GameStop’s stock market squeeze wasn’t what most think

Journalists struggle to get the facts right when news breaks, but the wiser among us remember writer Alan Barth, who observed that reporters write “only the first draft of the story,” and only later do we learn the whole story. .

At the world premiere of the documentary. “Diamond Hands: The Legend of WallStreetBets”, I learned there was much more to the fall, rise, and subsequent gyrations of video game retailer GameStop’s stock. And after listening to three of the meme stock investors speak at the South by Southwest Film Festival, I realized The whole story is not what I thought.

In January 2021, stock market watchers were shocked when shares in Gamestop, a physical retailer, soared despite being on the verge of bankruptcy. More surprising were the people who bought the shares, followers of a little-known Reddit page called WallStreetBets.

I called them “a marauding gang of day traders who promise to bring vigilante justice to the stock market.” By buying the shares, the buyers were driving up the share price of a company that hedge funds had bet billions against.

Many financial journalists reported that the WallStreetBets crowd was motivated by nostalgia for a brand they loved as teenagers. Some said that the merchants suffered from massive deception. I called them gullible.

“Diamond Hands”, directed by Zackary Canepari and Drea Cooper, proves otherwise.

Reddit user Alvan Chow, who goes by the Reddit handle Jeff Amazon, was looking for places to invest when he noticed short-selling hedge funds toying with GameStop. Chow believed that his bets against the stock presented an opportunity for other investors to force the stock price higher and profit from the funds’ lousy bet.

The tactic is called a short squeeze. Let me explain.

Short sellers borrow a company’s stock with a promise to pay it back on a specific date. They sell the stock, issue a report proclaiming the company a bad investment, and lower the price. They then buy the shares back at a lower price before returning them to the lender. They benefit from the fall in the share price.

Chow found that hedge funds had shorted 140 percent of Gamestop’s shares. That meant some shares were shorted, then lent again, and shorted again, a practice many think should be illegal. But this also made short sellers more vulnerable to a rise in the share price.

chow wrote a long and sophisticated analysis of the situation and explained how investors on Reddit could squeeze out the shorts by making them buy back the shares at astronomical prices. He published his thesis “The REAL Greatest Short Burn of the Century” on WallStreetBets in September 2020.

While some savvy investors got in early, nothing moved until December, when celebrity investors on social media took notice of the move.

Gamestop’s short squeeze, therefore, was not started by would-be revolutionaries but by a savvy investor who shared their due diligence.

The film introduces us to other key players, including notorious Reddit celebrity Roaring Kitty and short seller Andrew Left. But they also track down the small investors who amassed when the WallStreetBets hype reached its peak, and investment app Robinhood made GameStop stock a must-have accessory for millennials.

The title of the movie refers to WallStreetBets lingo. Those who sell their shares when the pressure is high are said to have paper hands. Those who can hang on, whether a stock is tanking or soaring, have diamond hands.

Small investors describe in the film how they saw their small investments turn into small fortunes that collapse. The film suggests that these part-time traders may never have visited WallStreetBets were it not for COVID.

An investor is a school photographer whose business dried up overnight. Another is a veteran, disabled by a diving accident, who has a brain injury. A third was a part-time waitress, a part-time actress struggling to make ends meet when New York City shut down.

While some managed to make tens of thousands of dollars, all say they will never get over losing the hundreds of thousands they could have made if they had had paper hands.

Some WallStreetBets investors are still sticking to the spirit of the diamond hands, still holding on to their GameStop shares, which are still worth ten times what they were when Chow wrote his analysis. But he sold his shares and made $8 million because he stuck to his thesis: squeeze the short sellers and reap the profits.

The film offers an insightful look at the world of millennials, their relationship with money and the bad hands that the financial crisis and the pandemic have dealt them. Most importantly, “Diamond Hands” tells the entire story behind a movement and challenge to Wall Street that is far from over.

Chris Tomlinson writes commentary on business, economics, and politics.

twitter.com/cltomlinson

chris.tomlinson@chron.com

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