The GameStop Fiasco: Why It Happened and What You Should Learn From It
By now, I’m sure you’ve heard about how a Reddit group triggered a short squeeze of the video game store GameStop, causing some hedge funds to lose billions, along with a cascade of other financial consequences for those who hopped on the bandwagon.
So what happened?
Before we delve into some simple trade speak, let me tell you what this was...
It was pure rage. It was a revenge trade.
Not a trade based solely on fundamentals, not technical analysis, not momentum. Was it some of those? Yes.
But what really put it over the top was pure emotion.
If you read some of the Reddit comments as this was happening, as I did, you would understand right away.
Comment after comment on the thread was filled with stories about how this was revenge against Wall Street.
Stories about the financial collapse of 2007-08, and how that impacted someone’s family as people lost their jobs. Participants blamed Wall Street greed for that, and this was payback.
It was the mob storming the Bastille.
This was all “right” brain talk. Completely emotional.
This is also known as the “Amygdala Hijack,” one of the 10 negative influencers I call “Decision Destroyers.”
You can learn more about those in my free guide 10 Decision Destroyers You Need to Stop Right Now, which you can download right here.
As a general rule, the “left brain” is one that is less emotional and is logical (think Spock on Star Trek).
The “right brain” is more emotional (think Captain Kirk from Star Trek, especially when he’s hamming it up).
What about the original idea that started the massive short squeeze? (I’ll explain that in a minute).
That was well targeted. It was, actually, a “right brain” idea.
Here’s What Happened with the GME Short Squeeze
Let’s get slightly technical. Both the hedge funds and the original thoughts from WSB group on Reddit were “right brain,” extremely logical.
The hedge funds thought, probably correctly, that the shares of GameStop were ridiculously overpriced. So they “shorted” the stock.
What is that? If you buy stock in a company and want to make money, you buy low and sell high.
A “short” is the same concept, but in reverse order. Sell high and buy low.
But how do you sell something you don’t own? You borrow it.
So a “short” borrows stock (which anyone can do) with the idea that the stock price will drop when it has to buy the stock to give it back to the brokerage it borrowed it from.
A trader borrows the stock when it’s trading at $100, and buys it back when it drops to $80. They pocket the difference, a $20 profit without ever actually owning the shares.
What happens if the short buys the stock at $100 and the price increases to $120? That’s a $20 loss. Not good for the short.
But if the short really believes in the idea, they borrow more stock, and keep rolling this trade over until the stock drops in price below $100.
If you are unable to borrow more stock your goose is cooked. That’s known as a “short squeeze”.
In fact when that happens, there are more buyers of the stock, so the price goes even higher, and the short has big losses.
Why the original idea from Wall Street Bets members was so logical (left brain)
The amount of the short positions compared to the total float of the company was excessive, around 147%.
Let’s say we are playing musical chairs.
The total amount of chairs is 100 (that’s the amount of total stock outstanding). There are 147 shorts that need to sit down at some point.
Advantage: The people that hate the shorts, a.k.a hate the hedge funds.
GameStop is not a behemoth like Google.
The total market cap of GameStop is very small compared to Google.
Here the smaller players can have outsized influence against deep pockets.
At some point the smaller players need to stick together, otherwise the big boys will win.
How do you encourage your team of smaller investors to stand firm in order to squeeze the hedge funds?
You tap into deep seated hatred for hedge funds/ Wall Street.
You seek out the rage for these people in the “right brain” to maintain your group mindset of only buying and never selling.
It only drives the stock up and makes the pool of available stock to close out your short position get smaller and smaller.
It was David versus Goliath.
My Wall Street friends didn’t get it at first.
They also used the “left brain”, explaining to me how overpriced GameStop was.
They were completely correct, but only on the “left brain” side analysis.
When I forwarded to them some of the Reddit comments I had read, they got it.
Will some of the Reddit buyers lose money? It appears certain they will.
But if you are furious at hedge funds/Wall Street, would you be willing to lose $2,000 for the unmitigated joy of watching some hedge funds lose billions?
Apparently so.
When you’re dealing with high stakes investments, you absolutely must balance your logical left brain thinking with your emotional right brain reactions.
The GME Short Squeeze is a textbook case of how multiple influencers -- from inside your brain, the outside world, and even from the past -- can sway your decisions.
To learn how to identify and overcome these influences grab a free copy of my guide 10 Decision Destroyers You Need to Stop Right Now.
Make better choices in work and life.
Eliminate these stealth influences to make confident decisions that yield the outcomes you want in life.
In business, it’s important to be well-liked. (Especially if you’re a woman!) But shouldn’t competency be the difference maker to whether a person makes more money? Isn’t being competent more important than being likable?