Game Theory - GameStop Made MILLIONAIRES Overnight... Now What?

Episode Date: June 5, 2024

Join former Game Theory Host MatPat as he breaks down the situation revolving around Gamestop stocks and how they went to the MOON! Credits: Writers: Matthew Patrick and Justin Kuiper Editors: Dan "Cybert" Seibert, Pedro Freitas, Forrest Lee, Tyler Mascola and Shannon (Bomb0i) Assistant Editor: AlyssaBeCrazy Sound Editor: Yosi Berman

Mmm, get em. Eat lead, you gup. Huh, looks like one of the stocks I bought this morning just went up by 10%. Dang, I'm getting pretty good at the stock picking thing. Let's see, if it went up 10%, that means I could sell it right now for a neat profit of $6. Yeah. All right. Stop right there. S-E-C.

Wait, are you part of the Securities and Exchange Commission, the government agency responsible for protecting investors? That I am. What you're about to do is a violation of the money. margin rules of the financial industry regulatory authority. Uh, what are you talking about? Surely it's not illegal for me to sell a stock that I just bought. I've done this several times already. Exactly.

Executing four or more trades within a five business day period makes you a pattern day trader. That has a minimum requirement of $25,000. So simply deposit that amount into your trading account and you can go on right ahead. Wait, whoa, hold up there. I just got 200 bucks for my parents for my birthday. I just thought it'd be fun to try and make some money trading stocks for a bit. These protections are for your own good, Pleb. They're there to protect you from making bad investments.

We can't have uninformed consumers trying to become day traders and potentially wasting their money. But it's my money. That I need to protect. And I'm not uninformed. I did my research on the companies I'm investing in. I know what I'm doing. Clearly not. If you did, you'd be wearing a suit and a Rolex and be trading with $25,000, like I said.

You do realize that the stock market is just gambling, right? How does investing more protect me? Like, what if I were to take that $200 and spend it, I don't know, rolling for new characters and Fire Emblem Heroes? Or better yet, put it on the blackjack table in Las Vegas. Yeah, that's fine. Go right ahead. Hmm. Internet, welcome to stonk theory.

The show that remembers when the game stopped down the block was still in EB Games. Whoa, hey guys. Welcome to E.B. Games. I also have a long enough memory to recall that period of time when pretty much everyone online hated games. because they would offer you like a buck 13 for your trade-in of 15 games. But now clearly we are in the end times. H.E. double hockey sticks has frozen over as the internet has rallied behind GameStop.

Its former nemesis as this glorified home of used games and funco pops has become the battleground in the war between billionaires and the every man. You know I was gonna cover this story, right? Something weird happens with the US's biggest gaming retail store that involves a bunch of gamers on Reddit, a gaggle of angry Wall Street bigwigs, billions of dollars, and even opens the door to Reggie Fisome memes? This was, as Thanos would say, inevitable. So are you ready for a crash course and everything that's been going on? Because if you are, then you'll see how this massive GameStop drama that we've seen unfold has forever changed the face of the US economy.

If you've just come back from a month-long internet break or something, here's the broad strokes overview. And don't worry, we'll get into the details here in a minute. Basically, you have yourself two groups. In this corner, you have yourself Team Internet, a group of individuals led by a handful of determined Reddit users, who've inspired a massive number of people to buy a very select set of stocks. In short, they're placing their bets quite literally on the future success of a handful of companies. That's just the normal way of play in the stock market. So what's the big upheaval here?

Well, the businesses they're choosing to back are, well, they're not considered to be all that great. Struggling companies like AMC theaters, Blackberry, Nokia, Bedbath, and Beyond, And the most prominent of all, GameStop. By doing this, they've managed to drive the price of all of these stocks up. And when I say up, I mean, holy geez, that even coronavirus cases has a vertical spike like this. GameStop stock has shot up nearly 1,500% in the last month, 2,600% in the last three months,

and almost 7,500% in the last year. From $3.84 per share to today, where it's $3.85. To give you a rough sense of this, if you had bought $1,000 worth of GameStop stock a year ago, today it'd be worth nearly $86,000. Wonder why it's been trending on Twitter for over a week? That, my friends, is why. And this is driving rich investors crazy. You see, in the other corner, we have ourselves a set of Wall Street hedge fund managers.

