It is tempting to see GameStop’s soaring stock as merely the result of clownish behaviour in a chat room. That would be a mistake.
4 min
GameStop is the platonic ideal of a stock bubble.
A combination of easy money, a real improvement in the company’s prospects, technical support from a short squeeze and a mad rush to get rich or die trying pushed stock in the retailer up 64-fold from late August to Wednesday’s close. Anyone who has held on for 10 days made gains of more than 10 times their money.
It is tempting to see GameStop as merely clownish behaviour in a chat room having some amusing effects on a stock few care about. That would be a mistake.
Sure, the wildly popular Reddit group Wall Street Bets—slogan: like 4chan found a Bloomberg terminal—is full of childish chat. Several users report that they have bet their parents’ pension fund on GameStop or that the boss’s daughter has bought in. There are plenty of calls for the stock to go to $1000 or more (it started the year at $18.84).
But GameStop’s soaring stock—and similar moves in BlackBerry, Nokia and others—is a bubble in microcosm, with lessons for those of us worrying about froth elsewhere in the market.
GameStop’s rise started with some genuine good news, just as bubbles always do. Ryan Cohen, who built up and sold online pet-food retailer Chewy, started building what is now a 13% stake for his RC Ventures in GameStop last year. He pushed for the staid mall-based seller of videogames to improve its internet sales. This month he joined the board.
Mr Cohen’s arrival means GameStop at least has a chance of joining the 21st century. From the first disclosure of his stock purchases in August up to the end of November the shares tripled, helped too by the improved prospects for the vaccine-driven reopening of the economy.
Along the way, some private investors latched on to the stock, helping its rise, and it became an item of discussion on Wall Street Bets, or r/WSB as it’s known.
This month the stock moved into the pure speculative phase, producing several daily jumps of 50% or more, and fundamentals were abandoned. Many cheerleaders on r/WSB stopped even making the pretense of arguments about Mr Cohen’s chances of turning the company around. Instead, there were two justifications for buying: wanting to get in on the price action to avoid being labelled, in the abusive parlance of the forum, a “retard” who missed gigantic profits, and the self-fulfilling prospect of hurting the large numbers of short-sellers.
As the late economist Charles Kindleberger put it: “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich. Unless it is to see a non-friend get rich.”
The scale of trading in GameStop shares is as extraordinary as the daily gains in price, suggesting widespread disturbance to people’s judgment. On Tuesday, $22 billion of shares changed hands, more than in Apple, the world’s largest company, and double GameStop’s market value. Adam Smith, the founder of economics, called speculative manias “overtrading,” and this is what they look like.
The hope of getting rich is only part of what’s inflating the bubble. Kindleberger argued that speculative manias needed innovative sources of financing, and the private traders on r/WSB have one: the shift last year to make trading in options free on Robinhood and several other platforms.
Options, like other derivatives, allow traders to use implied leverage to boost their bets, similar to borrowing money. In the same way that Japan’s bubble in the 1980s was fueled by cheap mortgages, and low Federal Reserve rates combined with collateralised debt obligations to support the housing bubble of the 2000s, the bubble in GameStop is aided by an increase in the money supply of private stock traders. Stimulus checks from the government can’t hurt, either.
Bubbles also frequently have support from technical factors that prevent the asset from being priced correctly. In the late 1990s, many dot-coms had a small float available, and none for short-sellers, making it hard or impossible for those who doubted the story to have their views expressed in the share price.
In GameStop, there are plenty of short-sellers, but they are making things even worse. The stock is caught in a vicious short squeeze. Short sellers had borrowed and sold more than 100% of the stock outstanding, as some was borrowed again. As the price rose, at least some of the hedge funds bought back shares to prevent further losses, so pushing the price up even further.
The most obvious parallel here is to K-Tel, the TV retailer of compilation tapes and the Veg-o-matic food processor, among other things. It announced in 1998 that it was moving online, prompting a jump in the shares that turned into an extraordinary short squeeze. K-Tel’s appropriately named public relations representative, Coffin Communications, gave this wonderful justification to the Washington Post: “Which do you think has more likelihood of success, a pure start-up that has never sold a product, or one like K-Tel that has been in business for 35 years?”
It turned out the answer was a pure startup, and K-Tel’s shares collapsed—but not before they had soared from $3.34 to more than $35 in under a month.
