Take that Hedge Funds! Game Stops GME, three years later.

[05032-Mendicant-Bias]

Summary

Dan Olson has released an amazing documentary about the Game Stop saga.

For those that do not remember, Robin Hood and other APP implemented the Penny Stock V2.0, combined with stimulus checks and bored people at home, an hobby theory from a pro broker about Game Stop being undervalued at 1$/share, someone spotting a Short Squeeze, with a belief that perhaps Wall Street is not a collection of law abiding upstanding citizens, led to a once in a generation social event where something happened. Linus too was part of the event with 50000 Canadian Rubles.

Exactly what happened to whom will long be subject to documentaries, congressional hearings, class action lawsuits, and public discourse. Below, you can admire the chart of the Game Stop stock in all its glory.

 

Quotes

Quote

Sure, Keith and a few others made bank off the GameStop run, but half of them gambled their gains away. Hedge funds on the other hand have been able to play against Apes and their predictable irrationality. Melvin ate dirt in '21 and closed up shop in '22, but Citadel started using Wall Street Bets as a recruiting ground and Hudson Bay made a tidy profit by assuming that Apes wouldn't just buy and hold through massive dilution but would outright thank them for the tasty dip. It is, as a phenomenon, an incredibly fraught subject for regulators because, just, how do you respond to this? 

 

My thoughts

Back in february 2021 I watched the GME saga from the sidelines, somehow doubting that this would end with Small Guys taking a W against the Hedge Founds. Two and a half years later, Dan Olson releases his new 2.5h documentary on the subject, mostly focusing on the GME subreddit community. It's throughly documented recap of mostly what happened after, and it's been fascinating to watch, I wanted to share since Linus was (a tiny) part of the saga.

 

A rundown of how it went to some of the people involved:

• Keith Gill made the original theory that GME was undervalued, closed the positions with stupendous profits as price climbed from 1$ to 90$. He avoided allegations of market manipulations. He quit social media when the GME subreddit was turning him into a cult leader, "decoding" his "hidden messages".
• Melivn Capital an Hedge Fund holding a large short position on Game Stop, was Short Squeezed into bankrupcy
• Game Stop itself printed and sold additional stock at the inflated price to raise capital, but was unable to substantially improve the outlook of the company
• Robin Hood during the pump phase, grayed out the BUY button for GME, which looked a lot like some angry Hedge Fund manager got on the phone with them, but it seems more simple, Because of how the underlying financial instrument works, Robin Hood was running out of money to open the position. Robin Hood made lots of money on the transaction volume.
• We'll never know the buy in/sell price of the subredditor, but the more financially savy likely sold after the price declined, and the only people left in the sub reddit, having missed the Short Squeeze timings, believe that the Short Squeeze never hapened and the MOASS (Mother Of All Short Squeezes) is nigh, and unconvincingly state they'll hold their bags until Game Stop trades for 10 million dollars PER SHARE. To this day the subreddit is overwhelmingly populated by people posting proof that they are "buying the dip"
• Ryan Cohen CEO of Game Stop, bought share in another meme stock of a failing company dear to the GME subreddit: Bed Bath and Beyond and sold his 10% ownership for stupendous profits
• Bed Bath and Beyond was nearly insolvent, and got a "deal" with Hudson Bay to get some capital to pay debitors, while printing an inordinate amount of shares, that GME subreddit happily bought. BBBY has since gone bankrupt, and shares are no longer trading, leaving the subreddit to hold the bag.
• While some Hedge Fund took grave losses with their short position on Game Stop, other Hedge Funds like citadels may have made profits betting on the price movement aftet the GME subreddit variable was accounted for. Since the subreddit strategy is "BUY AND NEVER SELL, APE TOGETHER STRONG", sophisticated Wall Street investors were able to come up with winning strategies against that.
• Finally, and most dear to me, our Linus! He had nothing to do with all the nonsense, he simply wanted to be part of this once in a generation event, and took part with 50000 Canadian Rubles. Yvonne was not amused. I do not know about his positions, but I would love to hear from him about it. Depending exactly on when and how Linus bought, there is the possibility that his investment is still above water! Linus said that he wouldn't sell, but I wouldn't hold against him if he closed the position in profit.

 

Just to be clear, HOLD AND NEVER SELL is not a real financial strategy, and chances are the guy telling you that, just wants to exit before you do.

