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Wed Jan 27, 2021, 02:02 AM

The GameStop Fiasco Proves We're in a 'Meme Stock' Bubble



Tweet text:
James Surowiecki
@JamesSurowiecki
My new column, on the war over GameStop.

The easy way to frame this is as yet another example of amateur traders hysterically buying anything that goes up. But I think something much more interesting, and complicated, is going on.

The GameStop Fiasco Proves We’re in a ‘Meme Stock’ Bubble
What the new dynamic between Redditors and Wall Street reveals about the stock market in 2021
marker.medium.com
10:07 AM · Jan 26, 2021


https://marker.medium.com/gamestop-proves-were-in-a-meme-stock-bubble-b3f39163a77f


GameStop is a struggling, kind of boring, mid-size retailer stuck in a legacy business — selling physical video games. But it’s also pretty much the only company anyone on Wall Street is talking about right now after its stock rose 160% in a matter of hours on Monday morning to an all-time high of $159. (By day’s end, GameStop’s price had been cut by more than half, but that still left it up more than 300% this year and almost 3,000% from its 52-week low. And it was up another 15% at Tuesday’s open.)

It isn’t GameStop’s precipitous rise, impressive as that’s been, that has everyone fascinated. Instead, it’s what fueling that rise: concentrated buying by thousands upon thousands of small individual investors who are using sites like Reddit and Robinhood to drive up what are now being called “meme stocks.” GameStop is the best-known of these meme stocks, simply because its gains have become so outrageous. But it was preceded last year by Hertz and Kodak, which, despite having struggling businesses, saw their stock prices soar when they became Reddit darlings. And now stocks like AMC, Nokia, and Blackberry (which is, yes, still in business) have also caught Redditors’ fancy.

It’s easy to see the meme-stock boom as just a speculative bubble, and evidence of how the current stock market has lost touch with reality. Speculative bubbles in so-called “story stocks” are, after all, familiar things on Wall Street. In the late 1950s, uranium stocks soared, followed a few years later by bowling stocks, and then RV stocks. (In 1969, a company called Skyline Homes saw its shares rise twentyfold.) And we all know what happened to internet stocks in the late ’90s. But in fact, what’s happening with meme stocks is very different from those previous crazes.

In a classic speculative craze, investors may take cues from each other — the fact that everyone is buying internet stocks makes you think it’s smart to buy internet stocks — but they’re not working together to make stock prices rise.

With meme stocks, on the other hand, that’s exactly what’s happening: The small investors on the r/Wallstreetbets subreddit (which has 2 million subscribers) and other sites are taking part in a conscious collective effort to drive the prices of these stocks up. No one is in charge of this effort, though, of course, some voices are louder than others. But it is a self-organized campaign with people using the message boards to communicate with each other, encourage each other, and reassure each other (thus the many posts on r/Wallstreetbets admonishing fellow “autists” — their self-mocking term for each other — to not lose their nerve and to keep holding GameStop’s stock). Thus threads with titles “We are the captains now,” “Have no fear, GME gang. We are consolidating in preparation for tomorrow’s moon landing,” and “GME — it never has to end.”

*snip*





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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 02:17 AM

1. Idiots.

People using sites like Robinhood et all think there's no risk and it's going to be fun to make some money. The trouble even with small amounts invested you can lose more than you put in. Educate yourself or get a money manager.

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Response to halfulglas (Reply #1)

Wed Jan 27, 2021, 04:16 AM

6. Most of the people doing this know they're not really making real money

They see it as gambling, and they're not betting anything they can't afford to lose.

It's a deliberate attempt to burn the hedge funds. That is their real goal.

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Response to halfulglas (Reply #1)

Wed Jan 27, 2021, 07:29 AM

9. I do invest

and this worries me for many reasons. But I don't think that most of the people participating in this think they're going to win big. They're uniting to take down a hedge fund, and honestly, it's fascinating to watch.

(And reading threads about it, I think it shows that rampant speculation isn't uncommon and stocks such as Tesla are completely overvalued and devoid of any tethering to reality, yet they don't receive the same sort of criticism.)

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 02:27 AM

2. I wouldn't call it a fiasco. It's simply amateurs manipulating the market instead of the pros.

I think a lot of the professional traders, including investment brokers, hedge funds and the like took a serious bath on Game Stop stock, especially if they were short selling it before its massive price inflation. Now those professional people are pissed and they are lashing out via friendly media outlets who are more than willing to give them time or space to vent.

