GameStop and Other Conspiracies
The year before I got married, I developed an ingrown toenail on my left big toe. It hurt. A lot. Over time, it got worse. It was raw. It was infected. It was so bad, I began walking with a limp.
Now, I know what you’re thinking. “Just go to the doctor. They’ll lance it, fix it and put you on antibiotics.”
Seems logical, right?
What did I do?
I soaked it. I picked at it. At one point, I walked barefoot from my parents’ house to the beach on a hot day, burning my feet because wearing a shoe was too painful.
Why didn’t I just do what I was supposed to do? Why did I keep poking it and doing more harm than good? In my mind, it was clearly less painful and inconvenient than going to the doctor.
Two weeks ago, GameStop stock exploded. GameStop is a video game store. It sells video game consoles as well as video games themselves and accessories for those games. And many, if not most, of their locations, are within shopping malls. You remember shopping malls - those conglomerations of retailers that were dying even before the pandemic.
As we discussed a couple of years ago on this blog, more and more games are purchased via download than a physical disk. DLC, or Download Content is the norm. In fact, PlayStation recently released their latest console in two versions - one with a DVD drive and one without. If you want a DVD drive, you’re going to pay $100 for that luxury.
There was a time, not too long ago, when your local GameStop was packed full of people on a Saturday morning. Mostly teenage boys with their moms in tow. But sales were brisk and the company was profitable. With the popularity of DLC and outlets like Amazon selling gaming merch, it is likely that GameStop’s days are numbered. There just isn’t a need to visit GameStop anymore.
Everyone expects the company to declare bankruptcy at some point in the next couple of years. Because of this, many Wall Street players are making bets against GameStop - something called “selling short.”
Short-selling means you borrow shares of stock from someone and sell them on the open market. At some point in the future, you purchase the stock, return it to the original owner. If the price you sold it at in the past is greater than the price you purchased it at just now, you will pocket a profit. Short sellers are hoping a stock drops in price - usually significantly. GameStop has a lot of short sellers on Wall Street.
A few rogue small investors on an internet discussion forum called Reddit decided this was an opportunity to make this work for them. They started buying both the stock and options on the stock, creating new interest in the stock. This drove the price of the stock up artificially. (Is this stock manipulation? That’s a call for the SEC, but it certainly looks like it is.)
The rise in prices caused short-sellers to buy shares to close their own positions and limit their potential losses. Something known as a short squeeze. (I know, this can be confusing.)
All of the buying to close these short positions caused the stock to rise even further.
At the beginning of the year, GameStop was selling in the high teens. By 10 days ago, the stock had doubled. By the middle of last week, the stock had risen to the 100’s, peaking at $480 a share. As of Friday, the 29th, it closed at $325 a share.
Did these small sellers in a discussion group really cause all of this?
Nope. There is no question they had hoped they could manipulate the market and push the stock up. But they never anticipated that the stock would rise by 20x!
So what caused it?
The short answer: The pandemic. And my ingrown toenail.
The long answer starts with a growing distrust of Wall Street. I can’t tell you how many times in the last week I’ve heard, “it’s about time these fat cats get a taste of their own medicine.”
Suddenly there is a prevalent belief that Wall Street manipulates all stock prices in order to ensure their profits and cause the little guy to lose. On top of that, many new investors into GameStop saw the profits these early traders reaped and wanted a piece of the action. Individuals drove up GameStop’s price by an intersection of greed and conspiracy. To burn it all down while making a buck in the process.
As more people believed that Wall Street has some magic fairy dust to make money when regular people can’t, more people jumped in, buying more options and more stock. This even spilled out into other at-risk companies such as AMC movie theaters.
Remember a few weeks ago in my weekly email, I discussed the dangers of isolation? It causes the logic circuits in our brains to misfire. A study in the 1960’s in Canada discovered that normally healthy people kept in isolation began hallucinating within a few days. They concluded that people in isolation make poor decisions.
But let’s go back even further. We all remember last April and the riots that spread throughout the country regarding policing of black and minority neighborhoods. The vast majority of these protests were peaceful. But some of them became very violent, destroying public and private property. Protesters even took over an entire section of Portland at one point, claiming the police had no jurisdiction there. (It ironically collapsed weeks later due to civil unrest.)
