OPINION: A big story currently shaking up the investment world is the incredible behaviour of GameStop shares in the USA.
The story has everything: David versus Goliath. People in the street versus Wall Street. Rule changes that seem to disenfranchise real people. Common sense defying changes in value. But what is really going on?
Firstly, what is GameStop? A (previously) small company based in Texas that owns video game retail shops, GameStop was trading at a price of $4 in August 2020, and had a total value of $280 million.
There is even a New Zealand connection – the EB Games stores in New Zealand are ultimately owned by GameStop.
So initially, nothing notable about GameStop, until a US Investment fund decided shares in GameStop were over-valued and they decided to “short sell” GameStop shares, essentially betting that the shares would fall in value.
Short selling works like this. An investor borrows shares from someone else who owns them and sells them, hoping to be able to buy them back at a lower price. Of course, if the share price goes up, the short seller is looking at potentially significant losses as they will ultimately have to buy them back at a higher price.
That’s where this story gets interesting.
A commentator on the Reddit social media platform noticed that the total number of shares short sold on GameStop was significantly larger than all the GameStop shares on issue. Rallying others on Reddit, the commentator created an army of small investors to buy GameStop shares.
So, on one hand we had a few multi-billion dollar hedge funds short-selling GameStop shares, on the other we have 5 million Reddit followers deploying small amounts of their own money, but adding to a substantial pooled amount to buy GameStop shares.
And it has been a one-sided battle. GameStop shares have rallied from below $5 in August to a high point of $480, briefly valuing the company at $33.5 billion. So far, one hedge fund has declared $3.5 billion of losses and received a bailout from other hedge funds. Individual investors have been boasting on Reddit of multi-million dollar gains. There is no doubt that GameStop shares are extremely overvalued at these levels, and there is no rational, value-based reason to buy them.
Ultimately, GameStop will be worth a lot less than it is now, so buyer beware.
And here’s where the story gets even more interesting. As of Friday last week, share-trading platforms like Robinhood and many brokers have restricted the ability of individuals to trade in shares like GameStop, citing concerns about disorderly markets and the ability of the investment industry to manage this risk.
The irony is immense: Billionaire hedge fund managers crying out to be saved from the crowd of small individual investors.
But to the small investors on the buying side this is just rank hypocrisy.
They see that Wall Street was losing on this trade, so Wall Street changes the rules to protect the hedge funds and their investors.
Why should short sellers be protected here? They have made an overly aggressive investment decision which has been determined, by the market, to be really, really bad. Live by the sword, die by the sword.
The ongoing GameStop saga is the start of the disintermediation of old-style investment behaviour.
Power will ultimately move from the few, large holders of capital to the many. The same disintermediation that we have seen in the music industry, the publishing industry, the taxi industry, the holiday booking industry, the travel industry – in fact everywhere – is hitting Wall Street.
Individual investors deserve more control and accountability. This doesn’t mean current investment managers will disappear, but it does mean fund managers will need to be more responsive and responsible.
Capitalism-based society has lifted more people out of poverty than any other system but watch out. Change is coming. Owners of companies and investment managers can no longer rely on new generations of consumers passively consuming products to drive profits. Consumers are now demanding ownership and control as well.
Paul Brownsey is chief investment officer at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product. Pathfinder Asset Management does not own GameStop shares, nor does it engage in short selling practices.