The Crying Game(Stop)
The GameStop phenomenon is a game of villains mistaking themselves for heroes, and one million marks getting fucked over. Let’s introduce the key players, the arena, and what the hell just happened, and what the hell will happen.
Plug In Your Controllers: Dramatis Personae
Player 1: u/DeepFuckingValue, the King of r/WallStreetBets
Player 2: Melvin Capital and The Shorts
Player 3: Robinhood, the Brokerage Firm
Player 4: Emma, a Twitter user who bought GME.
Player 5: A mystery player, unmentioned in the discourse, that I will reveal later.
What the Fuck Are Stonk Markets?
To understand everything you didn’t want to know about GameStop and r/WallStreetBets, we need to talk about what the stock market is, and specifically how stocks become money. Unless you understand how stocks become money, you will not understand what has happened, and why everyone in the above list of players is either rotten, or a duped mark.
What is a Stock?
To understand what happened with GameStop, I want to clear up what a stock is. This is simplified and doesn’t get into a number of technical details like discounted values and 0-dividend stocks.
A stock is a contract with a company that entitles the owner to some percentage of the company’s earnings, called the dividend. For example, if I own one share of Kohl’s, I can expect to receive twice a year a pay out from the company which normally ranges between $.40 - $.60 dollars a share.
The reason I would buy a share of Kohl’s is because I think that amount of money I will make in dividends will be higher than the amount that I paid for the share. I will call the amount of money you’ll make in dividends $X.00, and the price of the stock will be P. If P<$X.00, congratulations! You’re a winner! You made money!
Why Does The Price of a Stock Change Over Time? Part 1.
But, we don’t actually know what $X.00 is. That’s all in the future, and sadly, we live in the present. The dividend is some percentage of the company’s earnings, and earnings fluctuate. If the company does badly, the dividend will be low. If the company does badly enough, they may even refuse to pay out a dividend for the quarter. Disney did that in the wake of COVID-19: with cruise lines, box office releases, and parks closed, they did not give out a dividend in 2020 to recoup losses.
Oh no! If you’re a holder of Disney, that’s not good. Since you only make money if $X.00 > P, and $X.00 is suddenly lower because this year Disney won’t pay you anything, then you may lose money. If only you had predicted that a once in a century pandemic would occur and Disney wouldn’t give you a dividend. You never would have paid P dollars for it if that was the case!
And that’s the entire game of the stock market. The price moves because different people have different predictions on what the future will hold. People who didn’t see COVID-19 coming would be willing to pay a high P for Disney, because they thought Disney would have a high $X.00. But, if when Wuhan shut down you thought that rest of the world would soon follow, you would have only bought Disney if its P was very low.
Price changes reflect how the consensus of what Disney is worth changes over time. If everyone thinks that Disney will be closed for the entirety of 2020, then they aren’t going to buy Disney for a high price, and if no one will buy the stock for a high price then price will have to go down to a low one. It’s just like with buying shoes or a video game—if no one will buy high, then the sellers must go lower.
The stock market is then buying and selling predictions of what the future looks like.
Why Does The Price of a Stock Change Over Time? Part 2.
Now, we can talk about capital gains.
Unlike a pair of shoes or a video game, the people selling stocks are also the people buying stocks—you, me, and the banks. Because of this, if I bought a stock and its price rose, I could sell the stock and make money.
Still, the fundamental thing at play here is the dividend. I am selling because I think that P > $X.00. If I thought my Disney shares would net me 120 dollars over the next ten years, I would be a fool to sell it for 100.
That’s it for stocks. You either buy because P < $X.00, or you sell because P > $X.00.
Why Does The Price of a Stock Change Over Time? Part 3.
Okay, but remember what I said about how stocks are like regular consumer goods? They are subject to supply and demand as well. I already said that if no one wants to buy the stock for its current price, it needs to go down. The opposite is true: if people keep buying the stock, the stock price has to go up.
Normally, in a rational market, people want to buy the stock because they think $X.00 is high, and people want to sell the stock because they think P is high, but remember that price changes the same way that buying and selling works with real goods. If more people buy for any given reason, even stupid reasons, the price goes up.
What is a Retail Trader and What Is a Hedge Fund?
Retail traders are you and I. It’s any ordinary person with a Robinhood or Fidelity account. A hedge fund is corporation with analysts whose job is to analyze the market, pick the best stocks, and pass the money they make onto their shareholders.
