GameStop (2)

Well, the GameStop issue seems to have been a case of hyped-up keyboard jockeys getting over-excited.   Yes, some of the coverage saw the issue in terms of the “little guys” outsmarting the big Wall Street guys – but the inflated price (a peak of over $US400) didn’t last for long.   At the time of writing, it’s been bouncing around a bit for a few days, and is around about $US63, which is probably still way too high on the fundamentals but much below the peak.    Even the ABC said the Reddit army was doomed.  The article points out that “Reality can only be suspended for so long”, and that the true value of GameStop is nowhere near the price that the Reddittors have ascribed to it.

But has this really been a triumph for the amateur individual investors over the professionals?   I suspect not.  Sure, one hedge fund appears to have suffered, but if so, they deserved all that befell them as a result of getting involved in a “crowded short”.  It was pretty obvious that GameStop was a very “crowded” market, so not a good playground for short sellers.   Any professional fund manager would be aware of the risks involved.    Overly aggressive short positions in stocks with limited liquidity are vulnerable to a short squeeze.

The fact that it appears (depending on whose figures you believe) that shares amounting to nearly the entire capital of GameStop – or perhaps more than the entire capital – were short-sold suggests that many of the short positions weren’t conventional shorting (where shares are borrowed and then sold) but were the result of complex derivatives.    This is highly suggestive of the fact that other funds have been involved, not merely the “Reddittors” – and those funds have probably made money in the process.

On a more general note, I’m at a bit of a loss to understand why short-sellers are condemned so much.   If your view is that a stock is under-valued, then you buy “long”, that is, buy it in the belief that the price will go up.  This is usually regarded as prudent investing.   So why is it not equally acceptable, if you believe a stock is over-priced, to sell it short, taking the view that the price will drop so as to be in line with the underlying fundamentals?

Sometimes there’s a concern that this can lead to “market manipulation”.  But if so, this would come about from coordinated conduct and placing dodgy orders, so these are the things that need to be addressed.  I can’t see that short selling is any more manipulative than any other transaction.   But there should be no suggestion of “changing the rules” if the “big guys” (or anyone else) gets squeezed because they’ve allowed themselves to get over-exposed.  Let them wear the consequences.

There have also been suggestions that the apparent “rise” of amateur traders means that the funds sector will avoid shorting illiquid stocks where their positions might make them a target for co-ordinated retail investor attacks.   Perhaps traders will need to be a little more careful about telling the world what they’re doing but I have no problems with this at all;   let the traders be cautious where they tread.   Traders are quite capable of monitoring Reddit, and if a stock turns up in discussion, there are no doubt other stocks they can look at.

I just hope that not too many Redittors placed the trust in their on-line forum and invested money that they couldn’t afford to lose in GameStop stock when it was at high prices.  A comment on another forum stated, “Looks like Reddit has given up on GME and calling anyone who didn’t sell stupid”.   So, where’s the logic or sense in trusting an anonymous on-line forum when making investment decisions?   Who is to know the motives of the forum participants?