GameStop Mania: What Went Wrong

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Jakab discussed GameStop Mania: What Went Wrong. Here’s an excerpt from the episode:

Spencer: For sure. Yes. Investing to some extent is a zero-sum game. They got zeroed out almost. They lost close to $7 billion, this previously very successful hedge fund. There were other people who got blown up on Wall Street. So, I’m not saying that there weren’t some very substantial losses as a result of the meme stock squeeze and GameStop mania. What I’m saying is that Wall Street is comprised of lots of different people. Most of the money on Wall Street is earned through fee income, through processing transactions, and just holding other people’s money, and writ large. Wall street made a ton of money in the run up to this event, during the event, and following it, because you had all these young people–

It was mainly young people rush into the market with their money and lose lots of it. Even if they individually didn’t all lose money, because many people did make money or on paper are still sitting on gains. It was a very profitable event for wall street and for corporate insiders also, which is something people forget. People who just were really in the right place at the right time had some stock options, were sitting on the board of or in the C suite of these companies that were slowly going down the tubes, and all of a sudden, lightning struck, and they walked away with a lot of money when they didn’t expect to.

Jake: Yeah. So, how did the little investors end up losing money? They just kept overpaying for shares of GameStop, let’s say. Or, was it options that ended up going expiring at zero?

Spencer: Well, the whole episode really, if you want to get back to its origins, begins with the pandemic, which emerged about a year earlier. Not quite a year earlier. Every brokerage in late 2019 went to zero commissions in the United States. Then in early 2020, you had the pandemic and you just had a rush of young people. More than 10 million accounts opened. Mainly, places like Robinhood, but also E-Trade, Fidelity, Schwab, eToro, what have you. A bunch of people who previously had not been interested in finance suddenly were very interested in it.

There were many reasons for that. Part of that was just boredom. Part of that was that they had stimulus checks or other enforced savings with which they could invest. They were stuck on their phones for many hours, especially in the early part of the pandemic. Sports gambling had taken off. Suddenly, all sports were off the air, and they were looking for some other outlet. We’re talking really males between the ages of 18 years and 35 years were the kind of the Vanguard of the group that sent GameStop to the moon. They began doing all kinds of what you and I might consider dumb things with their money, with their investment accounts. And those dumb things turned out to be pretty profitable for a brief while.

If you look at, for example, ending in the month of the GameStop squeeze and beginning that March of 2020, or rather April of 2020, an index of unprofitable companies maintained by Goldman Sachs, it was up almost 300%. So, the worst stuff did the best. You had Warren Buffett, who obviously has a fantastic long-term track record, being spooked out of airlines. He dumped airlines close to the bottom. In terms of managing risk, probably it was the right move. In hindsight, it wasn’t the right move. You had an index of airline stocks jumping almost 100% in the following three months. So, all the things that people who their parents and grandparents may have respected the talking heads on wise gray hairs saying you should and shouldn’t do.

Doing the opposite was very, very profitable. And you had a bunch of new influencers emerging on the scene and telling people to buy Hertz, because even though it was bankrupt. Basically, everyone agreed and it wound up actually making money, but everyone agreed it was worthless. And people plowed into Hertz, doubled or quadrupled their money in a matter of days. All these reckless things made a lot of money. The peak of that was GameStop mania. So, I guess, I’m not talking specifically about GameStop. GameStop went from a $4 stock prior to the pandemic to as low as being a $2 stock. To being a $4 stock, call it the summer of 2020, when things started to percolate to a $483 stock.

There are some people who made money, and it’s still adjusting for splits and things like that. It’s still above where it was for various complicated reasons. Some of them just purely psychological, not financial, because it’s continued to lose money. It’s been through, I guess, now seven CEOs since our story begins has not– [crosstalk]

Jake: Wow. [laughs]

Spencer: -penny of profit, but the stock price is higher. So, I guess, if you bought early in the mania and then held on and that was part of the ethos was just holding on and never selling, you’re still up. Certainly, people who got in and were very cynical and then sold at or even slightly after the peak made a ton of money. I’m talking about the bulk of people who got involved in this. I have three sons, all in the age cohort that would have been doing this, ranging now from 17 years to 24 years, who got excited about the 17-year-old is too young to have their own brokerage account. But there were people who did it. Certainly, 24-year-olds were in the sweet spot. I know that their friends were in it. Some of them made money. A lot of them lost money.

The people who heard about it on social media, the week that this thing became a national sensation, the week that GameStop became the most traded security on planet Earth. [Tobias laughs] Most of those people lost money, especially the people who saw it as a cause, who said, “I’m going to put my little bit of money into this thing and I’m going to hang on and never sell, because this is the way to hurt- [crosstalk]

Jake: Sticking to the man.

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