‘The air could get let out of the balloon very quickly.’ What experts say you should know about investing in GameStop
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Signage stands in a GameStop Corp. store in Peru, Illinois. Daniel Acker | Bloomberg | Getty Images
Many people are unable to go to a movie theater, ball game, restaurant or bar, and are feeling isolated due to a lack of social surroundings. At the same time, social media companies use algorithms designed to keep people engaged by giving certain content more attention. “I tend to think about these as adding in an accelerant or jet fuel into a normal car engine,” Egan said. “All of these things amplify the psychology here in a way that we’ve not seen before.”
How the rally could end
The excitement could end just as quickly as it started — and investors need to be prepared. The quickest way that could happen would be if the Securities and Exchange Commission were to say it was investigating unusual activity such as market manipulation. As soon as that happens, it could cool everything off, according to Egan. “The air could go out of the balloon very quickly with a very light regulatory communication,” Egan said. Alternatively, interest could fall off more moderately as the news cycle changes directions and attention on these companies diminishes. Once vaccines are distributed and people start to return to more normal pre-pandemic routines, this substitute for normal contact will start to go away, Egan predicts. “It will still be there, it will just be much, much smaller,” Egan said.
Risks to watch out for
Admittedly, in order to get big rewards, you have to take big risks. That is one reason Boneparth said he doesn’t discourage his clients from dabbling in individual stocks. The best time to incorporate those kinds of holdings is after you have done your financial planning, secured your cash flow, identified your goals and aligned your core assets you help you achieve them, he said. “Once you get through all of that and you’ve done all of that hard work, it can be okay to take 5%, maybe 10% of your investable assets and go try and find some opportunities,” Boneparth said. Take stock in your personal situation before you risk your own capital in these kinds of bets, advised Sarah Newcomb, director of behavioral science at Morningstar.
GameStop skeptics Citron, Melvin succumb to epic short squeeze
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Melvin Capital and Citron Capital closed out of their short positions on GameStop Corp. as the firms succumbed to the stock’s meteoric ascent.
Melvin Capital closed its position after repositioning its portfolio, according to a spokesperson. Citron Capital’s Andrew Left also said Wednesday that the firm covered the majority of its GameStop short bets at “a loss of 100 per cent” in a YouTube video.
The gaming retailer surged even higher in U.S. premarket trading after an Elon Musk tweet fanned the flames of the stock’s rally that has sent the company’s market value beyond US$10 billion.
Short sellers have come under ferocious attack as crowds of retail investors pile into the least-loved names on Wall Street. The 50 most-shorted companies on the Russell 3000 Index have surged 33% so far this year, with the Goldman Sachs Group Inc. basket set for its best month since at least 2008.
GameStop’s stock whipsawed after the Melvin Capital move was first reported by CNBC. The shares were up 66 per cent at US$245 as of 6:37 a.m. New York time, having earlier more than doubled from the last close of US$147.98.
Hedge fund titans Ken Griffin and Steve Cohen this week injected US$2.75 billion into Melvin Capital after the firm lost about 30% this year. The capital infusion comes after Melvin Capital, which started the year with about US$12.5 billion in assets saw short bets, including GameStop, go awry.
The stock has risen more than eightfold this month in a dizzying rally fueled by Reddit-charged day traders. Melvin Capital’s retreat comes amid a warning by famed investor Michael Burry, who had a bullish stance on GameStop in 2019, that the surge has gotten out of hand.
“This is unnatural, insane, and dangerous,” Burry, best known for his successful bet against mortgage securities before the 2008 financial crisis, said in a tweet on Tuesday.
Hedge fund Melvin Capital closes out GameStop short: CNBC
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Hedge fund Melvin Capital closed out its short position in videogame retailer GameStop Corp., CNBC reported Wednesday. Fund manager Gabe Plotkin told CNBC’s Andrew Ross Sorkin that the position was closed out Tuesday afternoon following a huge loss. Shares of GameStop have soared more than 600% in January after retail investors, organized via Reddit’s WallStreetBets forum and other platforms, sought to push up a handful of heavily shorted stocks. Hedge funds Citadel and Point72 infused nearly $3 billion into Melvin Capital to shore up the fund, news reports said earlier this week. Plotkin told CNBC that speculation the fund would file for bankruptcy is false. Also, Andrew Left of Citron Research, in a video posted to YouTube on Wednsesday, said he covered the majority of Citron’s short position in GameStop in the $90 price range.Shares of GameStop trimmed premarket gains after the report but remained up 78%.