That being said, was it wise for these Redditors and fellow traders to invest in a brick and mortar company that primarily sells a physical product in a marketplace that is rapidly moving to digital products? Probably not; but the little guy needs to profit in the stock market, almost certainly more so than the big guys.

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 02:34 AM

3. How is This Different Than Pump and Dump?

Pumping and dumping was a huge thing on message boards back in the 90s tech stock craze. It is the same. Just a different message board.

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Response to TuskMoar (Reply #3)

Wed Jan 27, 2021, 03:09 AM

5. It's kind of different

because it's out in the open and the mass of buyers know what's going on (though they still don't know when it will end). Pump and dump is to trick people into buying.

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Response to TuskMoar (Reply #3)

Thu Jan 28, 2021, 12:40 AM

18. pump and dump relies on spreading false information about the stock/company

This isn't a thing that just happened this week ... it's actually been going on for months, with momentum among smaller (and some larger) investors growing, until it exploded into a critical mass this last week.

What happened with gamestop is that it was the "dump" that kicked off the frenzy. It was a very popular stock for investors (hedge funds, especially) to short--which is to say they expected the price to go down, so they were selling/dumping shares they didn't actually own, with the expectation that the price would fall and they could then purchase more cheaply the shares that they had already sold at a higher price.

But other investors felt the stock wasn't overpriced. Six months ago gamestop was selling for about 4-5 bucks a share. The short sellers figured it would drop to half that or lower, so they sold shares they didn't have at that price, expecting it to drop to (say) 1-2 bucks a share, at which point they could buy those borrowed shares, thus making a tidy profit. (The risk is that, if the price goes up, they have to buy the shares they have already sold at a higher price.)

Now, the people who started buying gamestop months ago weren't expecting it to jump to $350/share, like it did today. But they figured in the long term it might be worth, say, $20. The stock started rising in September or so, and rather than buying their "borrowed" shares at a higher price and taking a loss, the hedge funds started selling *more* shares that they didn't own. Eventually, the short-sellers were so confident in their position that they way oversold--to the extent that there were actually more shares *sold* than shares outstanding. So more buyers jumped on the bandwagon. The dumping frenzy has, ironically, sent the price skyrocketing.

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 02:42 AM

4. Straddle while others diddle...ELON loves to play...

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 04:24 AM

7. I love it

I hope it becomes a trend. Although the realist in me says the SEC will ride in to save the 1%'er, same as it always does. Can't have the peasants upset the oligarchy we have here.

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Response to inwiththenew (Reply #7)

Wed Jan 27, 2021, 01:23 PM

14. Like in casinos...

Many stories out there where jackpot winners actually receive very little after casino rules are applied

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 07:26 AM

8. Okay this explains what I saw on Monday

We were watching Mad Money for some reason. Just hadn’t seen it in a while. He mentioned something about Game Stop but I had no idea what he was talking about. Hmmmm very interesting. Sounds almost like outsider trading - buy a stock as a group driving it up.

While watching Cramer’s show I saw Blackberry scroll across the bottom. I was curious as to what they were still doing. I need to look that up.

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 10:25 AM

10. Aw, is The Invisible Hand mad because the proles figured out how to move it?

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 01:09 PM

11. I didn't realize they were gaming the hedge fund bandits.

I know little about the market and mostly only because I'm retired and have investments through my adviser and in that case go at it. Hedge funders and pump and dumpers are a pox on the economy so if these guys can beat them at their own game I'm all for it.

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 01:11 PM

12. Crowd-source Ponzi scheme. Any idiot who plays along, deserves what they get.

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 01:19 PM

13. I can't pretend to understand any of this stuff

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 01:27 PM

15. Whatever the Democrats do, they should not bail out any hedge fund..

 

..before getting $2000 relief check to everyone.

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Response to Nevilledog (Original post)

Wed Jan 27, 2021, 06:07 PM

16. I work with a guy who is up around $20,000

with AMC.

It's real.

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Response to Red Mountain (Reply #16)

Wed Jan 27, 2021, 06:39 PM

17. Did I mention he makes less than $15 an hour?

He's going to hold until Friday and then sell.

Good luck to him.

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