GameStop investors vs the establishment

Count me in the crowd who was not in on it. However, buying downtrodden stocks with some potential upside is as traditional as things get. An active investor would be wise to pick up some bargains in beaten-down sectors when the market drops. I bought shares in a party supply retailer this summer with the idea that people will start having parties eventually and also because it was getting into the retail side of toy sales. Time will tell if that’s a good move. Telling people about your purchases and ideas and getting them interested is also the way of the world. And it is sometimes just small talk. Can it be dangerous? Sure, just remember the tulips. If you don’t, don’t worry, I’ll get to that later.

So yeah, if you hear people who were never interested in stocks suddenly taking an interest in stocks, or a stock, it’s probably too late. For me, a sure-fire way to tell that it’s time to sell is if Jim Cramer is talking about it.

The latest buzz, of course, is GameStop and if you don’t know the recent history, here is a thumbnail: A group of new investors started focusing on companies with low stock prices that have a high short interest, meaning other investors sold shares they did not own of a company at a certain price hoping the price would drop below that so they can make money on the difference. Happens all the time. Here is the wrinkle: These new investors encouraged others to buy shares to blow the short sales and force the other investors to buy the stock to cover their short. As more purchased the stock through both ways, the price rises. As the price rises, word travels and others get in on it, causing the price to … well, rise even more.

In response, trading platforms froze out the stock and forced holders to either hold or sell, rather than buy more. The rationale? Extreme volatility. It didn’t take long for frustration to mount at what appeared to be actions taken to protect hedge funds that short from the well-organized actions of retail investors. It even drew the attention of U.S. Rep. Alexandria Ocasio-Cortez, who said the actions of Robinhood, the app popular with the young investors, should be investigated. U.S. Sen. Ted Cruz, a conservative who is not typically an ally of the progressive AOC, said he fully agreed. Any time you get those two to agree, you know you have regular folk upset. Could this be the populist issue that begins a new dawn of bipartisanship? I doubt it, but one can dream.

There are several theories why there is a new interest in investing by younger people. One is that it started when sports was inactive, another is that the apps make it fun and free, and another is that people are spending their stimulus checks. It could also be that a whole generation of young people want to take charge of their lives and take advantage of our free market system to better their lot in life. That’s good.

There have been other instances of inexperienced retail investors mucking up the system. After all, similar stock tickers and names for Tesla (TSLA) and Tiziana (TLSA), and Zoom Video (ZM) and Zoom Technologies (ZOOM) caused the latters’ stock to rise during a frenzy. Then there is the original frenzy of the Dutch tulip mania. In the 1600s, prices for the new and suddenly fashionable tulip rose because of demand, and then reached extraordinarily high levels when speculators got involved. It then famously crashed. Some might argue the same might happen for companies like Tesla, but the chances of Tesla stock being halted for market volatility are practically nil. The idea of the circuit breaker to protect the holders of a stock in extreme volatility makes sense and protects those who worry about a run to the bottom when people suddenly sell. This action on Thursday is different, however, as it does not protect the stock from dropping but rather from going higher to the benefit of established investors rather than what could be considered “rube” investors who simply outsmarted them. And that’s why it doesn’t feel fair.

Jon Mays is the editor in chief of the Daily Journal. He can be reached at jon@smdailyjournal.com.