We Have Never Seen Anything Like GME (Well, Since the Last Time It Happened)

Back in high school, I worked a fairly thankless part-time job at a Chick-fil-A in Westdale Mall in my hometown of Cedar Rapids, Iowa. On my breaks I’d wander halfway down the mall to the mall’s videogame store, Software Etc. Eventually, after hanging out there enough on slow weeknights, I ended up weaseling my way into a job at Software Etc., though in true irresponsible high schooler fashion I didn’t quit my previous job so much as stop signing up for hours. Software Etc. had been tilting away from software and PC components and more toward video games with the acquisition of Game Informer magazine and EB Games, culminating in the local store eventually switching over to GameStop my senior year. It was mostly shelf stocking and some minor customer service, a far cry from the semi-pushy upselling the the brand would become associated with. In fact, my clearest memory was closing the store early on January 1, 2005 due to a blizzard, allowing me to make it home in time to catch the second half of the Capital One Bowl and witness one of the greatest plays in Iowa football history.

I’ve been asked a lot about GameStop and the astonishing journey that GME has been taking recently. The simple explanation is that some members of the WallStreetBets community noticed some exposed short selling of GME by a hedge fund and decided to get the community to put on a short squeeze in order to force a drive up in price. Basically, the hedge fund didn’t properly balance their position and a some retail investors figured it out and decided to take advantage of it by rallying a bunch of other retail investors into a (temporary) virtuous cycle of price increases. The truth is more complex than that: the core concept has spread to other stocks in order to replicate GME’s success elsewhere, the majority of trades are happening on Robinhood which makes its money by selling order flow data to…large hedge funds, torpedoing a hedge fund allows for other hedge funds to purchase them at a discount or supplant them altogether, and so on.

Dramatic run-ups are nothing new to the world of investing. Hell, we were being bombarded with stories of Bitcoin hitting $40k a little over two weeks ago. How much higher has Bitcoin risen since then? Well, it is down to $32k as of 1/26/21, a roughly 20% in just under half a month. Without the frothing masses clambering over one another to get their piece of the pie, the demand for Bitcoin shriveled up, leading to a drop in price. It’s a classic financial bubble, with price and financials decoupling from one another, and the former being driven by some sort of…exuberance that is not rational. GameStop is just the most recent, but a glance at the meteoric movements of Bitcoin, Tesla, tech stocks in the 1999-2000 bubble, Japanese stocks in the 1980’s, or practically anything in the stock market in 1929 pre-crash all see an overlap with GME’s current situation.

Financial speculation bubbles have been around as long as there’s been financial markets. Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor is a fascinating look at speculative bubbles throughout history, going from the Tech Bubble all the way back to the (possibly apocryphal) Tulip Mania in the 1630s. Throughout history the thrill of the chase for untold riches can temporarily suspend rationality in even the most even-keeled member of society. Look at all the additional purchasers of lottery tickets when the jackpot creeps toward half a billion dollars: the spending of a couple of dollars for a dose of speculative whimsy into what could be can easily be understood. I’ve never been much of a gambler at casino games, but as the brother of someone who has the devil’s luck at the craps table, there is a certain undeniable thrill into playing against the odds and winning, if even for a short period of time. At the end of the day, that’s what the GME short squeeze should be viewed as: a speculative gamble for everyone who didn’t get in on the ground floor. Maybe you’ll get lucky and win big on your stake, or maybe it’ll dwindle down to bupkis. Just don’t mortgage your future on a play into something that’s not highly speculative.

Sure, there are stories of early GME/TSLA/BTC/etc. investors who saw their investments double many times over into the rarefied air of millions and beyond. They are the exception to the rule, but their random success is magnified and spread like wildfire to fuel the irrational rise of the bubble. You hear about their $50k investment turning into $10MM, but what you don’t hear about is the inability of many to escape a self-serving bias and lose most or all their windfall by trying to replicate their massive one-time success. You hear about a Mega Millions lottery winner and their 9-figure take-home lump sum, but you don’t hear how 70% of large sum lottery winners go bankrupt in a few years. But most troubling of all, you get thousands upon thousands of people focusing so much on climbing one specific tree in the woods that they don’t notice the forest is on fire. The top 5 stocks in the S&P 500 make up a higher percentage of the index than the peak of the dot-com bubble. The US Cyclically-Adjusted Price-to-Earnings (CAPE) Ratio is higher than at any point ever outside the dot-com bubble. US debt is expected to eclipse the size of the US economy this year for the first time since WWII.

The Tulip Mania of the 1630s spread to corners of Europe far and wide, capturing the attention of people from all walks of life. Legends grew out of this fervor, one of which was forever immortalized by the equally-immortal words of Alexander Dumas in his novel The Black Tulip:

“A syndicate of Haarlem florists, hearing that a cobbler at The Hague had succeeded in growing a black tulip, visited him and after some haggling purchases the bulb for fifteen hundred florins*. No sooner was it in their possession than they threw it on the ground and trampled it underfoot. ‘Idiot!’ cried one of them when the astonished cobbler began to protest; ‘we have a black tulip, too, and chance will never favour you again. We would have given you ten thousand florins** if you had asked for it.’ The wretched cobbler, inconsolable at the thought of the wealth which might have been his, took to his bed and promptly expired.”

Speculate with money you can afford to lose, but keep on your investment path and don’t lose the forest for the trees, no matter what your local WSB shitposter says to the contrary.

* roughly $106k in today’s US dollars
** roughly $707k in today’s US dollars