Don't worry, I'll explain what that is in a minute. These rich Wall Street guys had actively bet against GameStop. They bet that the company was going to die. that its stock would go down. And when I say the word bet, I do mean bet. When you put money in the stock market, you are literally betting on the success or failure of a company, just like you bet on getting closest to 21 in a game of blackjack,

or landing on red in a game of roulette. And so these guys bet a lot on the fact that GameStop would crash and burn. And now it is not. It is most decidedly doing the opposite of crashing and burning, which means that they've lost their bet and lots and lots of money. and the internet is blowing up about all of it. But what is really going on here? And how is all of this going to change the face of the stock market moving forward?

Well, let's talk about it. To begin, we need to understand where GameStop has been as a company. COVID has not been kind to retail businesses. And in the last year, we've seen everyone from mom-and-pop restaurants to mega chains like J-Crew and Guitar Center filing for bankruptcy. GameStop, well, not actually being bankrupt, has been on a downward trend since 2018. It went from $8.3 billion in revenue in 2019 to $6. $1.5 billion in 2020.

And mind you, that was a year with major console launches. Wauser, bowser, I mean, just last week I did an episode about how good 2020 was for the games industry. And yet, here's GameStop hemorrhaging money. They also announced that they had closed a whopping 462 retail locations, with hundreds more locations planned to close before April of 2021. So when a few hedge funds put in bets against GameStop, that doesn't really seem like it'd be that bad of a bet, to be honest.

So how do you bet against a stock? You see, hedge funds aren't like regular investments. Regular investments are things like stocks and bonds and mutual funds, the stuff that your dad's stock broker buys. All investments are risky to some extent, but they're not that risky. Over the long haul, the stock market generally goes up, so by the time you're ready to retire,

you can take your money out after 45 years of it slowly cooking away in there and be pretty okay. Hedge funds, though, are not your grandma's retirement account, or hopefully they're not. things tend to invest in all kinds of crazy stuff. They're called alternative investments, but not cool alternative like Weezer or The Cure. I mean alternative like speculating, which is just a fancy investment word for much riskier bets. And hedge funds take big, and I do mean big risks, with millions, if not billions of dollars tied up in these speculative

bets. If it seems weird, yeah, well, you're definitely right, but the people who win big in hedge funds are the people who do things like buy yachts and gold-covered steak. It's kind of like Mr. Beast. except, you know, minus the humility and irony. Like, these are the people who are unironically spending $100,000 on a golden ice cream Sunday. So hedge fund managers, people who run the riskiest investments in the world think GameStop is safe to bet against, and they do a kind of funny investment called shorting. When you short a stock, you don't actually buy the stock, you borrow it. Sort of like how you borrow a library book.

It's super weird, so hang with me for a second. You get paid the price of the stock at the time that you borrow it, let's say $10. And since you're borrowing it, there's also an expiration date on it. You gotta return that thing. Your hope is that when you check out your stock, the price is high, and when your due date comes, the stock has fallen and is now worth much less. That way, you keep the difference, and now you've made a ton of money. If it doesn't really make sense, don't worry too much about it, just take away this.

When you short a stock, you're betting against it. You want it to go down. But the problem is that if you're wrong, very wrong, and that stock doesn't go down, but instead goes up, Well, you still have to return the stock on its expiration date, and you have to pay whatever it's worth at that point. So if you short a stock when it's $10, maybe you hope it falls to three, and when you return it, you keep $7.

To-ching, you go buy yourself a fry and a frosty. But if you short it at $10, and now it's $100, well, you've made yourself a big oopsie. You now owe that $100 and not the $10. And the higher that stock goes, the more you have to pay. The biggest risk of a short stock is that your losses are essentially infinite. That stock can go as high as it wants, and when the due date comes, you have to pay it all back. And jokes on you, anytime it goes above your original shorting price, you're also paying interest.