The difference with GameStop is that the r/WSB mob is actively engineering a short squeeze, discussing the pain they hoped to inflict on the short sellers and encouraging buyers not to cash in their profits.
Because there are so many shares that need to be repurchased by short-sellers, this offers an exit route for those who sell. But not everyone can do this, and those who are left holding the stock when demand eventually evaporates will watch the price plummet as it reverts back to something closer to what is justified by the company’s profit potential, just as K-Tel did.
Warren Buffett attributed to his mentor, Ben Graham, the line that “in the short run, the market is a voting machine—reflecting a voter-registration test that requires only money, not intelligence or emotional stability—but in the long run, the market is a weighing machine.”
The absence of emotional stability on r/WSB is obvious and has worked out beautifully for buyers of GameStop so far. But when the stock is weighed, many will be found wanting, as they always are in bubbles.
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CIOs can take steps now to reduce risks associated with today’s IT landscape
3 min
As tech leaders race to bring Windows systems back online after Friday’s software update by cybersecurity company CrowdStrike crashed around 8.5 million machines worldwide, experts share with CIO Journal their takeaways for preparing for the next major information technology outage.
IT leaders should hold vendors deeply integrated within IT systems, such as CrowdStrike , to a “very high standard” of development, release quality and assurance, said Neil MacDonald , a Gartner vice president.
“Any security vendor has a responsibility to do extensive regression testing on all versions of Windows before an update is rolled out,” he said.
That involves asking existing vendors to explain how they write software, what testing they do and whether customers may choose how quickly to roll out an update.
“Incidents like this remind all of us in the CIO community of the importance of ensuring availability, reliability and security by prioritizing guardrails such as deployment and testing procedures and practices,” said Amy Farrow, chief information officer of IT automation and security company Infoblox.
While automatically accepting software updates has become the norm—and a recommended security practice—the CrowdStrike outage is a reminder to take a pause, some CIOs said.
“We still should be doing the full testing of packages and upgrades and new features,” said Paul Davis, a field chief information security officer at software development platform maker JFrog . undefined undefined Though it’s not feasible to test every update, especially for as many as hundreds of software vendors, Davis said he makes it a priority to test software patches according to their potential severity and size.
Automation, and maybe even artificial intelligence-based IT tools, can help.
“Humans are not very good at catching errors in thousands of lines of code,” said Jack Hidary, chief executive of AI and quantum company SandboxAQ. “We need AI trained to look for the interdependence of new software updates with the existing stack of software.”
An incident rendering Windows computers unusable is similar to a natural disaster with systems knocked offline, said Gartner’s MacDonald. That’s why businesses should consider natural disaster recovery plans for maintaining the resiliency of their operations.
One way to do that is to set up a “clean room,” or an environment isolated from other systems, to use to bring critical systems back online, according to Chirag Mehta, a cybersecurity analyst at Constellation Research.
Businesses should also hold tabletop exercises to simulate risk scenarios, including IT outages and potential cyber threats, Mehta said.
Companies that back up data regularly were likely less impacted by the CrowdStrike outage, according to Victor Zyamzin, chief business officer of security company Qrator Labs. “Another suggestion for companies, and we’ve been saying that again and again for decades, is that you should have some backup procedure applied, running and regularly tested,” he said.
For any vendor with a significant impact on company operations , MacDonald said companies can review their contracts and look for clauses indicating the vendors must provide reliable and stable software.
“That’s where you may have an advantage to say, if an update causes an outage, is there a clause in the contract that would cover that?” he said.
If it doesn’t, tech leaders can aim to negotiate a discount serving as a form of compensation at renewal time, MacDonald added.
The outage also highlights the importance of insurance in providing companies with bottom-line protection against cyber risks, said Peter Halprin, a partner with law firm Haynes Boone focused on cyber insurance.
This coverage can include protection against business income losses, such as those associated with an outage, whether caused by the insured company or a service provider, Halprin said.
The CrowdStrike update affected only devices running Microsoft Windows-based systems , prompting fresh questions over whether enterprises should rely on Windows computers.
CrowdStrike runs on Windows devices through access to the kernel, the part of an operating system containing a computer’s core functions. That’s not the same for Apple ’s Mac operating system and Linux, which don’t allow the same level of access, said Mehta.
Some businesses have converted to Chromebooks , simple laptops developed by Alphabet -owned Google that run on the Chrome operating system . “Not all of them require deeper access to things,” Mehta said. “What are you doing on your laptop that actually requires Windows?”
