For me reading is a real pleasure, especially when it is a book as interesting as The Anti-Social Network by Ben Mezrich where he tells the GameStop story, something that motivated me to write this long post was to delve into the truth of the facts, something that led me to raise the need to take up the story of the struggle of the small against the big elites, especially in these moments where we feel the world is falling apart after the FTX disaster.
August 2020, Massachusetts, a 34 year old man, American cap and long hair uploads a video to his channel called Rowling Kitty, he only has a handful of viewers but every day he has more. In the title you can read words like short or value investing and during the video he explains why the company GameStop which trades at 4.65 dollars could rise to the barbaric 50 dollars.
For hedge funds like Melvin Capital that's not going to happen, the future is the online catalogue and a physical video game retail chain has its days numbered and has failed to digitise, that's why hedge funds are betting against it but the guy with the American cap and long hair is stubborn, his name is Keith Patrick Gill and he's about to start a real war between Reddit's retail investors and the big funds, a story that will make his $53,000 investment reach $50 million. 000 investment to $50 million, this is the astonishing rise of GameStop.
In 2019 Kate Patrick was a young father of a family, he was in his thirties and just had a child with his wife Caroline and worked in an insurance company, he was an ordinary man, but it is worth saying that he had financial studies. He worked in a software startup that helped investors analyse stocks and he even had a broker's licence, i.e. he was a man who knew how investments worked, who had experience and who knew how the big funds moved on the stock exchange, he even had his own investment strategy.
Deep Value looks for reactions that are undervalued, but with hidden potential value. For Keith Gill, GameStop, which had traded as low as a single dollar, was that stock with potential. GameStop's stock has been falling since 2016 and by 2019 its price was down to a single dollar and there were reasons for that. GameStop is a company that sells physical video games and consoles, meaning they have shops with shelves full of games and shoppers stroll through their aisles browsing and enjoying the moment of purchase. For the nostalgic, buying physical games, being able to look at the covers, touch them and keep them is very important, but the reality is that the industry is going in a different direction. Games are increasingly bought on digital platforms such as Steam or Epic, downloaded and played without the need to buy them.
If subscription services like Microsoft's Game Pass succeeded, it meant that GameStop's business model, the physical sale of video games, was hanging by a thread and in 2019 this was not only already known, but had already been seen in other sectors such as cinema (Blockbuster, a physical movie rental company had gone bankrupt and companies like Netflix were positioned as the future of the sector. Digitisation was the key and that's why GameStop's shares had fallen to the floor, which is why people thought Kate Gill was completely crazy.
When in July 2019 she started posting a series of threads on Reddit titled GameStop, Gill had invested $53k in GameStop stock and call options, and it's not like she was a millionaire with $53k to spare. Gill is a typical YOLO (You Only Live Once) investor and it was with that philosophy and the conviction that GameStop had hidden value that he bet on going short on this almost hopeless company.
The fundamental reasons for GameStop's stock being on the floor were clear: it had failed to make the transition to digitalisation, but there was more to it than that. To understand the background we must talk about short investment, in the stock market you can go long, i.e. you buy a share and wait for the price to rise so that you can sell it at a higher price and obtain simple profits, but you can also go short, which means that instead of betting that the price is going to go up, you bet that it will go down.
To do this instead of going to your broker and asking him to buy a share from you, you would ask him to lend it to you. Let's say GameStop is worth 10 dollars, so my broker lends me a share of GameStop and I sell it for 10 dollars, that's going short. When the price goes down to say 5 dollars I buy back the share and return it to my broker, I have made a profit of 5 dollars which I will have to deduct some commission but I can buy a kebab (maybe not, inflation is very bad).
Generally speaking, going short is like betting against a company and in the case of GameStop there were a lot of funds betting against it. By January 2021 GameStop had 140% of its shares short, you may ask: how is it possible that there are more shares short than actually exist? Well this is because the same stock can be sold twice. Imagine that Tony has a share in GameStop, he has an agreement with the broker that allows the broker to lend him that share for someone else to short. The broker lends it to Anna to short and Anna sells it to Bob. Let's say Bob has the same agreement with the broker, where the broker can lend the stock to another short seller.
