Introduction

Manipulating stock markets, attempting to make money independent of any realistic valuation of the stock in question, is deeply wrong, and creates stunning amounts of damage. Most often to the little guy. That’s what’s happening with GameStop.  

That is the subject of today’s 10 minute episode.

Continuing

What is behind GameStop is market manipulation, more specifically a pump and dump. More than a little reminiscent of a Ponzi scheme or a chain letter. 

The mythical Robin Hood took money from the ruthless, undeserving rich, and gave it to the downtrodden and disposed. The Sheriff of Nottingham was the strongarm for Prince John, the embodiment of the evil, undeserving rich.

Today, Robin(hood), an online broker, offering a no-fee way to buy and sell stocks, and its band of Merry Day Traders, orchestrated a short squeeze, with the avowed intention of simply punishing hedge funds, today’s Sheriff. With today’s Prince John presumably being the “system” which is always unfair to the little guys. 

Here’s the scene that many imagine when we think of GameStop. The hedge fund pro shows up at work, having been driven there by a car service. His grande latte is handed to him as he heads to the conference room, filled with massive computer screens and data analysts. His boss, a Goldfinger type, announces that they are going to make billions by shorting GameStop (GME). And off they go. The lonely day trader is sitting at his kitchen table, home from work because of COVID, using his Chromebook to look around for something he can afford to buy that might allow him to make a few dollars. And miracle of miracles, the day trader wins, makes tens of thousands of dollars while beating the hedge funds at their game. That’s a fun scenario, and it brings a smile to my face. We all love a successful underdog. And we’ll get back to this.

Let’s take a pause for some definitions: 

Hedge Fund. Big, private money.

Short selling. A bet that a stock is overvalued and will go down. Short sellers, “shorts”, borrow shares, then sell them, contracting to give them back at a certain date–plus interest. If the stock goes down, the shorts make the difference between the price of the stock when sold and the lower price when they bought the contracted number of shares to return to the lender. 

Going long. Betting that a stock will go up. This one is simple: buy the stock you feel is undervalued, then wait and see.

Short Squeeze. If a shorted stock starts to rise rapidly instead of falling, the shorts will scramble to buy enough stock to cover their positions. The shorts scrambling to buy drives up the price, and encourages others to jump in and buy as well. This can cost the shorts stunning amounts of money. Here is an example. If you buy 1M shares of stock at, say $4, the most you can lose is $4M. If you short the same $4 stock, and it rises to $104, the loss is $100M. 

Honest stock buying and selling. Putting your money down, betting that you have correctly assessed a stock to be either overvalued, or undervalued. 

Stock manipulation. Using the power of large amounts of money to push the price of stock either up or down, entirely independent of what you feel the real worth of the company’s stock to be in the market. 

Pump and dump. Big money buying heavily into a stock with the intention of driving it up well past its real value–then dumping it for a huge profit. Ignoring and not caring for the people who lost as much as you made.

Short selling is an honest way to make money if you believe a stock is overvalued. Additionally, it sends a useful signal to anyone paying attention that the stock in question may be overvalued. Going long is also an honest way to make money if you think a stock is undervalued. And it, too, sends a useful signal to the market.

Now, let’s look at some facts about GameStop as published by the Wall Street Journal: 

“The stock rose over 1,600% in January. People are...