A New Financial Power Has Awoken
“Gamestonk” has changed the markets forever. The only question is by how much
Gamestop isn’t exactly what one would describe as a company of the future. Its main product is software stored on a physical disk in an era where this could be downloaded in minutes. Its main point of sale are bricks and mortar stores in an era where the share of online sales are growing every year. To add insult to injury, the vast majority of these stores have been forced to close due to the coronavirus pandemic. And yet, despite all this, its stock is currently trading up by more than 2000% over the past 3 weeks.
This astronomic rise has been fuelled not by exceptional management, a new amazing market niche or anything that could be considered rational by conventional investment logic. Its been fueled by individual investors, coordinated by the WallStreetBets reddit forum, all motivated by the chance to financially ruin hedge funds who had bet that Gamestop’s stock would decrease. Conventional wisdom suggests that the price will crash any second now and all of these investors will lose massive amounts of money. They would counter that the hedge funds still hold a large number of outstanding short positions and will eventually be forced to buy Gamestop shares whatever the price. If this proves true, this would inflict massive losses on the hedge funds and generate huge profits for the retail investors.
Irrespective of what happens with the Gamestonk saga from here, there are already a number of fundamental changes to markets as a result of this.
1. All short positions are now less valuable.
At a high level, any position on the market is essentially valued by looking at all possible outcomes and their chances of happening, then estimating a price from these. For example, the likelihood that the company’s profits will increase, or that they will have a PR controversy. One outcome that was not priced in before this week was the chance that an internet forum would cause a large group of small time investors to intentionally cause catastrophic losses to your short positions. Now that we’ve witnessed this as an actual thing that can happen, it will have to be priced into all short positions from here on out.
