* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
When trying to beat the Wall Street pros at their own game, they should be more than prepared to lose
Simon Youel is Head of Policy & Advocacy at Positive Money, a non-profit research and campaign group working towards a money and banking system which supports a fairer, more democratic and sustainable economy.
Even after a year of extraordinary upsets and twists, few would have predicted that struggling video games chain GameStop would become a headline news story that pitched Wall Street giants against an army of amateur investors.
The U.S. brand has become the centre of a bidding frenzy as the most prominent of a number of so-called ‘meme stocks’ backed by small-time buyers coordinating on social media, and which has raised profound questions about the nature of our financial systems.
The row began when bidders in the Wall Street Bets forum on the website Reddit noticed that funds were taking a short position on GameStop – essentially betting that the chain was sinking – and realised that if enough of them bought up they could leave major institutional investors suffering.
Shorting involves borrowing a stock from another trader and selling it straight away in the belief that you can buy it back cheaper when the price goes down. But if the stock goes up, traders are forced to buy back at a loss.
For a while the amateur traders’ gambit worked - GameStop’s share price rocketed, hedge funds’ losses reached billions of dollars, and the message seemed to be sent to those on Wall Street trying to profit from misery on Main Street.
Those who got involved at the right time got rich quick, and we all got to enjoy a bit of schadenfreude from Wall Street fat cats upset that their gambling had blown up in their faces.
Much has been made of how the amateur investors’ bets apparently constitute a financial storming of the Bastille - the symbolic event which sparked the powder keg of the French Revolution.
But it’s important to remember that with the French Revolution and the Republics that followed, the real winners in the end were not the workers, but the wealthier classes who went to war with the old regime.
Day traders cashing in on the boom have adopted the language of social justice, arguing they are on the side of the 15,000 GameStop workers whose jobs were at risk.
But the truth is that those who have been driving the GameStop mania are out to make money, and it probably doesn’t matter to them whether they make that money from the arrogance of hedge funds or the aspirations of their fellow individual investors.
Those on both sides of this speculative war of attrition won’t mind ordinary workers being sacrificed as collateral damage, or even outright cannon fodder. The hedge funds know they will put GameStop employees out of work if their shorting is successful.
But the day traders also have an interest in enlisting those who have never invested before into gambling money they can’t afford to lose, in order to buy the stock when its value is being ‘pumped’, and to be left taking huge losses when it’s ‘dumped’.
Beyond all the dramatic metaphors, it shouldn’t be so easy to forget that there are people actually risking their lives among all of this. And these are key workers, risking their lives not to wage war against the suits, but against a deadly virus during a global pandemic. And it’s unlikely they are the ones who are benefitting from stock market bets.
We need to be honest that the ‘little guys’ making money from all of this are likely the middle classes who’ve been lucky enough to continue comfortably working from home under lockdowns, giving them more disposable income and savings to throw into stock market bets.
Ultimately, the GameStop story is a side-arc of the broader uneven ‘K-shaped’ recovery, in which the response to the Covid pandemic appears to be fuelling very different fortunes for the wealthy and the working classes.
With many asset prices surging while incomes suffer under lockdown, it’s hard not to want to get involved.
When central banks appear willing to flood markets with endless quantitative easing, it seems as though there is indeed a ‘magic money tree’, just for those with enough wealth to use as a ladder to climb it.
It should go without saying that whenever asset prices rise it’s rarely the ‘little guy’ who is the real beneficiary. It’s those who already own assets and have the wealth to speculate who gain the most, at the expense of everyone else.
Those investing in ‘meme stocks’ like GameStop need to be honest with themselves and decide whether they are involved because they want to eat the rich or because they want to become rich. If you’re trying to do both, the stock market probably isn’t the best place for you to be.
Either way, when trying to beat the Wall Street pros at their own game, they should be more than prepared to lose. Perhaps the most important four words would-be traders should bear in mind is not the obvious truism of ‘buy low, sell high’, but ‘the house always wins’.
Our Standards: The Thomson Reuters Trust Principles.