Hedge funds almost always do better than retail traders. They have a number of key advantages: they have full time analysts whose job is to get this stuff right. As a corporation they get to borrow at discounted rates, allowing them to better protect themselves from losses. Corporate debt also reduces tax liability, which isn’t true of consumer debt. Retail traders often can only trade during the stock exchange’s regular hours, whereas hedge funds can strike deals at any hour of the night. Another way that hedge funds always win is that they have access to Bloomberg Terminals, which are hardwired to get the most recent prices fast, much faster than a retail trader on their Robinhood app.
The deck is stacked against retail. If you’re retail, you’re day trading, you’re probably going to lose money.
What is Pump and Dump?
Pump and Dump is the story of u/DeepFuckingValue and the GameStop phenomenon. I don’t want anyone to say that Reddit “gamed the system” or invented something fundamentally new. Pump and Dump is when someone convinces people to buy as much of the stock as possible to raise its price—that’s pumping—and then when the price is high enough, they sell—that’s dumping.
This is what happened with GameStop. r/WallsStreetBets convinced a number of retail investors to purchase the stock so that the price would go up. Because of media coverage of the spiking price, r/WallStreetBets was able to convince more people to pump. This sent the price from $20 to $400 dollars. At that point, the smart investors dumped.
What is a Bubble?
Pump and dump is an example of a bubble. But, what’s a bubble?
Here’s how a bubble works.
The price is going up, therefore I should buy the stock.
Buying the stock makes the price go up more, as shown above.
This makes a new incentive. Instead of P > $X.00, it’s really P(tomorrow) > P(today).
This becomes a self-fulfilling prophecy. As long as P(tomorrow) > P(today), more people will buy the stock, and so the price tomorrow will always be higher than the price today.
At some point the price becomes too silly for anyone to keep buying. Now, P(tomorrow) = P(today).
And… If it isn’t going up anymore, why hold onto the stock? That $400 you have in GameStop stock would be much nicer as $400 to pay off your rent, wouldn’t it? So, you sell.
But, if you sell, then the price goes down, so P(today) > P(tomorrow). So, logically you should sell today before tomorrow comes and the price falls. This leads to the opposite feedback loop, where P(today) > P(tomorrow), so P(tomorrow) keeps falling. Everyone needs to sell out to keep their profit.
The people who benefit from a bubble is everyone who buys low, and the people who lose money from a bubble is everyone who buys high. Remember, you only make money by buying GameStop at $400 if GameStop goes up to $450. You bought the stock because you believed that would be the case.
But, what if the stock never goes up again? What if it only goes down? Then, you’ve lost $400. And if you bought the stock at $300, you lose $300.
A stock bubble is the opposite of a good party: arrive early, leave early.
This is inevitably the problem with u/DeepFuckingValue and Pump and Dump. At some point, people need to have the money in GameStop turned into real money to buy goods and services. They have to sell. And if they sell, the price has to collapse.
Does the price of GameStop really have to come down?
Yes. The reason is that stocks aren’t money. There are two ways to convert stocks into money: dividends, and selling the stock. Since GameStop’s dividend is historically $1.60 a share per year, it would take 250 years for the dividend to pay off someone who bought it at 400 dollars. So, the only way to make any real money off the stock is to sell it. And if one person sells it, as outlined above, everyone has to sell it.
Are you sure? Some people say they will hold forever?
They won’t. Let’s break down two reasons why.
Number one is, again, that stocks aren’t money. The people with GameStop stock will want to buy things at some point. The only way to buy things is to sell their stock.
Number two is, let’s say that the stock value plateaus. Let’s say that GameStop stops at $500 and stays around that price for a month. Why the hell would you keep holding? Only if you think that the stock goes up forever will you hold forever. If it even pauses for a second, you should sell.
And let’s even talk about the idea of “holding forever.” “Holding forever” is actually an idea that comes from value investing, which is a philosophy of investing focused on dividends. You hold forever because you are sure that Disney will always provide you a plump dividend. But, since dividends are a non-factor here, that strategy can’t work.
I repeat: hold forever is a stance that is based on dividends. There are no dividends. There is no way to hold forever. To make money, at some point, you must sell.
Are you absolutely sure? Some people say they will hold forever out of spite!
The answer is still no. A few reasons why:
The Hedge Funds might give up and stop shorting the stock. Then, there’s no reason to inflate the price to hurt the shorts, because no one is short. So why keep holding? Price collapses.
People get bored. There is a lot of fury around this right now, but at some point it’s going to stop being a meme, stop taking up news, and people will forget the fun and exit. It is legitimately fun to be in GameStop right now, to have a national news story be about you. But every meme dies. Price collapses.
