Oh dear. Some financial institutions are upset that some individual stockholders figured out how to play the market taking advantage of the institutions’ techniques. The big players are upset that others have begun beating them at their old game. Simply by buying and selling in just a particular way the stock price of GME (Gamestop, the strip mall game store) rose dramatically, making money for the individuals and potentially making the institutions lose billions. As one comedian put it, the tiny violin factories are getting busy. Such is the changing nature of the US stock market which may be about to enter a revolutionary period. Or not.

Here’s my overly simplified (yet sadly long) interpretation of what happened to GME.

Believe it or not, it is legal and allowed to sell shares you don’t own. Why do that? Do that if you think the price will fall. Instead of the conventional ‘buy low sell high’ it is ‘sell high buy low’. How do you sell something you don’t own? Borrow shares from a shareholder (who probably thinks you are wrong), and buy them after the drop. There are a few problems with that. One) Selling short is betting on failure, and can be a self-fulfilling prophecy because as the price goes down, the company’s ability to borrow money for growth also goes down. Two) Some short sellers will promise to borrow shares – eventually. It becomes possible for too many promises to be kept, too many shares borrowed than can ever be found. Three) The most a long-term shareholder can lose is 100%, but short sellers can have unlimited losses as the price goes up.

Imagine being a shareholder in a company that you consider to be promising that someone else thinks will fail, or can be made to fail. You’re ready to wait for years but the shorts think they can make money now. A shorts’ attack can ruin innovations and growth, making billions for the shorts without regard for jobs, lives, or solutions. From what I’ve heard, the shorts were hoping to make money on GME because it relies on sales at their physical stores, and more gamers are buying and downloading rather than driving to the mall. As an investor and shareholder, you might be more than a little upset if you think the company has a profitable strategy.

Imagine being an upset shareholder thirty years ago. About all you could do would be to go outside and scream at the sky. Now, scream online and probably find others screaming, too. Rather than play the institutions’ game of short seller, however, a crowd of investors realized that one way to literally make the short selling institutions pay was to drive up the price. Buy. Buy. Buy. If the institutions could be forced to sell above the prices they bought at, the institutions would lose money. One report mentioned about $5B in losses. That probably exceeds most SEC sanctions from previous cases, didn’t require political lobbying, and maybe made money for some of the long term investors, too. If the shorts promised to borrow more shares than existed, then there can be a scramble to buy buy buy to limit losses, which ironically drives the prices up.

Trevor Noah (The Daily Show) produced an excellent interview of Doug Henwood better describing the macro-view that includes Fed funds, another bubble, and the need and futility of investing reform. They mentioned one thing in particular, if a crowd of individual investors lose billions, it is taken as a sign of their amateur status, but if institutions lose billions they ask for financial aid from the government – and might get it.

I’ve been watching with some interest because I’ve seen similar losses ignored. Even when the losses were manufactured by felonious manipulation of the stock price, all the individual shareholders can hope for justice, not recompense.

This is the nature of individual investing, or at least that was the situation.

The stock market is supposed to operate openly, fairly, honestly, legally, and without collusion. Sounds like a good idea. The market is really driven by greed, fear, privilege, bias, power, and greed. Did I mention greed? Greed. Markets were developed to allow company owners to sell bits of their companies (shares) to raise money for creating, growing, and maintaining the business. Technology shifted that. Computers made it easier to analyze every company, not just a selected few. Understanding one industry well was less profitable than finding the best leverage regardless of industry. The stock became more important than the company. Connect the computers via the Internet and the speed of trading accelerates to the point that there’s no need for traders to appear in person on a trading floor. Automate as much of the process as possible, and the computers can analyze, select, and execute trades faster than any human. Get more sophistication into the system and institutions can buy long and sell short at the same time for the same stock in ways that ‘hedge their bets’. Individual investors become increasingly disadvantaged.

(Personal note about my personal finances: That’s why I invest in companies that most of the market decides to ignore, at least for now. Even though institutions could analyze every stock, there are institutions that are restricted from buying or selling companies that are too small. That’s where I go shopping.)

And now add discussion boards, places online where shareholders can share notes, analyses, insights, tactics and strategies, rants and raves. GME’s shareholders found allies on a reddit.com board. (Check my Semi Annual Exercise EOY 2020 for the boards I track.) Get enough disgruntled people together and they might just try something, as they did with GME. I don’t know the details of those conversations. I don’t need to. I do know, however, that the stock jumped over 1,200% in the last month, and over 5,500% in the last year – and that is down ~50% from the peak. Shorts got burned.

There’s an argument to be made that what just happened was collusion, which is something the SEC can investigate. There’s a counter-argument that the combined assets deployed by the individual investors was small compared to the assets deployed by even one institution. If ten individuals are working together does it matter if they are all on the same institution, across more than one, or are ten people with personal finance plans? Should the SEC investigate everyone? That might be necessary for reform on a scale similar to uncovering governmental corruption or domestic extremists. Should the SEC only investigate the individual investors? That would be more ammunition for the battle between the haves and the have-nots. Should the SEC hold back and implicitly allow an abuse of the system that was developed to invest in companies and the country’s future rather than simply being a money manipulation scheme? That question may be the fundamental perspective that underlies what happened with one stock within one year. Do the rules only get enforced for this one stock this one time, or is this a return to enforcing regulations systemically, or is this the opportunity for a reform that would challenge major sources of wealth and power in the US?

Back to the personal side of personal finance. As I mentioned in my Semi Annual Exercise EOY 2020 at the end of 2020; my portfolio is “up 170% in six months and 300% in a year”. Is that because all of those companies made that much progress, or because they were overlooked but aren’t now, or because (as mentioned in the video above) the Fed has put ~$5T into the financial markets, or now I wonder if something similar to GME is happening with MVIS and LCTX in particular? Is this yet another bubble like the others I’ve seen over the decades? We are about due.

The essence of investing is buying and selling. I appreciate the appreciation in my portfolio, but I am not planning to buy more or sell what I have. I don’t have any casual cash, and by my analyses my companies and their stocks are probably undervalued based on ‘Present Value of Future Revenues Discounted For Risk’. (Details in my book, Dream. Invest. Live.) I am watching, but I am not acting because I am an investor. The closest I come to speculating is in buying stocks in companies that aren’t profitable, yet. Without profits they are harder to analyze, and computers like having numbers to analyze, which gives me an opportunity to buy low and eventually hopefully sell high. (The book includes examples of when that worked and when that didn’t.)

The story behind GME is handy as an insight into the way things were done, can be done, and might be done. This could be the event that leads to a more equitable way to trade equities. Or not. Entrenched institutions have erected impressive battlements. But even without reforms, it looks like the country-folk might have found a way into the fortress.

“Miracle Max: Have fun stormin’ da castle.
Valerie: Think it’ll work?
Miracle Max: It would take a miracle.”

– Princess Bride, IMDB.com