 

Sources

 

[Middcore]

In the end, for the sake of supposedly sticking it to Wall St fat cats, a whole bunch of dumb redditors lost their money, while other fat cats and a few smarter redditors profited off the stupidity. Meanwhile a shit company that should just die already has been kept on life support. 

[Fasterthannothing]

I mean you could see this from a mile away a bunch of Reddit people either too afraid to lose their chicken nugget money to hold for long term or too stupid to get out while they could was no match for an actual investing company who can afford to ride the dumb waves of Reddit and make substantial money off of it.

[Taf the Ghost]

While it was interesting, the rise was the only kind of wild part. There's a functional set of market dynamics those that aren't in the weeds ever take into consideration. By way of an analogy, think of a Price has having springs on both sides.  There's a point at which both sides break and the price either skyrockets or tumbles. The sudden movement by small investors caught the automated "eyes" of the high frequency systems, which are actually what caused the rise, until the entire Sell Side Liquidity was burned up. 

 

Those High Frequency Trading firms are the ones that actually cause those spikes, as much as Redditors might think they're the big movers. That's just not the way volume works in the US Stock Market.  However, those HFT firms are attached to data scrapers and would have seen the activity, and once it started breaking into the Short Squeeze's funds the algos would have pouched on it.

 

As for Linus, he got in about the point I was trying to convince a friend to sell their position. I've used it a few times around here, but there's always roughly a "fair value" for a company. I've used Value = Earnings * 8 and it normally works well out. (Sale value of a company being over Earnings * 10 means something you need to look at closely as being fishy.)   Once it was beyond that point, you're gambling on oddities rather than a fundamental disconnect.

 

Also, feather your profits. The mental effects are a whole lot easier to manage when you do.

[Spotty]

Moved to off topic. Tech News must have a strong relation to technology and actually be news. A YouTube video about financial investments is neither. 

[05032-Mendicant-Bias]

3 hours ago, Spotty said:

Moved to off topic.

Thanks, I thought I had posted it in general discussion but by muscle memory I went to tech news.

9 hours ago, Taf the Ghost said:

Those High Frequency Trading firms are the ones that actually cause those spikes, as much as Redditors might think they're the big movers. That's just not the way volume works in the US Stock Market.  However, those HFT firms are attached to data scrapers and would have seen the activity, and once it started breaking into the Short Squeeze's funds the algos would have pouched on it.

I suspected it was other funds that saw an opportunity there and made big moves. Too bad for redditors that entered at absurdly inflated prices, that left them with no meaningful exit strategy, but hope more redditors enter and push the price even higher...

 

About High Speed Trading, I think the practice should be illegal and all transactions should take a fixed 10 seconds to process. Finance should be about allocating capital efficiently, laying a dedicated fiber optic cable to place an order lasting 10 milliseconds, which has nothing to do with allocating capital. So much wasted intelligence and expertise on a pointless "dig the hole, fill the hole" excercise.

9 hours ago, Taf the Ghost said:

I've used it a few times around here, but there's always roughly a "fair value" for a company. I've used Value = Earnings * 8 and it normally works well out.

That's a strategy I respect. Unfortunately I think the modern investment has moved beyond fundamental value. E.g. WeWork was valued at 48 billion dollars at one point while losing 5000$ per new user. It was so completely detached from reality, even knowing very little about real estate I could tell it was nonsense. The founder came out ahead with billions to his name and no criminal history, and is spinning new schemes. He won, that's what "gaming the system" actually looks like.

 

I think this is a big contributor to the "Hustler" movements. If some people involved in WeWork made billions, why can't a GameStop stock holder make billions? I really think Regulators have to start enforcing financial regulation and punishing White Collar Criminals to get a grip of entrprises that saps capital that could be allocated in productive enterprises.

  

14 hours ago, Fasterthannothing said:

I mean you could see this from a mile away a bunch of Reddit people either too afraid to lose their chicken nugget money to hold for long term or too stupid to get out while they could was no match for an actual investing company who can afford to ride the dumb waves of Reddit and make substantial money off of it.

An open question left on Dan Olsen's video stayed with me "As a regulator, how do you respond to that???"

A community of people, get together in a cult whose belief is to invest in a bad company, in the hope of collapsing the economy and becoming Masters of the World ever after... The apex of lazyness, greed and stupidity. I'm a strong advocate of customer protection, but there is a limit to protecting people from themselves.