I’m not convinced that those who are “doing it for the lulz” or out of some vengeful instinct make up a significant enough portion of those buying to make the vengeance buys enough to prop up the price indefinitely. When I go to Twitter, I see people who say they are in it for the lulz, but they are just as likely to talk about the big wins they’ve made on Nokia and GameStop thus far. The lulz may be a socially acceptable farce to hide the fact that, deep down, they want to hit it big, they don’t want to be poor anymore, and they are willing to gamble it all to get rich. Nihilism, in our generation, is sexier than materialism, and a gambling addiction is the only thing that Generation Z has no lexicon for. So, if not enough people hold simply out of spite, well… Price collapses.
What is Shorting?
Shorting is a way to make money off of a stock’s price falling. I won’t get into much detail here, but there are two concepts you need to know.
The short interest is the price of being short. Just like with the price of a stock, it fluctuates based on market perceptions.
The percentage of shares short is the number of shares that are part of a shorting contract.
A number of hedge funds, specifically Melvin Capital, were short GameStop because it’s a shitty fucking company that isn’t expected to turn a profit until 2023. Therefore, if the price truly were based on the dividend, and GameStop was expected to have a rock bottom dividend for the next few years, shorting it made sense. Its short interest was 140%, which is very high, showing how popular it was to short the stock.
What is a Short Squeeze (Extra Credit)
Okay, short squeezing is only interesting because it is the reason why Reddit decided to do pump and dump on GameStop. When more people are short than long, that drives the price of the stock down. The idea is that if so many people are short the stock, there’s no chance that owning it will be the right move, so people start selling.
A short squeeze is when everyone sees the depreciated stock price and decide that the shorts can’t be right. They buy the dip. The price then skyrockets.
So, you heard that right: Everyone thinks the price will go down, so it goes down, and then everyone sees the dip and decides that the stock should go up again so the price goes up again.
This is why r/WallStreetBets went for GameStop, and then later AMC, Nokia, and United Airlines. These are all brands that have not done well because of COVID-19, and had the majority of their shares short. So, they bought the dip. They squeezed.
What Happened With GameStop
u/DeepFuckingValue proposed inflating the GameStop stock in a short squeeze on July 27th 2020. The argument was simple: too many people were short, so the price was low. The analysis caught on in r/WallStreetBets and earlier this week, the dam finally broke and the price skyrocketed in a short squeeze.
There isn’t much to say about this other than that u/DeepFuckingValue likely didn’t know that this would happen when he posted the original analysis. I don’t know at what point this analysis took over the hive mind that is r/WallStreetBets, but when it did his name became synonymous with that of a God. He, and his acolytes, kept telling people to buy, buy, buy. The frenzy from retail investors was enough to inflate the price so that u/DeepFuckingValue’s position netted him 22 million dollars.
At some point, Robinhood and other retailer brokerage firms had to decide their response, and the response they went with was to limit how much retail traders could purchase of GameStop. This highlighted, once again, that the Hedge Funds have always had an advantage over retail: the Hedge Funds could continue to go long or short on GameStop, but retail traders could not. As of Friday, there is still a strict limit on how much GameStop stocks you can buy.
Why Every Player in this Game Sucks Except The Losers
Why I hate u/DeepFuckingValue
Good faith interpretation of u/DeepFuckingValue: He is an investor that thinks he can make money in a short squeeze, and thanks to the power of the Internet as well as some populist branding, he was able to pull it off.
My candid take on u/DeepFuckingValue: There is no “Deep Value” in a short squeeze. As highlighted above, a short squeeze only works for a limited amount of time, and only when there are enough people short and enough investors interested in inflating prices. At some point, the price collapses. So, u/DeepFuckingValue, under the guise of a populist revolt against Wall Street, has become rich on a method that will necessarily see a number of retail investors lose money. Again, any retail investor who joined the crusade against the Hedge Funds when the price was at $400 stands to lose 95% of their wealth if the price goes back to $20. He has invented a way of getting rich that will see everyone late to the bubble lose all of their money. This is the shallowest value imaginable.
Finally, the mystery player, to be revealed below, will show you how shallow u/DeepFuckingValue’s populist rhetoric is. His pump and dump may be punishing the shorts, but there are other Wall Street fat cats that are likely to make billions off of it.
Why I hate Melvin Capital
Good faith interpretation of Melvin Capital: Here’s what, I would be short GameStop too if I had the power to go short GameStop. The video game industry came into its own in the last two decades, and GameStop has found a way to reap zilch of that growth. Plus, it’s just an abusive company that chews through its employees. I am totally fine with it getting shorted into the dust.
