Should You Buy GameStop? YOLO Baby!

I remember playing euchre on Yahoo! Games back in the 1990s. That’s when online games were new. “Where’s everyone from?” I would type in the game’s chat window.

“Toronto.”

“Arizona.”

“San Paolo.”

“Cool.” I would think. “I’m in Canada playing euchre with someone in Brazil.”  Remember, it was the 1990s. This technology was still brand new.

Text acronyms were new back then, too. You know: LOL, OMG, LMAO etc.  BRB popped up a lot during euchre chats. I had no idea what it meant.

I used to sound-out words like that. Just like Sesame Street taught me. BRB sounded a lot like “burp.” So I figured people were eating while playing cards. I honestly thought that. LOL!

I eventually figured out these words were acronyms. BRB was short for “be right back.” (I know… I was a big newbie back then.)

Today, acronyms are everywhere. I have no idea where they come from. Sometimes I’ll get a text message that looks like a cat walked over a keyboard.

Here’s a word I had to look up recently: YOLO. It means “you only live once.” (Of course it does! It always seems obvious after I Google it.)

YOLO explains a lot in the stock market today.

YOLO Baby!

There’s a whole crop of acronyms that investors use today. YOLO. FOMO (fear of missing out). TINA (there is no alternative). FIRE (financial independence retire early).

I get why acronyms are popular. Who wants to type out “for what it’s worth” on their phone? Just type FWIW. It’s faster. Easier.

Acronyms are shortcuts. And looking for shortcuts is a very human thing to do. Just be careful. Shortcuts can get you into trouble, too.

Like I said in my last post, 2020 was a crazy year for the stock market (i.e. the price of oil was negative at one point). It looks like some of that craziness is carrying into 2021.

ICYMI: GameStop

I got a lot of questions from clients asking about GameStop. If you don’t know, GameStop is a company whose stock soared to astronomical levels this year.

What makes this story so fascinating is the behind-the-scenes fight. It’s a battle between small retail investors and Wall Street titans. A classic David versus Goliath story.

GameStop stock was up as much as 2500% this year. That’s not a typo. Twenty-five hundred percent.

What happened? Did they discover a cure for cancer? No.

GameStop sells video games in strip malls. A bricks and mortar company that’s doing very poorly right now. In fact, COVID-19 pushed the company close to bankruptcy.

Yet the stock rose 2500%. What the heck is going on?

To understand what’s happening, you need to know a little about short selling. Here’s a quick lesson on that.

OMG: Short Selling 101

You probably heard the phrase “Buy low. Sell high.” That rule always applies in the stock market. You buy a stock low, then you sell it high to make a profit.

Did you know that you can sell a stock before you actually own it? It’s true.

In the stock market, you can “borrow” a stock and sell it first. Why would someone do that? Because they think the stock is terrible and the price will fall soon. Selling a stock before you own it is called short selling. And believe it or not, it’s legal.

As an example, think of Blockbuster Video (another bricks and mortar company). A few big players on Wall Street felt that online streaming would kill Blockbuster Video. They were right. Blockbuster eventually went bankrupt (RIP VHS tapes).

Here’s how short selling worked for Blockbuster: A Wall Street firm borrows 100 Blockbuster shares from a broker. Then they sell those shares (sell high). Remember: they think Blockbuster is terrible, so they want the stock to fall. Once the stock falls, they buy 100 Blockbuster shares from someone else (buy low). Then the Wall Street firm returns the 100 Blockbuster shares they borrowed.

GameStop’s business was in bad shape. So many Wall Street hedge funds shorted the stock. At one point, the number of GameStop shares sold short was 114%. That means over 100% of the shares were “borrowed” and sold short.

Now here’s the kicker: A massive army of small investors got together to buy up GameStop shares. These small investors coordinated things using an online forum on Reddit called WallStreetBets. All this buying from small investors made the price of GameStop stock go up.

When Wall Street hedge funds needed to return the GameStop shares they borrowed, they couldn’t find any to buy. That’s called a short squeeze. At that point, supply and demand takes over. Big demand for GameStop shares. No supply. That made the price for GameStop shares skyrocket.

The Wall Street titans lost billions on GameStop. Melvin Capital, a big hedge fund, needed a $2.75 billion investment after it lost a fortune betting against GameStop.

So it looks like small investors won this fight. But the war is far from over. Stay tuned.

Personally, I think GameStop is still a bad business. But the stock for this “bad company” still went up more than 2500%. Maybe I’m wrong. Only time will tell.

(Update:  As of Feb 4, 2021, GameStop was down over 85% from its peak this year.)

TTP: What’s your point?

Here’s my point: You’re not “investing” when you buy a stock that’s already gone up 1000%. You’re “speculating.”

Crazy speculation always encourages more crazy speculation. Now this craziness is spilling into Canada. BlackBerry is another company whose stock skyrocketed this year.

BlackBerry is a business that’s struggling, too. It also has a lot of shares that are sold short. (Short sale information is public information published regularly.)

Now BlackBerry is not GameStop. But you can argue that BlackBerry’s best days are probably behind it. That didn’t stop people from speculating, though. BlackBerry stock was up almost 300% this year.

In an article in the Globe and Mail, Andrew Willis talks about a post he read on Reddit.  “BlackBerry YOLO LETS GO I want to be free of this mortgage.” the post said.

I’ll admit. I don’t know the person who posted the BlackBerry YOLO comment. I don’t know if that person lost money speculating on BlackBerry. I don’t even know if that person is real.

All I know is this:

• BlackBerry stock is down over 50% since that comment was posted
• Nobody brags on Reddit that they lost their house betting on stocks

Final thoughts

Acronyms like YOLO might make texting easier. But investing is never easy. Be careful when you think you’ve found a shortcut to riches. It’s usually a road to heartbreak.

Epilogue: I was inspired after reading Andrew Willis’ article.  The Globe and Mail published my latest letter to the editor.