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Home Kuo’s Smart Take Smart Thought Of The Week: GameStop

Smart Thought Of The Week: GameStop

A Canadian man has just broken the Guinness World Record for eating three Canadian Reaper chilli peppers in 9.72 seconds. These are the hottest chillies known to man, with a Scoville Heat Unit rating of 1.5 million….

…. An average jalapeño only has a score of between 2,500 and 8,000 SHU. The humble chilli padi, otherwise known as the Bird’s Eye Chilli, has a SHU reading of between 50,000 to 10,000. So, the Reaper chilli is hot.

As much as I like spicy foods, it would not be advisable that I try to break Canadian Mike Jack’s record. It could be the death of me if I should try.

The same goes with attempting to jump on the GameStop bandwagon or any bandwagon, for that matter. It is irrelevant which side of the GameStop divide we belong? Our fingers could get very badly burnt if we treat the stock market like a casino.

You might, for instance, side with those private investors who have collectively decided through social media to hammer the mighty hedge funds?

Or you might be on the side of professional money managers, who believe that they should be allowed to make money by betting that an overvalued share will fall….

…. Clearly, these hedge-fund managers didn’t quite count on the power of social media that have harnessed the animal spirits of the masses. Some have romantically described it as a tussle between David and Goliath.

But it is not just one David that has decided to take on the giants of the finance industry. It is hundreds, if not thousands, or perhaps hundreds of thousands, of “David’s” that have collectively vented their anger by pitting their savings against the billions from the hedge funds.

Someone is going to get hurt. Some already have. At first, it appeared to be the hedge funds. They have been forced to buy shares on the open market at elevated prices to return the shares that they have borrowed and sold at a lower price.

But hedge funds can afford the losses. It will be painful, but they knew what they were letting themselves in for, when they shorted the shares.

The question now is what happens next.

Traders who have bought GameStop shares will only be able to realise a profit if they can sell their shares to someone else. But what if there no buyers? What if they are the only people who are willing to buy the share?

Well, the shares will fall, which they have. And they will continue to fall until willing buyers are found. And who might these prospective buyers be? That is a good question.

The situation that we find ourselves in is succinctly put in the “greater fool theory of investing”. When we invest in bad companies, we are hoping to find a bigger fool to take the investments off our hands. If we can’t, then we are that fool.

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Disclosure: David Kuo does not own shares in any of the companies mentioned.