David against Goliath

It has been an interesting couple of weeks on the New York Stock Exchange, where an epic battle of David (as in the small investors on Robinhood and Reddit) versus Goliath (hedge funds and their billionaire owners) is unfolding. On one hand it is refreshing to see that private investors can unite against Wall Street’s behemoths, but on the other hand this also reminds me of the dot-com bubble which burst in 2000.

Social media has made it particularly easy for amateur investors to share their trading ideas, as has been shown in unprecedented fashion by the activity on Reddit’s WallStreetBets board and their action in unison which has seen the share price of GameStop rise by 2500% from just under $19 at the beginning of the year to a high of $483. This is really heard behaviour at its best, with thousands of American smalltime speculators ramping up the share price of one lacklustre company, all to the detriment of Wall Street institutions and professionals who had been shorting the stock and were haemorrhaging money by the billions.

But has it really been the ‘unsophisticated hordes’ pushing the share price up? Or were the hedge funds the culprits, trying to close their uncovered positions before losing even more money? And does it even matter? Whatever the reason, the events of the past couple of weeks have shown that amateur investors have managed, at least for now, to turn the tables on ‘The Suits’ (as in the supposedly intellectually superior and definitely arrogant Wall Street professionals). I have worked, a long time ago, for two decades as an equity trader in Geneva and London and experienced first hand some of the personalities that are so well characterised in Jordan Belfort’s memoir ‘The Wolf of Wall Street’.

Unfortunately this is unlikely to last. Not only has the SEC, the US regulatory body charged with protecting investors, started to look into the trading patterns of GameStop and other stocks whose prices were ramped-up, but some of the brokerage firms favoured by the Reddit-crowd took it upon themselves to limit the number of shares their clients could purchase. The hedge funds are also likely to have learned their lessons and will be particularly careful not to find themselves caught with their pants down – at least in the short term. Greed is a powerful motivator and I suspect they will soon enough be up to their old tricks again.

And what about the stock market equivalent of a flashmob? As GameStop’s share price has collapsed just about as quickly as it had exploded, it is quite likely that many of the late arrivals to the party are now nursing losses too, and, as a result, they may be more cautious in future. Furthermore they are not that many stocks which are as heavily shorted and can as easily be manipulated as this struggling retailer of computer games. It takes a rare combination of circumstances to create such a perfect storm.

20 years ago, at the height of the dot-com bubble, valuations of tech stocks were very frothy indeed. Every Tom, Dick and Harry had become a stock market expert, peddling the latest investment tips, and losing money was the hallmark of a successful dot-com business. Fast forward to 2021 and Tom, Dick and Harry are at it again, playing the stock market like there’s no tomorrow as events of the past couple of weeks demonstrate. Is this a bubble which is about to burst? I don’t know, but I certainly feel increasingly uncomfortable looking at dealing patterns such as those displayed in some stocks in recent weeks and valuations in general. It looks to me increasingly like the year 2000 all over again.