My candid take on Melvin Capital: But, I’m not going to stan a Hedge Fund. It’s a Hedge Fund. It’s full of bullies and mean finance types. I am happy that they are bludgeoning billions, even if I agree on the merits with their financial positions and maneuvers, because it is ugly that there exist funds with billions of dollars whose whole job is to generate billions more dollars for other billionaires.
Why I hate Robinhood
Good faith interpretation of Robinhood: Robinhood has no way to win in this scenario. Its reputation has been marred by day-traders losing it all since WFH began. If you, like me, know that most retail traders are going to lose millions when the GameStop bubble collapses, and you have a reputation as a site where investors cheat themselves out of money, you would restrict risky trading too.
My candid take on Robinhood: Robinhood was always evil, was always on the side of the fat cats, always helped ensure that the Hedge Funds have the edge. They gave a $65 million settlement to the SEC because they did not show users the actual best stock prices. You know how I said above that Hedge Funds have Bloomberg Terminals that let them see the best price faster than anyone? Yah, Robinhood didn’t even try to give its users the best price.
Furthermore, Robinhood’s business model made it so they would always have to side with the banks.
Robinhood doesn’t charge its users. So, where does it get its revenue?
What Robinhood does is that it contracts with other brokerage firms and sells your contract to purchase or sell stock to that brokerage firm. That brokerage firm then buys the stock and transfers it into your account.
Robinhood makes its money by giving the big banks your orders. And so if the big banks decide that Robinhood users are screwing them over, Robinhood will side with the banks over the users.
And… Our Mystery Player is… Ryan Cohen
You don’t know Ryan Cohen. But Ryan Cohen is an entrepreneur with a controlling stake in GameStop. He purchased GameStop earlier this year and was able to inflate its price prior to any of the r/WallStreetBets shenanigans by promising, in his words, to make GameStop “the next Amazon.”
Ryan Cohen is everything I hate about the stock market. He buys a firm, talks a good talk, and then suddenly gets free money for it despite doing nothing. He hadn’t done literally anything with GameStop’s brand, but with a single press release this summer he inflated the price from $4 to $20.
Because of u/DeepFuckingValue, Ryan Cohen is now a billionaire. I don’t believe anyone deserves to be a billionaire, but if there’s one person who deserves it the least, it’s Ryan Cohen.
Don’t you get it? The game was rigged from the start! Anything that Reddit did to fuck the shorts was going to benefit the longs. Ryan Cohen was long. He’s a billionaire now. You can’t tell me this was a populist revolution when Wall Street crowned another billionaire.
Our Loser: Emma
You don’t know Emma either. She’s a trans girl I follow in Twitter. She’s very depressed, and very poor, and right now her life savings are in Nokia, AMC, and GameStop.
It’s retail investors like her that will be hurt when this house of cards falls down. She doesn’t know how stocks work, how they become money, she just knows that stonks are going up right now and she hopes so hard that she can make enough money from this to be free from her transphobic parents, to get the surgeries she needs, to be happy.
I don’t know what’s going to happen if she holds too long and the stock collapses before she can sell. She’s expressed suicidal thoughts before. I’m actually worried for her health if this bubble pops. This whole affair has been framed as Wall Street versus Main Street, but Emma doesn’t even live on Main Street. In this metaphor, she lives in one of alleyways, an incredibly marginalized young woman who thinks, for once, she can have something nice.
And Goddamnit, she deserves something nice! If I could give her the 22 million that u/DeepFuckingValue made I would in a heart beat. But she has entered into a compact that could just as soon fuck her over as it could give her the money she needs to live.
That’s the society we have made, a place where the poor need to gamble to see anything good in their lives.
Epilogue
If you know so much about stocks, why does u/DeepFuckingValue have 22 million dollars, and you don’t?
Because I have a gambling addiction.
Oh.
In October of 2020, I became a day trader. I was doing quite well for a short spell and quadrupled my money. I then lost most of it. I would take on very reckless buys because I craved the buzz that can only come when you allow fate and luck to dominate you, when you let the market take control. I am happy that I realized this gambling addiction at the age of 24 when I was unable to gamble away a lifetime’s worth of savings, when no one financially depended on me. I don’t make reckless trades anymore not because I don’t think that I could have 22 million dollars, but because deep down in my heart I’m convinced I can, and I know that I’d be willing to lose everything for a shot at it.
I think, at some point, I will write something longer and prettier about Robinhood and gambling, but there are a number of people in GameStop now who likely have a nascent gambling problem.
And Ryan Cohen is the one who benefits.