On Money & More – March 2021

Are you familiar with GameStop? If so, you probably know it as a place to buy and sell video games. But, for a brief moment, it was the center of the investing universe. (NYSE:GME) GameStop, like many retail stores, struggled in 2020 and had, understandably, seen its share price struggle as well. The price was around $19 at the beginning of 2021. Remarkably, however, by mid-day on January 28th the share price had risen a staggering 2400%, to $483. The historic move, and subsequent media frenzy, captivated the country at the end of January.

January 28th will be the most infamous day in what has been dubbed the “GameStop Short Squeeze,” although the story really starts in late 2020 when a group of amateur investors discovered that several hedge funds had short-sold GameStop shares. The hedge funds believed that a company that had seen $2 billion in lost revenue would likely see its share price continue to go down, so they borrowed and sold shares – called short selling, with the goal of making a profit on the downside. The key in this strategy is to replace the borrowed shares with shares purchased at a lower price. The amateur investors, who were primarily members of a Reddit forum called WallStreetBets, perceived the opportunity to short squeeze by purchasing as many GameStop shares as possible and refusing to sell, subsequently preventing the short sellers from returning their borrowed shares at anything lower than astronomical prices. The loosely coordinated effort, fueled by nostalgia for GameStop and a healthy dose of “sticking it to the man,” took off, creating a media frenzy, and a sense of greed as the stock price skyrocketed. The average trading volume of the stock jumped from around 10 million shares per day to almost 200 million on January 22nd, January 25th, and January 26th.

The success of this endeavor was surprising, even to members of WallStreetBets. It would not have been possible without commission-free trading, primarily driven by a new style of brokerage platform, the most famous of which may be Robinhood. These platforms are undeniably geared towards Millennial and Gen Z investors. They offer commission-free trades and access to investing in a manner that was previously unavailable to the general public. Robinhood, in particular, boasts the ability to make purchases before any money has left your bank account, which made them particularly appealing to day traders looking to cash in quickly. On January 28th, this practice forced Robinhood to restrict trading on GameStop, as well as several other stocks that had been highlighted by the WallStreetBets group. In a statement released on January 29th, Robinhood pointed to lack of funds to cover the day’s trades, as well as market volatility as the reason for the halt. That didn’t appease investors, who have already filed a class action against the platform. The move also managed to unite progressive and conservative politicians, who believed the move was an effort to protect hedge funds at the expense of the amateur investor. When things finally settled, however, hedge funds lost over $10 billion and a few Reddit investors made millions.

While the idea of investing a mere $19 and earning a return of $483 can be exciting, tempting, and certainly newsworthy, it is important to remember that many, if not most, of the individuals “riding the wave” of GameStock’s price fluctuations lost money, making this type of “investing” more like going to Las Vegas than the type portfolios advocated by most professional advisors. While the GameStop short squeeze was fascinating to see, Cutler was content to watch this one from the sidelines.

All opinions and data included in this commentary are as of February 12, 2021 and are subject to change without notice. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.