I know you know GameStop is going down and you put it up for sale too, in short the short interest can exceed the total shares of the company is a mess yes, but never mind the question is: was this ethical? For most of the users of the Reddit group called WallStreetBets it wasn't, for them the big funds that went against betting against the bankruptcy of beloved companies were the enemy. It was about greed without limit, people with ties who didn't mind destroying a company for the sake of making money, and they were acting against companies with an emotional factor. In the case of GameStop, many remembered how they wandered its aisles in the mall choosing a video game to play with their siblings, they were from a generation that had grown up playing video games and were about to see a company of their childhood disappear because of the decision of the suits on Wall Street.
On the other hand, it was argued that taking a short position could serve to protect the market, for example, when a company was underperforming, was poorly managed, belonged to an outdated sector, going short would signal overvalued stocks and prick potential bubbles. Similarly, betting on a stock correcting its price would not be the same as betting on a company going bust.
One firm that was having a lot of success in finding such stocks was Melvin Capital. In general, most of this investment manager's investments were in longs, so it had made a lot of money on its shorts in its first year of business. By 2014 it had made 70% of its profits from its short positions, that same year its founder Gabe Plotkin had his eye on GameStop and decided to take a short position although he was not the only one. At that time many other Wall Street companies anticipated what was going to happen and also went short and right from 2014 to 2019, GameStop's shares did nothing but fall.
They had won but instead of retiring with profits in 2020 came the pandemic, so the mistresses in suits and ties on Wall Street saw that while the Video Game Industry was doing record numbers because people were locked indoors playing their consoles 24 hours a day that physical shop franchise was just sinking further into the mire because people were locked in and couldn't go out and buy games. So Plotking saw it clearly, in 2020 he increased his short position against GameStop, it seemed like an obvious move but he was about to face one of the biggest risks in short investing and one of the most spectacular phenomena in the short market: the Reddit subgroup called YOLO WallStreetBets, led by a user called DeepFuckingValue, that is, our friend Keith Patrick Gill.
At first Gill received comments calling him crazy, coupled with the fact that the WallStreetBets forum was not exactly made up of expert investors, even calling themselves retarded, louts and degenerates and seeming to have more knowledge of meme creation than money creation. Despite being a community with its own language codes and its own humour (more like black humour) that was based on offence, on being a bit of a bastard, it hardly seemed that they could have the organisational capacity to put Wall Street in check, the point is that they were not alone. One day in August 2019 Gill woke up and saw that his shares had risen by 20%, behind this was Michael Barry himself, the famous investor and hedge fund manager who predicted the bursting of the 2008 housing bubble.
Barry apparently thought GameStop was in better shape than it looked and bought 3% of the company's shares. When this became public, Michael Barry not only got GameStop's stock to rise, but it sparked something in the Reddit community. Like the movie The Big Short featuring Christian Bale impersonating Michael Barry as a guy with Asperger's syndrome, Reddit users found him somewhat charismatic, many of them also referred to themselves as autistic and this in a way served to differentiate the community from its antithesis, the sharks in suits and ties and gelled hair who saw themselves as capable of eating the world.
Wall Street was made up of different people, as they called themselves retards, louts and degenerates who liked memes more than charts, at which point some on the forum stopped seeing Gill as a madman and started following his updates to see how his initial investment grew from $53,000 to $113,000. Then the YOLO philosophy was no longer so crazy and some on the forum started to follow him and open their long positions in GameStop. However not everything was going to be a bed of roses, in 2020 the pandemic arrived and people stayed locked up at home and for a physical shop like GameStop it was a real hell, then he kept posting his updates on the forum in the red and saw how everything he had gained he also lost, but at no time had it crossed his mind to sell, perhaps he was convinced of the Deep Value of the company or as he used to say: the Deep Fucking Value.
When there is a lot of short pressure and yet the price goes up there will come a time when someone will have to buy. The fact that he has to buy the most expensive share will make the price continue to rise, then the next short will trigger the margin call and so on, because the price could rise without limits and as GameStop reached the barbarity of 138% of its shares short all these hedge fans who were betting on its collapse were going to have to cover positions at much higher prices, triggering the snowball effect.
In the following months the GameStop case would turn into a psychological war between retail investors, the so-called diamond hands and funds like Melvin Capital, it was a David versus Goliath.
Even if the price of GameStop went up.
So much for the first part of this story, tomorrow I will share the continuation, where it is worth noting how the WallStretBets forum managed to bring one of the world's largest investment funds to its knees with the help of the Robinhood app, which played a decisive role in the rise of this strategy of the "misfits" against the "sharks".
