PORTLAND, Maine — In the early days of the pandemic, Donovan Black was mostly sitting at home, bored and unable to work. So he decided to casually invest money in some stonks.
“Stonks” means stocks — at least in the parlance of the irony-drenched investing world that Black cares about. When the 35-year-old Peaks Island landscaper bought shares in GameStop, a dwindling video game franchise retailer with stock prices routinely below $20, he was acting on advice he gathered from a punchy group of posters on Reddit forum WallStreetBets.
It appeared that some people spent the early days of the pandemic figuring out a way to gum up the financial industry and make a buck buying up cheap nostalgia stocks. Like a lot of behavior that originated on the internet, it started as a joke, kind of. But Black liked the stock.
Those Wall Street bets have paid off and then some. Black made a handsome sum from his investments over the last year. But the short-term financial gains aren’t as fun as watching day traders and Wall Street institutions sort through the wreckage.
“The hedge fund investors are a little salty right now,” Black said. “There’s poor people making money now. They don’t like to see that.”
Most media accounts are still struggling to sort out the winners and losers of the recent stock market chaos surrounding GameStop and other publicly traded dinosaur franchises. But Black is pretty clear about it. The wealthy elites who’ve gamed the system for years have been blindsided by a horde of far less powerful small-share investors with smartphones, and they don’t know what hit them.
GameStop isn’t the sort of stock you’d think would be hot right now. The brick-and-mortar video game franchise, founded a year before Blockbuster, wasn’t exactly thriving even before the pandemic, which added acute health risks to the prospect of browsing in real life over shopping online.
But the company’s dwindling valuation made its stock vulnerable to the conditions of the moment. Savvy Redditors, many of them passing the time during the pandemic, realized last year that GameStop and several other stocks had been “short-sold” at more than 100 percent of their shares.
In a nutshell, if investors think a company is going bankrupt, “short-selling” is a way to monetize that. To short-sell, investors “borrow” shares from someone else who holds them and quickly sell before paying for them. They assume those stocks will fall, because buying them at a reduced price later on earns them profit. It’s a nimble inversion of the stock market’s golden rule: “buy low, sell high.”
Acting on information that financial entities were borrowing and “shorting” more GameStop shares than exist — which is, illogically, possible in the stock market — Reddit investors realized that if they bought GameStop options en masse, the stock prices would go up, and hedge fund investors who had short-sold shares in the first place would be forced to buy them back at higher rates, yielding big profit margins for the new investors.
They shared that info online.
“It wasn’t a super-coordinated thing, it was like, here’s an opportunity to make money. Join me if you want. There was a sort of tribalism to it,” he said.
Black, hardly an avid investor, was piqued.
“I saw what was happening and thought this is a no-brainer,” he said. “This is easy money right here.”
And it was, before this week. At one point, GameStop’s stock had rocketed to $373 a share before a chaotic Wednesday.
Black saw diamonds. He liquidated $14,000 worth of stocks on GameStop, money he intends to put into his small landscaping business and fixing his truck.
Then things got weird. Robinhood and TD Ameritrade, two of several new low-barrier investor platforms that have made it possible for small-time investors like Black to trade freely in the stock market, suddenly froze the ability to buy GameStop shares. At least one Wall Street firm that was shorting GameStop, Melvin Capital Management, was bailed out by the hedge fund company Citadel and its wealthy benefactors — with insider trading scandals in their past — who sent $2 billion of emergency funds to shore up the firm’s losses from having bet against GameStop’s soaring stock.
As Black and others on Reddit saw it, the Wall Street empire that swears by the free market just contradicted itself.
“Now there’s a coordinated institutional attack on these stocks,” Black said. “They’re talking at CNBC about how we’re manipulating the market. Meanwhile, they’re coordinating with the brokers. Right now” — as of noon Thursday — “we cannot buy the stocks we want. If that’s not market manipulation, I don’t know what is.”
Hedge funds can make money on a company’s failure, forcing them to liquidate. Short-selling GameStop’s shares, he reasons, ultimately accelerates the job losses of people getting paid poverty wages to work their stores in the middle of the pandemic.
If that’s legal, why isn’t it legal for a bunch of internet users to make unexpected buys on some cheap stocks?
To be clear, none of this stock trading directly involves GameStop workers, many of whom have expressed puzzlement at their company’s stock volatility while they make $11 per hour. A manager at a GameStop in Topsham said the company had prohibited employees from talking to reporters about the issue.
A class action complaint was filed against the Robinhood app in a New York court on Thursday. The company said it would reopen GameStop trading on Friday.
The situation is evolving, and it’s hard to know what happens next. Because the hedge funds issued more shares than exist on the market, they are legally obligated to return them. And Redditers who bought “meme-stocks” for the price of a slice of pizza might see hedge funds paying exponentially more in private equity funds to buy them out.
To them, the situation is payback for the predatory tactics that caused the Great Recession and several insider trading scandals. They’re urging stockholders to “hold the line” — that is, to not sell their GameStop shares — even as another round of well-funded short-sellers climb aboard seeking to game the system in their favor.
But Black is in for more than he invested.
“It’s an ideological battle at this point,” Black said. “I don’t care if I lose every penny I have in it. Right now it’s about doing what’s right.”