Making it worse, there's no way out of it. See, before you make this very risky bet, the brokerage firm that you borrowed from needed to make sure that you could pay them back. So you had to prove they had a ton of cash on hand before you even made this deal as collateral. If the stock goes so high that you hit your cash limit, well, the broker will actually force you to, to buy the stock back, even if it's worth multiples more than you paid for it. They basically clean you out of everything you have. See? I told you that hedge funds were risky business. So if it's so risky, why would all the big brain financial experts at hedge funds be doing it?

Well, first off, with big risk comes the potential of big reward. That's just the potential of gambling. But it may help things that the system might kinda be rigged in their favor. And that's not my words, take it from Jim Kramer, host of one of the most famous investing shows on television mad money. A lot of times when I was short at my hedge fund and I was positioned short, meaning I needed it down, I would create a level of activity beforehand that could drive the futures. It doesn't take much money.

That interview on The Daily Show, by the way, is one of the most uncomfortable but amazing gotcha takedowns that I've ever seen happen in a live TV broadcast. Basically what he's saying here is that by shorting the stock, it drives it down. And then, by the nature of being an influential hedge broker, you could, Say, go on TV or tweet out the fact that you just shorted the company because you think it's going to go down. That would in turn cause the viewers at home to start selling their stock, which would cause the price of it to go further down, helping to ensure that your risky bet isn't quite as risky as it first seemed,

and instead pays off big time. You're basically creating a self-fulfilling prophecy, which borders on market manipulation, which is illegal, so I'm not saying anyone actually did anything like this, and I'm sure the SEC was totally on top of all of this. I'm just mentioning it here because it's been something people have been discussing as a part of the wider issue. Anyway, with the GameStop fiasco, it's actually a self-fulfilling prophecy in the other direction. This group of Reditors, by standing together and getting everyone to successfully buy and hold massive amounts of GameStop stock for multiple weeks,

have forced the price to go up a lot. And during that time, all those hedge fund managers who bet against GameStop have lost up to 1.6 billion. That's billion with a B per day. In fact, one of the most aggressive funds, Melvin Capital, had to be bailed out by fellow firms to the tune of $3 billion. And here's the kicker, friends. Remember that hole when it gets too high and you hit your cash limit, you're forced to buy it thing? Well, all those funds are hitting their limits and having to pay the Piper. By forcing funds like Melvin Capital to close their positions,

that is, turn in their library books early to buy the stock at its super high price, Reddit has basically forced people who didn't want to buy GameStop stock to pay for a huge amount of GameStop stock, which in turn drives the price up even more to benefit Team Internet. This is the short squeeze that everyone's been talking about over the last few weeks. So that's pretty much everything in broad strokes. There are of course other nuances here, like how Melvin Capital tried to double down by short selling the stock even more in an attempt to push the price back down, which ended up backfiring in a huge way. But at this point, you largely get everything that you need to understand.

So what's the takeaway? Why cover this on game theory? You know, I always have to come to some grand sweeping conclusion to make this all worth your time. So what is it in this case? Why did I take you on this little adventure? Well, two things. First, let's talk about GameStop itself. Well, all of this is being framed as for the memes,

and while Wall Street has tried to discredit the Reddit users as an angry mob of sex-starved amateur investors, no joke, GameStop really wasn't that dumb of a bet. Again, none of this is meant to be taken as any sort of investing advice. I'm just actually looking at the company. At the beginning of this episode, I told you how badly GameStop is doing. If that's the information that you're going on, hedge funds are making the right call. In order for GameStop to survive, it needs to completely reinvent itself. And in 2020, that's exactly what it started to do.

No joke. It started with several drastic changes in leadership. Probably the most headline worthy of these came back in March when Reggie Fissime, the former president of Nintendo of America. Yes, Mr. My Body is Ready himself announced that his body was ready to join GameStop's board of directors. And over the past few months, GameStop has been adding more members to its board of directors, including three from Chewy Inc, an online pet food retailer. Seems like a weird fit, right?

