Investment Gems

Photo credit: Mike Mozart

The GameStop episode is not about valuation. It is about supply and demand. With 130% short interest and what seems to be a volume of puts issued way bigger than the available float, it seems like a bad case of an overcrowded trade that got squeezed.

Therefore, it makes no sense to talk about shorting the stock due to unrealistic valuation. No one can predict when this will normalize, and it follows that one should not chase this.

A couple of decades after Alfred Winslow Jones invented them, long/short portfolios have become the norm in the financial industry. One of the tricks to have a good performance is to pick losers to short. Unfortunately, during the last two decades, institutionals became increasingly less creative in picking shorts, and basically, flocked to the same trades. It was a case of a tight community copying itself to exhaustion. Hence the 130% short interest that has been reported in the media.

What the WSB (Wall Street Bets) crowd did was to spot a crowded trade in a market with a tight exit. It is also interesting that some of these guys were teenagers back in 2008 when a bunch of short-sellers squeezed the housing market and dragged the US economy to hell. They kind of feel like they’re serving justice to the fat cats. And, it’s not like they are completely wrong. Unfortunately, I think that this euphoria will turn on some of them. Nevertheless, it is very interesting to see there is this gang of vigilantes targeting consensus trades made by professionals. It might change the market dynamics in the future and create exciting opportunities. Picking short-selling targets will become much harder for institutionals.

Finally, market pundits advised management teams in these companies to ignore all the commotion and internalize that, for a period, their stock will be different from their business. I wonder if that’s the right approach. Maybe management teams should come up with a plan to bring innovation to their current business units. And, they should issue shares to finance it. That would give the company the resources to go back to growth instead of remaining a value trap that hedge funds love to short.