets against companies under the assumption their stock prices will go down. Short-sellers earn their profits by stocks going down rather than up. This strategy leaves them exposed to unlimited losses because there is no limit to how high a stock is allowed to rise. The Redditors kept buying, which drove the price of Gamestop up. To avoid limited losses, the Hedge funds covered their short positions by buying the stock back.
This short squeeze drove Gamestop’s price even higher.
The Redditors won the battle, but they will most likely lose the war under the “Joe Millionaire” doctrine.
The first season of that reality television show was brilliantly effective. An ambush by definition requires the element of surprise to be effective. By the second season, the required element of surprise was gone. There was no third season. The Redditors can no longer stay under the radar. They will most likely be infiltrated by very sophisticated Wall Street traders who will manipulate them into making unsound bets. This will cause the ragtag band of keyboard warriors to quit, as most ragtag armies do.
The one thing that could help the Redditors is…
If Wall Street makes the mind-numbingly stupid decision to use the heavy hand of government regulators against the Redditors. Some hedge funds are already demanding that these online Redditor stock trading forums be shut down. In an astounding irony, Wall Street is usually a bastion of freedom while Reddit is known as a haven for social justice warriors promoting cancel culture. While shutting down the predominantly leftist Redditors would seem like schadenfreude, it would backfire. The Redditors would only be driven underground, making it tougher to detect their actions.
The short-term bottom line is that the Redditors played within the rules and outfoxed the hedge fund managers. They won because they deserved to win. They played the game better.
The long-term bottom line is that the billionaires on Wall Street have the money to play the long game.
If they get a big bet wrong, they are often in a position to rebound. A small investor who gets wiped out is far less likely to make a comeback. Throw in political connections and government bailouts, and the deck is stacked. If the Redditors keep trying this strategy and get badly burned, there will not be much recourse.
If Wall Street learns anything from this, it is to not ever destroy businesses that make video games, junk food, or marijuana. Young people online will strike back Cobra Kai style if you mess with gamers and stoners.
If the Redditors learn anything from this, it would be to avoid becoming what you hate and fight against. Do not let the thrill of a win fuel your own greed. When the Cobra strikes back, you will be afraid. Fear will still be more powerful than greed. Do not let smugness cause you to get crushed. The market is smarter and tougher than all of us combined.
Enjoy the win. Now stop and go play your games. Wall Street is serious business.