What was the claim: That the police were anti-minority.
Certainly not. Several of these incidents that prompted the protests as Spring became Summer turned out to be very legitimate arrests.
There is no question that there are bad apples in the police barrel. And sometimes this extends to entire departments. But an outright nation-wide conspiracy to target minorities? The facts just don’t bear it out.
Let me give you another data point. This past November, we saw the most contentious Presidential election in more than 100 years. (If you think things are bananas now, take a look at the early 1800s. Contention and corruption in that time make us look like angels in comparison.)
Claims of election fraud by Trump supporters began even before the election was held. The calls got worse as we approached the end of the year. It culminated on January 6th with a swarming attack on the Capitol building in Washington DC. (Which was an offshoot of a very peaceful protest. Can you see the relationship here?)
Was there election fraud? Probably. Was it widespread? Probably not. Courts packed with both Democrat and Republican judges could not find any significant irregularities. Even the Supreme Court, filled with three Trump nominees, chose not to weigh in on the matter.
What’s Really Going On?
How are all three of these events connected? They are connected via small groups of isolated people who cannot think rationally and begin to assume that someone is out to get them.
The fire is fanned by the media and politicians. Soon we are in total chaos.
Do these ultimately destructive actions help? Maybe. The BLM protests have opened up communications and caused police departments to review their policies. The Capitol protests are likely to bring about closer scrutiny of the voting process - something both parties have been clamoring for in their own ways. And the GameStop debacle has likely changed how Wall Street will attempt to profit on failing companies.
But at what cost?
Due to some violent Black Lives Matter protests, police have pulled back their community policing efforts, leaving innocent citizens in those high-crime districts more at-risk. In the wake of the Capitol attack, there is a massive distrust of government from both sides, leading to further chasms between the parties. And regarding the GameStop debacle, many investors - people like you and me - are going to buy shares of a failing company at 10 or 20 times what it is likely worth, eventually realizing massive losses that could jeopardize their financial future.
Isolation has caused us to set aside reason and logic and replace it with raw emotion.
Conspiracies have run rampant in the last 12 months. From the police to crooked politicians to poll workers to judges to politicians to Wall Street to the SEC to Trump to Biden.
What’s worse is that you probably picked out a couple of those and said, “well, yeah, those folks are off their rockers, but my personal conspiracy is 100% true.” We considered none of these true just twelve months ago. Now they are suddenly all true? Is that really likely?
What can we do? Well, when my foot was too sore to think, I finally made a doctor’s appointment. Logic finally won out.
Those few days waiting for my visit were torture. I really wanted to back and fix this myself despite months (yes months) of data that showed that I was only making it worse.
Inside of 15 minutes with the doctor, my toe was well on its way to healing. I could walk normally almost immediately. Within a few days, the infection was beaten back and my toe looked normal again.
The world will heal from all that we’ve experienced in the last 12 months. What we have to trust is that the facts we truly believed 12 months ago are still true. Panic and conspiracy are products of our isolation. If we understand that, we can conquer it and make good decisions regarding our portfolios, our families, and even possibly our big toes.
In time, this pandemic will pass - likely from the vaccines that are currently being distributed. As of this writing, we are vaccinating over 1 million people per day in the US.
In the next few weeks, we’ll likely see the number of daily vaccinations rise even further. Remember that most of the January vaccinations were specialized people. From front-line workers to the extremely at-risk - people who were vaccinated at their place of work or at the facility where they reside. As we begin vaccinating regular people the number of outlets for vaccinations will rise dramatically. It won’t be at a few select locations - it’ll be at every CVS and Walgreens in the country! It is feasible that by April we will be vaccinating 2 million or more per day. (At 8 vaccines per hour, 12 hours a day, CVS and Walgreens could vaccinate almost 2 million people per day by themselves!)
Our goal from now until we reach herd immunity is to realize that our emotions do not run our lives. They don’t govern how we treat others or even how we invest. What is ironic is that when this is over, we will look back at our beliefs during this time and wonder how we got so panicked in the first place. Just like I did with my big toe.
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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns. Always count your change.