In the story of Gamestop, the media has been pushing a classic David and Goliath story for the past several weeks as a few hedge funds (out of something like 10,000 funds, tho the precise number is unknown) got caught in a most amusing short squeeze.
It does seem likely that online fora were the germ of the squeeze idea; clearly some relatively small investors were able to acquire decent numbers of shares in the early goings, when shares are $5, even a speculative-minded retail investor with $10 or $100k can start acquiring a solid amount of daily trading volume, reducing float and shares available to borrow or to buy to cover.
But I wonder how much of this squeeze was ultimately orchestrated by some other big funds or players; it is possible, indeed, even probable, that other funds smelled blood and also purchased? Might it have been a case of professionals gaming other professionals with a few retail investors just making out like bandits?
One theory would be - no, since if that were true, someone would be talking about it - and the media hasn't said anything. But a second view might be, what incentive does the media have to tell the story? So long as anonymous day traders with fabulous but unverifiable human interest stories can claim to be "winning one for dad" clicks rain down on the articles. If the story was, hedge fund A crushed hedge fund B, it would get some play among the financial literati, but would likely not seep out into the wider culture.
So no journalist is going to be assigned to get to investigate and the funds that made the money probably don't want to share, since it paints a target on their own backs.
But honestly, when the shares were at $300 and $400, how many retail investors could be buying in any volume? $10k nets 33 shares, against a trading volume in the millions. If the retail investor was buying and selling (day trading) then ok, he could round trip many times, but then he wasn't "holding the line" as a hero, but rather just a guy exploiting volatility.
No, it seems to me, that the most likely story is that some hedge funds saw movement and started buying with the intent of generating the squeeze. They would be best positioned to negotiate the private market transaction to deliver the shares the funds needed to cover once things really got going.
Moreover, one has to ask why management didn't avail themselves of the opportunity to issue additional shares; these are authorized and management could have registered more shares for sale with the SEC, EXCEPT that management wanted to sell their own shares and if there was a new round of shares sold by the company, management would be barred by insider trading rules for six months from dumping their shares. So they prioritzed themselves over increasing the financial strength of the company with insanely cheap capital. No one is telling that story, either. Note that management telling people that they would issue additional shares would have broken much of the speculative bubble.
And quite frankly, reading some of these stories of these small investors, one really has to wonder if they aren't all fabulists - a class of people increasingly taken in by a media desperate for narrative stories that play to subscriber bias.
I have owned small businesses and have worked for them, too. I have never known small business owners to be as reckless with their financing as the people described in these bios. Every one of these children of small business owners who had the company "implode in a week" with nothing to show for it? How many small business owners are so illiquid? It's perhaps easy to believe this if you are an employee living paycheck to paycheck, but most small business owners I know keep large amounts of liquidity on hand. In fact, one of the primary differences between founder led firms and management led ones is a demonstrable liquidity preference among founders; where managers worry about hitting all of their financial metrics to earn the largest bonus and push financial ratios, founder led firms are usually more motivated by institutional preservation and capitalized themseves much more conservative.
I understand that it was tough to get financing in late 2008 and early 2009. If you had to roll over financing of anything, it was tough. If you didn't have months of expenses in cash, you could get crushed; but I simply don't believe that we have dozens of children of small business owners using day trading to effect World Socialist Revolution.
Alas, we also don't have a media environment interested in questioning this stuff, either. The stories are "too good" to check.
I’ve stumbled onto your blog via a pathway that involves an unlikely combination of the Value Investors Club, Seeking Alpha and a nano-cap stock.
ReplyDeleteI have read some of your blog entries and I hope you continue to post. Here are some of my remarks on this particular entry:
RE: Share Issuance
The GME ride has been quite something to watch and the longer the ride lasts the harder it will be to resist the temptation to participate. It is a difficult experience watching Bob down the street get rich as the saying goes (to be clear Bob has no special talents and might possibly be of below-average intelligence). Buffet discussed this way back in his annual letter to shareholders in the pre-historic age (…year 2000) where he remarked that “nothing sedates rationality like hordes of effortless money”. Naturally, he was referring to the internet bubble, but such sentiment could just as easily be applied to GME, or perhaps even the market as a whole these days.
