The suspension of disbelief that watching a movie requires reminds me of people buying meme stocks right now.
Suspension of disbelief means ignoring reality and logic. When you see someone on a social media platform post a photo of a man playing video games, causing the stock of a struggling video game retailer (in this case GameStop GME) to soar 300% in the premarket, it feels like you’re watching a movie because you can hardly believe it happens in real life.
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Honestly, I somewhat enjoyed watching GameStop stock go wild after someone on Reddit RDDT posted a screenshot of an account with millions of dollars in GameStop stock and call options. But I wouldn’t want to play the GameStop trading game.
Whoever posted on Reddit may or may not be the same Roaring Kitty who helped create the “Mother Of All Short Squeezes” (MOASS) in GameStop stock in 2021 by getting retail investors to put their money in GameStop to stop and force hedge funds to buy the shares to cover their naked short positions.
The poster may not even own those millions of dollars in GME stock and options. But many retail investors immediately suspended disbelief and put their money into GME.
Short sellers are scarce
The biggest problem for those trying to create a new MOASS in GameStop now, compared to 2021, is that hedge funds are no longer naked short GME. In 2021, short interest in GME was over 100%, meaning many hedge funds had most likely sold GME shares without actually borrowing them first, which is necessary when shorting a stock.
Let’s go back a bit and explain what short selling and naked short selling are. Imagine going to a party on Friday night and the hosts are out of beer. You have a good friend with a few suitcases in her basement, so you run to her house and ask if you can borrow those suitcases for a few days. You take them back to the party and sell each can of beer for $10. You are now “short” by two cases of beer because you borrowed the beer and then sold it. On Monday morning you buy two cases of Coors for $1 per beer, replace the borrowed beer and make 90% on the transaction – a fair short sell.
On the other hand, someone with lesser ethics could have “borrowed” (i.e., stolen) the beer without telling their friend and then started selling it at the party for $10 a beer. When the friend sees that she has run out of beer, she calls the police, who arrest you. By the time you get out of jail there is a beer shortage and a case of Coors now costs $100 a beer. You have no choice but to buy that beer to replace what you “borrowed”/stole. You just lost 1,000% on that trade – an illegal naked short sell.
In 2021, when Roaring Kitty helped build an army of retail investors who created the MOASS on GameStop, there were naked shorts who had sold GME shares without borrowing them first. Every GME short seller, like our beer short seller, has to buy back those shares at some point and return them to their rightful owners (unless the shares go to zero). When 150% of the total shares outstanding were sold short, it meant that retail investors (by buying GME shares en masse) could force those short sellers to buy back GME at higher levels because they were getting margin calls from their brokers, as in the $100- a beer example.
Now, however, only 20% of all outstanding GME shares are being sold short, meaning these short sellers will likely be able to cover their shares more easily and won’t be squeezed as hard as they were in 2021. In other words, significantly more money would be needed are from retail investors buying GME to apply the same kind of pressure they did three years ago, and that’s unlikely to happen again.
Full stop on GameStop
Meanwhile, GameStop is still a struggling video game retailer with little growth prospects and questionable survival potential over the next five years. If you want to build wealth slowly but surely and as safely as possible, you probably want to avoid this whole GameStop movie. Stick with revolutionary companies like Tesla TSLA, Meta Platforms META and China’s Tencent Holdings TCEHY, who are changing the world.
Willard and/or 10,000 Days Fund LP had a net long position in META, TSLA and TCEHY at the time of publication. Positions may change at any time without notice.
More: One theory about how Roaring Kitty amassed such a huge GameStop position
Also read: The latest GameStop stock rally is fueled by ‘baseless speculation,’ says brokerage CEO
