GameStop & Your Retirement

There’s no bigger story in 2021 than GameStop.   As social media powered Robinhood traders assault a large hedge fund there is quiet joy that Goliath is being slain by David.  

The underdog is winning.  Or so it seems.

And while the frenzy continues (though it’s unwinding quickly), the real question for many of you is: How will this affect my retirement?

Before we address that question let’s address what’s likely taken place with GameStop.

A relatively small and (soon to be it appears) obscure company, shorted by hedge funds (they are betting that the stock will fall and the company fail), suddenly rises as experienced and knowledgeable Reddit-connected traders buy into the stock causing pain to the hedge fund’s shorts.  This took time, building momentum over months.

As the stock rises quickly in 2021, a few hedge funds takes significant losses, as others take on new short positions. 

At the same time, experienced Reddit traders are likely selling their stock to less experienced investors distributing their positions across a large group of individuals.   As the stock drops hedge funds benefit from their newly positioned shorts while broad losses are spread over tens of thousands of inexperienced investors across the world.

Doesn’t sound like David beat Goliath in this example does it?

A few hedge funds lost money.  Experienced Reddit traders made money.  A few other hedge funds made money.

A large group of inexperienced investors will have material losses.  And the lesson of a lifetime.

So in the end money has largely flowed from the inexperienced to the experienced.  

Sounds like Robinhood? Not so much.

In a week, the whole story may be old news.  And the effect of such shenanigans will likely have no quantifiable effect on your retirement.  “Short squeezes” like this aren’t new to the world of trading and investing.  Most just aren’t this dramatic and well covered by the media.  But for you, in the end, likely irrelevant.

Photo by Michael Förtsch on Unsplash