Is video-game retailer GameStop (NYSE:GME) an emblem of retail traders defeating the short-selling hedge funds? Or, is GME stock the poster child of a market that’s entirely divorced from the world’s economic realities?
It’s a topic of heated debate with no definitive answer. Cautious investors will shake their heads in disbelief at the price moves of meme stocks, while the Reddit army will declare victory over the well-heeled institutional investors.
Ultimately, the gigantic auction house known as the stock market will decide who wins and who loses here. Whether the joyride in GME stock is “justified” or not, might not be relevant in the final analysis.
On the other hand, value investing legend Benjamin Graham once said that stock market is a voting machine in the short run, but it’s a weighing machine in the long run. So, will the market weigh in favor of long-leaning GameStop investors in the coming months?
A Closer Look at GME Stock
On July 23, 2021, I declared that long-side GameStop traders would continue to burn the short sellers. At the time, the share price was around $177.
I have to admit, my timing wasn’t spot-on. Since I made that call, GME stock slipped below $160. So, I suppose that the short sellers won that battle.
But, will they win the war? Maybe or maybe not, but consider the level of risk they’re taking.
GME stock has a 52-week high of $383. In other words, the share price could literally double from its current level before meeting a resistance point.
And once a short squeeze commences, it’s like a virtuous cycle for the longs.
With the threat of unlimited losses looming, the short sellers could be forced out of their positions, which in turn could push the stock price even higher.
I suppose that we could look at GameStop’s trailing 12-month price-to-earnings ratio of -$1.78. It’s negative, yes, but not horrendous for a $150+ stock.
The Boredom Argument
“Investors Will Get Bored of GameStop,” was the title of a recent Wall Street Journal article authored by Rochelle Toplensky.
In it, Toplensky compared GME stock to fidget spinners, ice-bucket challenges: a fad which, the author believes, is likely to fade.
I see Toplensky’s point, but there’s a problem.
Sure, every trend fades sooner or later. However, as economist John Maynard Keynes (the Warren Buffett of his day) once said, “the markets can remain irrational longer than you can remain solvent.”
For modern-day short sellers, their solvency is threatened when they bet against GME stock. All it takes is a groundswell of support on Reddit, and the next thing you know, the shorts are getting squeezed like a lemon.
A Moral Crusade
“GameStop’s BIGGEST LOSERS are old people. I love Reddit kicking Hedge Funds butts. Keep it up. Unfortunately the biggest losers are pension funds managed by Hedge Funds. Thank god I don’t need a pension. If you are young learn to kick Wall St’s butt and never need a pension.”
Clearly, Kiyosaki isn’t afraid to speak (or tweet) his mind.
With the advent of low-fee/no-fee stock trading, young folks have entered into the investing game in droves.
Skeptical folks might complain that these amateur traders are ill-informed. Maybe some of them are, but collectively, they’re a potent force in the markets today.
What Kiyosaki seems to be getting at is a moral crusade against the inordinately powerful institutional traders. Toplensky characterized this as a “David-versus-Goliath battle to defend a nostalgic childhood brand against hedge funds.”
And in 2021 at least, David is kicking Goliath’s butt.
The Bottom Line
You don’t have to love GameStop, or even like it.
My point is, you don’t want to bet against it.
As long as there’s an army of morally motivated young traders ready to take up arms at a moment’s notice, it’s best to let them fight their battles – otherwise, you could imperil your own solvency.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.