If you followed the shares of WallStreetBets (more info here, here, here), you probably wrestled with about 6,000 paragraphs starting like: “if I gave you one banana …” This is because you probably learned more about shorts and options and side calls in a few days than making hundreds of movies consumption and TV stockbroker content. You can have a newfound intimate work knowledge and disgusting from online brokers. Now you know how stocks rise, time to learn how they fall.
Despite the story of a two-party class war between WallStreetBets and hedge funds – which has now escalated to mania on CNBC, where a parade of venture capitalists suddenly dies on the side of ‘the little guy’ – many other people are holding on to the now expensive shares which WallStreetBets managed to send to Pluto. This includes teachers whose pensions are tied up in public funds, individual rich people who have them got smokes, and the diseased brick-and-mortar enterprises themselves.
Who is probably going to suffer? What happens to the economy, if anything? What happens at the end of a “short print? We asked authorities in the field for guidance.
Will GameStop and the twelve other stocks inflated by retail investors ever fall?
Aswath Damodaran
Professor of Finance at the Stern School of Business at New York University
This is not inevitable, but likely. Nothing has changed fundamentally at these companies, and if the only thing keeping head above water is trading Redditors, then the stock will lose its oxygen if they go to other targets.
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Donald Langevoort
Thomas Aquinas Reynolds Professor of Law at Georgetown University Law Center
We are too early to answer. Nothing is inevitable, but if the past is an indication, the relevant share prices will mean again. What fuels a bubble like this (assuming it’s a bubble) is investors’ belief that previous indications are that they may move indefinitely, which may continue for some time (self-fulfilling prophecy), but a natural end point it. Clearly, those who got in and out at the right point will celebrate their brilliance, but unless they are disciplined enough to stop before the settlement, there will be losses.
Terrance Odean
Rudd Family Foundation Professor of Finance, Haas School of Business, University of California at Berkeley
I did not analyze the fundamental value of GameStop. From what I have read, however, I expect recent prices to far exceed the fundamental factors.
What this probably means is that prices will fall significantly, but not necessarily to prices before January. However, there is no set quick rule on how fast the drop comes. A share can last a long time in terms of the fundamentals. This is likely to disappoint owners in future profits, but it can take quite some time. GameStop is unusual because of the amount of investors paying attention on both sides.
Is there a chance that market makers will end up taking a large share of the losses?
Terrance Odean
Market makers are at risk if they hold large temporary positions in extremely volatile stocks. So, yes, they can take losses. However, the institutional investors with the greatest risk are those who have large short positions without hedging.
What happened when large hedge funds, for example, knowingly blew up a bubble?
Sloan Distinguished Professor of Management and an Associate Professor of Economics, Finance and Accounting from the MIT Sloan School of Management
We saw it during the late nineties with the internet bubble. As we know from transcripts and interviews, a number of funds acknowledged that a bubble existed at the time. But what many realize is that it can be easier to ride on the bubble and pull profit on its head before it bubbles, rather than trying to exert affirmative market influence by pushing prices back to fundamental values.
People who decided to try racing and bought at the end of the bubble in the 2000s eventually lost. Also one of the undersold groups that lost due to the bubble are hedge funds that tried to exert market influence by putting prices back to the fundamental factors. An example of this is people like the Jaguar Fund, sometimes known as Tiger Fund, who have tried to exercise a kind of affirmative power that moves away from the internet bubble and uses bets against the valuations. They eventually lost and eventually had to close before the bubble burst.
Other funds such as Quantum Fund, under George Soros, apparently held a position that was more in line with the bubble. I must be clear that I do not know their intentions, but they survived it.
So there was a bit of a difference in what funds did well than in funds that did not. It seems to match those who knew how to ride the bubble in time, versus those who tried to exert market influence.
Is there a scenario in which the majority, or even half, of the retail investors who bought GameStop or these other stocks make a profit?
Aswath Damodaran
No.
What are the effects of the GameStop shortcut on the overall market?
Aswath Damodaran
Hedge funds have already been in trouble in terms of performance in this crisis. Money has flowed from passive vehicles to passive vehicles and this will only speed up the process. I think Melvin Capital had already lost money on positions before the GME run.
Short pressures in one stock can force funds with large short positions in that stock to sell other positions that are often profitable to raise money to cover calls. If many hedge funds have correlated positions and receive simultaneous margin calls, this can lead to a situation where these funds all sell the same positions to raise money, which causes the prices in these positions to drop, leading to more calls (if the positions lever). Individual hedge funds with strong leverage can get hurt.
Can it harm pensioners, such as teachers?
Donald Langevoort
[Pension money] there will be a lot of interest – funds need to invest on a portfolio basis with caution, but we know that some public funds feel pressured to fight bets with the legal mandate. That said, a diversified portfolio is unlikely to suffer much from such events, and learning from painful experience can be a helpful solution.
What happens to the companies themselves?
Arun Chopra
“Twitter professor” and founder of financial market research firm Fusion Capital
If you look at AMC – AMC has started but they have a lot of debt and need money. And so they issued shares the moment the stock ran out, and it’s back [at the time of interview]. And so not all short pressures are equal. This will not bankrupt the industry.
At the very basic level, we see that short pressures are constantly taking place in markets. We have a strategy that takes all of this into account, and there are three to four really good opportunities each year. It happened in Tesla. So it goes on. It’s getting a little worse now because we’ve never traded so many options.
The real risk is that the short-term stocks will force these fund managers to sell their quality stocks. And if that happens, you’ll get Google and Facebook and those who come down, and then anything the Fed tries to do to keep things afloat will be under pressure. And for me, the issue falls back to the Fed, because why do they let it get out of hand? And then you can even extrapolate it further why this social situation is going on for the class warfare.
Closing thoughts
Arun Chopra
I think what will happen is the volatility and the message boards like WallStreetBets will remain. Before all that, they did research. GameStop was there a year and I kicked myself for writing it off as a dog.
You can see these fantastic thoughts especially on WallStreetBets [the kind of thinking] of people who are younger. If you see things a certain way, and you do not stick to dogma and textbooks, it creates the boards. There is no doubt about the abilities of the younger people.
I think this narrative about the common man comes from everything that was going on. We never dealt with the idea that there was a housing accident in the formative years for a large part of the generation that is now being asked to pay two hundred grand to go to university, which does not even guarantee anything. I bet if the system were fairer, half the group would be doing other things.
So when I read reports about the survival of the housing crisis on WallStreetBets, I immediately think absolutely. And I’m shocked to watch CNBC, and they say, ‘Oh, I love David and Goliath too! But I want, no, you do not. You just show up, are you kidding?
I just think realism is important, and to understand that it is not going to solve the problem. I’m sure more people lost money on AMC [when it crashed on Thursday] which GameStop did not even pursue and thought AMC would be the next one. I think the bigger problem we have is that these real systemic issues, like Congress doing something about student loans, need to be addressed.