Short Squeezes for Dummies
One for the textbooks, not the big screen
I knew about the GameStop short squeeze because I started getting messages from friends asking me how to get started in day trading. Soon, I got emails from strangers, including a reporter for the BBC. That was fun.
But here’s the thing: the GameStop trade wasn’t day trading. It was a long-term trade, promoted by one Roaring Kitty, that turned into short squeeze. The squeeze made the thing take off.
While GameStop shares were a good value, Dumb Money really isn’t at first-run ticket prices. It’s worth seeing but wait until it comes on TV. The main reason for this is that the situation was very simple.
Short selling involves borrowing an asset, selling it at the market price, and then waiting for the price to fall before buying it back to repay the loan. The best short sellers do great research, and I enjoyed working with them back in the day. It’s a tough way to make money, because in theory, a stock can go up infinitely, but it can never go below zero. This means short sellers theoretically have unlimited risk and limited profit potential.
A traditional long-short hedge fund manager looks for one company that is doing poorly and another one that is doing well, then shorts the poor one and buys (goes long) the good one. This way, the risk of the market is eliminated (the short position benefits if the market goes down, while the long position benefits if the entire market goes up. Thus, the position is neutral toward the market.) For example, a fund manager might short a struggling brick-and-mortar retailer like GameStop and buy shares in the company that replaced it, Amazon.
Short selling seems crooked, but it’s not. No one likes people who bet on things failing, even though the short sellers aren’t responsible for the problems. I believe that good short sellers are good for the market, because they do their research and maintain efficiency. The movie takes the position that short sellers are bad. In the writers’ favor, one of the short sellers involved is Ken Griffin, who got a lot of laughs at a Chicago showing. (Griffin, who spent a crazy amount of money trying to become an Illinois political player, failed but caused a lot of damage in the process, then packed up his toys and moved to Florida.)
Keith Gill, the protagonist, works as an analyst at Mass Mutual insurance. He loves stocks, and he starts a YouTube channel where he discusses his ideas and shares his balance sheet. He has a goofy schtick, the better for likes/shares/subscribers. He makes a case that GameStop is undervalued because Wall Street doesn’t understand what gamers love about the company nor the assets on the balance sheet. Hedge funds, meanwhile, shorted the company because they see a company nearing bankruptcy.
And then, it’s a pandemic, people are bored, they have stimulus checks, and they find out about this dud pushing GameStop. And the rest is history.
The movie leans too hard into Keith Gill as a working-class hero in a way that becomes predictable. His parents have working class/middle class jobs (truck driver and registered nurse). But Gill has an upper-middle class job and is a CFA charterholder. He knows what he’s doing. (And he definitely has a conflict of interest with his employer.) Pete Davidson plays his screw-up brother, Kevin Gill, and watching Pete Davidson is always a treat.
The GameStop traders were rewarded, handsomely, but the situation is unlikely to repeat for several reasons. One is changes in regulation. The regulators want to prevent another massive short squeeze not because it doesn’t want small investors to profit, but because if big institutions fail, we’re all screwed.
Besides, retail trading isn’t the way to stick it to the big banks. Instead, the way to go is indexing, which offers better risk-adjusted, fee-adjusted returns than most active money managers with very low fees. Likewise, the way to screw your bank is by paying your loans off in full and on time. Keep your account balanced, too, so that the bank never collects an overdraft fee.
In other news, I was driving this morning and thinking that there aren’t any new songs that reflect my life the way it is now. The Sirius XM satellite picked up my brainwaves and played the new Blink-182 song One More Time. It’s perfect.