The digital equivalent of the Peasants’ Revolt – why the GameStop story is both beautiful and terrifying

You always have to take postings on online message boards with a pinch of salt but this one – “I can now write my mom a check and put my sister through lymes treatment. This has been a very rough year, but I’m so thankful for every single one of you” – encapsulates what is both beautiful and terrifying about the extraordinary GameStop story.

It’s a story in which people from Main Street have reaped lottery wins at the expense of uber wealthy Wall Street hedge funds. That’s part of the beauty of this unprecedented tale. But before we go deeper into both that and what terrifies me about this, a few words of explanation for those new to the party.  

GameStop is a US video game retailer that was knocked for six by the pandemic and gamers increasingly favouring downloads over discs. Over the last year its shares hit a low of $2.57 (£1.85). On 31 December, they closed at $18.84 (£13.60). By the close of trading on Wednesday, they had hit a staggering $348.58 (£251), driven to that height by an army of small investors.

The genesis of this sudden surge has been traced to Ryan Cohen – the founder of the online pet food giant Chewy – who took a 13 per cent stake in the retailer in September and started pushing for it to become a specialist online retailer of games and gaming products. This is a sensible strategic move, although there is no guarantee of success given, you know, Amazon.

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An apparently receptive GameStop duly invited Cohen and a pair of his associates onto the board. It wasn’t long before sparks started to fly on bulletin boards such as Wallstreetbets, a popular and sometimes entertainingly profane Reddit page. Using services such as Robinhood, an app designed to make trading cheap and accessible to small investors, people piled in.

Wall Street came to the opposite conclusion about Mr Cohen’s plan, however, and hedge funds aggressively shorted the stock. Short selling is a means of profiting from falling share prices. The investor borrows shares, usually from a big institution, for a fee and then sells them with the aim of buying them back at a cheaper price at a future date before returning them to their owner.

It’s a dangerous strategy. If you buy a parcel of shares in the hopes of them rising, you can only lose your initial investment. The lowest a share price can go is zero. If you short them, your losses have no such cap on them. Equally, the sky is the limit if the shares rise, as GameStop’s have.  

Usually in a dust up between Main Street and Wall Street, Wall Street wins. The capitalism it espouses is a major reason why millions of Americans are hurting, lack health coverage (like the sister of the online poster I mentioned above), have minimal employee protection and so on.  

Its traders’ machinations exacted a brutal toll on those caught up in the last big economic shock – the financial crisis – when big banks and asset managers spread toxic debt around the world and nearly broke the global economy by so doing.  

But this time Main Street has won. So far. The apps have given small investors – the owners of the “mug money” in Wall Street parlance – the collective ability to overwhelm and flatten titans, forcing them to close out their short positions and crystallise enormous losses.  

The whole thing looks a bit like the digital equivalent of the Peasants’ Revolt, except this time the peasants have got their sister’s lymes disease treated rather than having to watch their leaders get hung, drawn and quartered.  

Such power is intoxicating and the battle has spread beyond GameStop. A number of other companies targeted by shorts, including cinema operator AMC and British rival Cineworld, have seen their share prices bumped up in recent days.

“When this is over and the battle is won,” someone posted on an online message board, “let’s do something the fat cats on Wall Street would never do. Let’s donate some of our earnings to a deserving charity.” See what I mean about beauty? Amid all the horror and cynicism of 2020, that sentiment is glorious. There was also this: “This probably won’t get anywhere and I don’t care, even if one person sees this, I am proud to be a part of this piece of history with you. I don’t know who you are or where you live or what your living situation is like or why the f**k we haven’t sold for massive tendies [profits] yet, but I do know that this isn’t about money anymore. It’s about proving a point.”

Which brings us neatly to why this terrifies me. If you are just in it to prove a point, and stick it to Wall Street, then more power to you. But some people may have bet big, and risked money they can’t afford to lose by doing that.  

When you buy a share you’re ultimately buying a portion of a company’s future earnings. What if there are no earnings, or they’re so far in the distance they start to look like a pot of gold at the end of the rainbow put there by leprechauns? That could very easily be the case with GameStop.

Its current share price looks like a classic bubble; the sort of thing that got started in the mid 1600s when tulips started being imported to the Netherlands from Turkey and became the most fashionable purchase around. Suddenly, everyone wanted a piece of the action. When the bubble popped a lot of people got badly hurt.  

Popular stocks can be sustained by sentiment. Tesla would be an example. But even though Elon Musk’s outfit makes more money from flogging carbon credits than it does electric cars, and what it does make is held back by Musk’s absurd pay package, it has turned a profit.  

Will a revived GameStop following Cohen’s plan ever do that? It’s an open question. Will the belief that Wall Street has got it wrong and the boom that it’s sparked prompt some to join the charge with money they need for their medical expenses only to see it vanish if and, more likely, when the bubble pops?

There is a concern that some very cynical “pump and dump” merchants – seeking to boost the price of particular shares before selling out to make a quick and dirty buck – are exploiting the situation to draw people like that in. American regulators are obviously concerned, but there’s not a lot they can do about the situation.

If I’d made a bunch betting on GameStop and sticking it to the shorts, I’d be selling right now and turning my paper profits into hard cash (for the record, because I write about financial matters, I don’t trade shares).  

Trouble is, when enough people start doing that the tide will turn, gravity will come to bear on GameStop, and the people on Main Street who don’t act quickly enough will lose.  

As I said, the GameStop story is by turns beautiful and terrifying.