One of the most interesting things about providing insights into all things Business Acumen to more than 7,200 followers
is the requests for insights into “hot topics.” After a bunch of requests to explain what is really going on with GameStop and the stock market, I figured it was time. Last week during the height of the insanity it was hard to get a deep understanding. Today, after GameStop dropped back to under $100 a share, it’s time to examine and learn about this from a Business Acumen perspective.
If you’ve been through one of our Business Acumen programs you will recall that we use stock price as one of the primary metrics of assessment. In the Business Simulation portion of the program, you made decisions that (hopefully) created shareholder value through increased revenues, profit, and free cash flow.
GameStop has done none of that. But the value of the stock skyrocketed from $17 a share in early January, 2021 to $468 at one point on January 21, 2021. To put that in perspective, if you had purchased $10,000 worth of stock on January 4 you could have sold it for $276,000 at the end of the month.
How it Began
Unlike the COVID-19 virus which started form mysterious origins ranging from a wet market in Wuhan, China to a research project in a lab gone wrong, the GameStop phenomenon of 2021 can be directly traced to something called “Wall Street Bets (WSB).” WSB is a group of loosely organized traders, also called a “reddit” who devised a plan to purposely drive the price of GameStop stock higher in a maneuver called a “short squeeze.”
In our simulation, you got rewarded for doing well by running your business well. The reward was a higher stock price because investors believe that the simulated company would continue to do well so therefore the stock was worth more and more.
Unfortunately for companies like GameStop, Bed, Bath, & Beyond, AMC Movie Theaters, Blackberry, and other retailers negatively impacted by the reaction to COVID, the opposite is true. As their business suffers and revenues go down, the value of the stock goes down. Many years ago, Wall Street investors created an instrument called a “short” which essentially is a bet that the stock will do very poorly. In my opinion this is more like gambling in Las Vegas than investing in great companies, but this is not the blog on the virtues of capitalism.
6 Business Acumen Perspectives to Understand What Just Happened on Wall Street
To help explain, here are 6 things to know about what just happened:
Shorting a Stock
In our simulation, you learned stock prices go up if you do well.
In the “real word” of investing, the truth of the matter is that financial markets provide investors with opportunity to profit whether stocks go up or down. In a “stock short,” which presents a lot of risk to an investor, sellers borrow shares they sell in the present with the hope of buying them back at some point in the future at a much lower price. In extreme situations where there are a lot of investors shorting a stock, it creates an artificial situation called a “short squeeze.” A short squeeze is a rapid increase in the price of a stock owing primarily to technical factors in the market rather than underlying fundamentals such as… company performance. A short squeeze can occur when there is a lack of supply and an excess of demand for the stock due to short sellers covering their positions by buying back stocks at the lower prices.
Why GameStop?
It doesn’t take a stock market wizard to realize that traditional retailers like Bed, Bath, & Beyond, AMC theaters, and Blackberry phones were going to suffer during a global pandemic. These stocks were ripe for selling short as there is no way any of them were going to increase in value because all the key elements – Revenue, Revenue Growth, Profit, Profit Growth, and Free Cash Flow were going to be abysmal for at least 12-24 months.
This is where the WSB group and others like them came in. If you have a coordinated effort of enough investors buying and as a result pushing the price higher, it will create a short squeeze. Not only do you have a lot of people buying the stock, which is driving the price higher, but you have short sellers covering their positions at extremely high rates which will cause them extreme losses. Once word got out what was happening, the entire thing went viral and non-investors started to add more fuel to the fire.
Why Now?
It’s a perfect storm of factors including:
- There is a new President (and the old one and his volatility are gone)
- It’s a new year
- People are bored out of their minds in the 10th month of lockdown
- There is a lot of cash sitting around in the bank accounts of all the 25–30 year-olds who are working and are living rent-free with their parent
- It’s new, shiny, and cool
- It’s easy. Just exercise a trade in 2 minutes on your Smartphone when you are pretending to be paying attention in a Zoom meeting
- There is an unlimited amount of knowledge on the web about how to do it
- Social media
What’s the Real Motivation Behind This?
There are many reasons and motivations behind this including:
- It’s a new take on the old adage of get-rich-quick
- It’s a way to hurt really rich Hedge Fund billionaires
- You can become an overnight Social Media icon
- You can make a lot of money
How Does this Involve the Economy and How Can I Apply My Business Acumen?
One of the most important lessons from our Business Acumen programs is that the economy and the stock market are not equal and don’t really run in parallel. The stock market reflects much more of the future than the present. You will now always be able to say that you remember the year of 2020 when at the pinnacle of the global pandemic, the economy was being shut down, unemployment skyrocketed, and the stock market hit new highs. That’s because the smart investors were realizing the new disrupted economy and betting on stocks like consumer-packaged goods that make cleaning products.
What Happens Next?
That’s an interesting question. Several of the brokers and online services put restrictions on the ability to buy and sell these distressed companies. Interestingly enough, the Securities and Exchange Commission (SEC) immediately stated it was looking into this as a potential violation.
I think another group will try again very soon. But the next time, it won’t be so cool and won’t be so much fun because by the time the final story is written about the GameStop fiasco, most people will have lost money and won’t want to lose any more.
