Tiffany Hagler-Geard | Bloomberg | Getty Images
The stock market is known for being unpredictable and volatile and any sense of normalcy was blown up during the recent GameStop rally.
Most of us know the story so far: after discovering that several hedge funds bet on the video game retailer losing value, people joined the Reddit WallStreetBets forum to increase the stock price by 1,500%. During January, the price of GameStop shares rose to a high of $ 483, from a low of $ 17.
The balloon appears to be already appearing, with GameStop shares up to about $ 55 starting Friday.
However, the event is unlikely to be forgotten any time soon, experts say.
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The Reddit forum of retail investors promising to take on Wall Street still has over 8.5 million subscribers (or as they say, “degenerates”). And Netflix is already in talks to make a film that dramatizes the real battle between huge hedge funds and a bundle of everyday traders.
Moreover, experts say that the event tells us about what people bring to market today – and what that could mean for future investments.
More bubbles
In many ways, the GameStop rally resembles the bubbles of the past, but also has some unique features, experts say.
“What’s new is the scale and speed of the event,” said Veljko Fotak, an associate professor of finance at the University at Buffalo.
The ubiquity of smartphones where people can download investment apps, the availability of cheap or free trading, and a “restless energy pandemic” are factors that have contributed to the video game retailer’s rally, said Dan Egan, vice president of finance and investment at Betterment.
Populism around the globe is yet another factor that has fueled the balloon, Fotak said. “Some investors were motivated not only by pure greed, but also by the desire to ‘stick to man,'” he said.
Many people are also brought to market these days when they see friends or people they follow on social media promoting certain actions, said David Sekera, chief market strategist at Morningstar. Some of these posts are very compelling: Reddit users, for example, were exchanging high-level analysis of GameStop finances.
“The days when social capital research was limited to big Wall Street firms are long gone,” Sekera said.
All these events that propelled the GameStop bubble could stimulate much more.
“I think to some extent, this movement of the Reddit herd will continue,” said Jason Reed, a finance professor at the University of Notre Dame. “We’ve already started to see the move to other stocks and assets, such as AMC, Blackberry and Silver, gaining considerable momentum.”
As GameStop shares crashed on February 2, many Reddit users claimed to keep their shares or even buy more, writing that there was no loss until they settled.
Source: Reddit
More people who invest are positive, but only if they act so wisely, experts say.
Those who buy shares based on social media posts, for example, often take risks with money they can’t afford to lose, Egan said.
“One of the biggest concerns is newer investors who see a ‘hot’ stock, but don’t fully understand the ramifications of investing in it,” he said. “Many retail investors could lose their shirts.”
Fotak said he read about a recent law graduate who said he was pleased with his victories on GameStop.
“Now he could afford to pay off his student loans,” Fotak said. “Yes, a lot of greed is at stake here.
“But there is also great despair,” he added. “I really hope it sold out right away.”
Less shorted?
Hedge funds that shorted GameStop suffered huge losses as the Reddit package of day traders bought the stock in bulk, raising its price. Melvin Capital, for example, lost more than 50% in January.
These failures could make other investors more contemptuous about short-circuiting or betting against stocks, experts say.
“After seeing a few other funds taken out of the field on the bars in these short positions, hedge fund managers will be much more cautious about the actions they will be willing to shorten,” Sekera said.
Less shortening means a less healthy market, Fotak said.
Bubbles tend to be less common in countries where short sellers are less restricted, he said. This is because the pessimism of short sellers can balance some of the optimism about a particular sector or stock.
“And in this climate, with market valuations at record levels, we need the opposing views of short sellers more than ever,” Fotak added.
Another advantage of short sellers is that they often expose serious problems to companies that other investors and regulators have missed, Fotak said.
“Because they are looking for companies that are overrated, they are always looking for fraud,” he said, adding that he often publishes research on companies’ bad practices.
So it’s unfortunate that the GameStop disaster could reduce power, Fotak said.
“To the extent that it delays the release of negative information, we all suffer from a less efficient market,” he said.