Not really. Chewy is an online store selling physical goods that people traditionally bought at retail stores, pet supplies. Now, instead of going to a store, Chewy has become the mecca for keeping your pet happy from the comfort of your couch. GameStop needs to do that exact same thing to survive, and they're aligning themselves with the people who have the experience to get them there. And with that added bit of context, I think you can start to see that while closing hundreds of stores may make for a scary headline, it makes for a positive bottom line. Fewer stores means fewer employees, fewer overhead costs like rent and utilities, all while meeting the customer exactly where they want to buy things online. And as it turns out, GameStop's e-commerce building has exploded over the past year. According to its most recent investor reports, their e-commerce revenue is up over 250% compared to the previous year.

That is a huge jump. For reference, in recent years, Amazon has only posted 30 to 40% year-over-year growth, and that is considered big. As I'm writing this, GameStop is now valued at $22 billion. And who the heck knows where it's going to be by the time this episode goes live? Is it a bubble? Probably. But GameStop's previous valuation of $285 million, yeah, that's million with an X amount. also seems pretty far off when you consider that its revenues were still above $6 billion. And that's where it was last summer when hedge funds like Melvin Capital started shorting it.

And I'm not alone in thinking this either. Michael Burry, the guy who correctly predicted the 2008 housing crash and ended up making a fortune, has been expecting GameStop to go up for years. So much so that he quietly purchased over 5% of the company back when it was trading for between $2 and $4.20 per share. Given that in January, the shares are now selling for between $200 and $400 a share. I'd say made the right call. By the way, if you don't know his story, go watch The Big Shorn. It's this incredible movie about exactly the sort of stuff we're talking about today.

Actually, feels a bit like a big budget version of game theory, funny enough, the way they explain things. But point number two, and to me, the most interesting part of all of this, is how things changed from here on out. This was obviously a bit of a blindside for Wall Street, to put things lightly. But the thing is, it was always a ticking time bomb. See, any hedge fund over $100 million has to disclose its holdings at the end of every quarter. So the kind of information that led to this short squeeze has always been out there. It has always been publicly available. Heck, there have been articles for a long time about how to copy hedge funds by reading about their published holdings.

All you needed was a group of individuals who could unite and put that information to use. And Reddit cracked the code. The GameStop drama has shown that the internet can create success. Successful investor collectives that can win big, which essentially means that we have ourselves an entire new class of investor on our hands and they are here to stay Unless of course the SEC decides to regulate them out of existence Ha ha that's not funny that said don't expect the sort of thing to happen again friends the hedge funds have already gotten smarter Andrew left the CEO of Citron another hedge fund that lost 100% of it short against GameStop made an announcement that his firm would stop putting out reports on companies it believes are failing and would instead focus on positive narratives. He said, quote,

we started Citron to be against the establishment. We've actually become the establishment. The Citron narrative is gonna have a pivot. I mean, who knows if it's true, but they are not gonna want to make this mistake again. And considering that they have to make their investments public, there's only so much that they can do to hide. They're just gonna have to take positions that are harder to attack or further out of the reach of collective investors. In short, though, this is a huge moment. A massive financial victory for some, they sell while the stock is high, but a symbolic victory for everyone else. The foundation of another impenetrable ivory tower has been rocked by the forces of the internet, which I gotta say is a pretty cool thing to have witnessed.

And hey, here's the last thing I'll say, if you happen to be one of the lucky people who did manage to make like seven figures off of GameStop in the last few months, consider taking a piece of that and paying for someone's college loans, or donating money to people who've lost their jobs or businesses in the last year. Because that, my friends, is when the last year, little guy really wins, not just the at-home investor who made money off of one big gamble, but when it's paid forward to the people who never really had that money to invest in the first place. But hey, that's just a theory. A game theory! Thanks for watching!