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The Carr Report: What was the big fuss surrounding GameStop?

by Damon Carr, For New Pittsburgh Courier

I’m a little late in covering this topic, as I was late in purchasing shares in GameStop. Actually, I wasn’t late on purchasing GameStop; I never bothered to purchase any of the stocks. What a miss! Or was it?

Once GameStop became the leading news story on all major networks and publications, my wife asked me, “Are you upset we never purchased any stocks in GameStop?” I replied, I honestly never even thought about it. Neither the thought of purchasing GameStop stocks nor the regret of missing out on the potential windfall that could have been made from GameStop ever crossed my mind. Here’s why.

Unless you dedicate serious man-hours to researching and tracking companies and their respective stocks on a daily basis, NO ONE really knew what was going on with GameStop until it became major news. Once it becomes major news —there’s a high probability, it’s at its peaking point. Even professionals who track companies and their respective stocks daily such as the hedge fund managers don’t get it right 100 percent of the time. Otherwise, they would’ve never “shorted” the stock thinking it would continue to decrease in value.

Now the question becomes, will those who caught the wave get out in time to realize their gains? Or will they maintain what is known as “Diamond Hands” and ride it out until it starts dropping and then completely crash? Those who were late to the party; are they going to purchase stocks when it’s near its peak? If so, at what point will they seek to exit the frenzy? Sounds a lot like “market timing.” I personally believe that “time in the market” is a more predictable, more stable investment strategy than timing the market.

Over the past several weeks, we observed GameStop stock soar 1,800 percent going from $17 per share to as high as $483 per year. That’s insane! Let me put this in plain dollar language for you.

If you owned 1,000 shares of GameStop stocks when it was trading at $17 per year, its total value was $17,000. $17 per share times 1,000 shares = $17,000. If you held on to the stock when it was trading for $483 per share, its total value would have been $483,000. $483 per share times 1,000 shares = $483,000!

That’s a $466,000 increase in value taking you from small change to a half-millionaire —on paper. If you didn’t sell and realize your gains hoping stock prices would soar even more, you may be upset.

As I write this article, GameStop stock is currently trading at $62 per share. So that same 1,000 shares of stock is currently worth $62,000, more than the $17,000 initial value, but a far cry from the $483,000 at its peak.

What happened? What’s all the fuss surrounding GameStop? How did it become newsworthy?

GameStop, a gaming company that sells video games, gaming accessories and gaming systems, has been losing market share over the past several years.

I have two sons. One has a PlayStation. The other has an Xbox.

They play video games every day. Interesting enough, I haven’t bought a video game from a retail store in over five years. In this digital-age environment, my sons download all of their video games. Practically all families are doing the same thing. Combine this with COVID. Nobody is going to the mall. End result, the GameStop business model has become obsolete. They’re losing money year after year. In 2019, GameStop reported losses of $800 million. In 2020, GameStop reported losses of $500 million.

Hedge fund managers who are professional investment managers manage large investment portfolios with sophisticated investment strategies. Many of these hedge fund managers have been eyeballing stocks such as GameStop, BlackBerry, and AMC Entertainment. They believe that these stocks were overvalued.

They’re betting that these stocks are going to continue to decrease in value. So they “shorted” GameStop stocks…meaning they borrowed stocks and sold them for say $17 per share. They planned on purchasing the stocks back after they dropped by a specific dollar amount per share in an effort to earn a profit.

Let’s say, they planned on purchasing stocks once it dropped to $10 per share. The difference in price per share when they borrowed the stock versus price per share when they purchased the stock is their profit—minus fees and expenses.

Let’s assume one hedge fund manager borrowed and sold 100,000 shares of GameStop at $17 per share. Let’s further assume the value of the shares dropped to $10 per share. They purchased 100,000 shares to pay back the borrowed stock. $17 per share times 100,000 shares = $1.7 million (shorted or borrowed stock) $10 per share times 100,000 shares = $1 million (purchased stock). In this example, hedge fund managers would have profited $700,000.

Only problem, the price per share didn’t go down. Price per share went up. Way up—to the tune of $483 per share, creating a short squeeze! Using the same example, in order to pay back the 100,000 shares of stock they borrowed at $17 per share for a total of $1.7 million, they would have to purchase those stocks at $483 per share for a total cost of $48.3 million. Imaging borrowing $1.7 million but owing the investment firm $48.3 million. Ouch! Worse! Hedge fund managers’ potential loss was in the billions!

What created this frenzy?

A group of layman investors on Reddit’s WallStreetBets chat room forum.

Before the frenzy, there were 3.2 million members in this chat room. It’s now over 8 million members and growing. Somehow, someway, members within this group figured out that the GameStop stocks were being shorted. They rallied together to purchase shares of GameStop stock, which created demand in the stock, causing the price to surge big time!

It was a crazy ride. In the end, the Wall Street pundits are very well connected. The funds they manage represent pension funds, endowment funds and insurance funds, etc. When hedge fund managers lose money, it’s really the big institutional investors that lose money. Phone calls were made. The media caught wind of it. SEC regulation required Robinhood to increase their liquidity position.

Long story short, we witnessed GameStop’s stock price drop 70 percent in 90 minutes allowing many of the hedge fund managers to right their position and ease their losses.

I read a few stories of everyday people who got out in a nick of time to reap huge gains. However, I’m reading countless stories of people who didn’t time the market properly and watched their statement go from upwards of $1 million to $30,000.

Then there’s one story that caught my attention. New York-based hedge fund manager Senvest Management. They never shorted GameStop. In fact, they got on board with the layman investors and rode the mania, making $700 million in the process.

(Damon Carr, Money Coach can be reached @ 412-216-1013 or visit his website @ www.damonmoneycoach.com)

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