No doubt it would make prudent financial sense - from a company perspective - to issue shares at the height of a bubble. However, even if management wanted to do so it would be nearly impossible for a number of reasons one of which you mention. 1) share issuance would set an upper bound on the stock price and likely that would be below the $500 / share peak, 2) placement would be a difficult go as what institutional investor would want to buy GME as such inflated prices (in their heart of hearts they know this is a game but to buy at a offering price way, way, way above fundamental valuations would make it all too real), c) offerings take time to underwrite and place and by the time an offering is completed the stock may have fallen to earth, which leads us to final point d) one is unlikely to find an investing house to participate in such an offering given all of the above (especially if they retain any risk should shares not be able to be placed with third parties).
RE: Personal Stories and Liquidity
In general, I agree that if a single week (or night as the stories go) led to the demise of a business, then the business was not well run. Far from being the cause of those kinds of failures the financial crisis simply revealed who was swimming without trunks. I run a small contracting business and it has always been my preference to have at least 12 months of liquidity available should work dry up. At the beginning this was not possible but now, many years in, that is exactly the kind of cash or equivalents I have on hand.
I also agree that these stories are not properly vetted simply because they sound good. Who doesn’t like an underdog story or a sob story or anything where the little guy is demonstrably purer than the antagonist?
My concern is that this narrative will work for a time, as it has in the past. But in the end, while a few will make lots of effortless money (and be the common mans’ hero), most will lose all the shirts in the closet and probably the ones they had to borrow. This is not good for anyone.
Hi there - thanks for the feedback. I had no idea that anything on this blog had reached VIC, but as a nano-cap, SPCO doesn't have much writen coverage. I do have a new article in the works. I still like the story there.
ReplyDeleteYour feedback on this article is fully on point - there's insight in every paragraph. I hear you about the challenges of underwriting something like this, but why not do a rights offering?
Those rights, priced intelligently, could be extremely valuable to the shorts, right?
Thanks for the confirmation as well about how a proper small business is run; I used to keep at least a year of expenses in cash because self-determination is important. Today, actually, my wife and I have something like two years of household expenses in readily accessible funds. Quite frankly, in this environment, with valuations stretched as they are, optionality and protection against major dislocation has likely never been more important, at least not in my lifetime.
A rights offering may be more likely to succeed than a secondary offering, but I still think there are inherent issues given the volatility. Unless the discount from market is truly astronomical, I don’t think management can be assured of anyone exercising the rights. For example, say the stock is at $300 and the rights set at $200 (that would be a very steep discount by historical standards) the market might go to $50 on the last available day to exercise and we are back to square one. And if the discount was too steep it likely would not be allowed / be viewed as market manipulation (of a sort). Though that may not matter much because this entire situation should probably be viewed is: if it works, it is free money and if it does not, they are no worse off.
ReplyDeleteThinking about this a little more, a contingent value right (CVR) tied to the market price of existing stock (subject to a floor) might be a way around the volatility issue. Though I am not sure of the SEC regulations on something of this sort.
Out of curiosity from all this I perused some of Keith Gill’s YouTube videos where he talks about his approach. While he certainly misuses the term value investor (in the traditional sense), he does appear to be what I would dub an intelligent speculator. Though to be fair to Keith, I do think the traditional use of the value investor title should be broadened to include approaches of a predominantly statistical character (intelligent speculation). It is just that one should be clear, to themselves, about what they are doing. Often people are not, and in time, that’ll be made known one way or the other.
Anyways the point about mentioning Keith is that it was actually somewhat entertaining, and he does share some good resources. Worth checking out if you have a couple hours.
Thanks for the recommendation - and sorry for the slow reply. Your comment got stuck in moderation. Wow, those are some long videos, but I will check them out.
DeleteI like your idea of the "intelligent speculator" because "investment" properly understood should be about increasing the productive capacity of the business or the enterprise. In a narrow sense, picking securities can increase the resources available to the "enterprise" but not really through adding aggregate productive capacity to the economy, but by increasing the CLAIMs on the existing assets. Of course, if you are buying intelligently, you are probably looking at a company that either is overcapitalized, or something that has lots of opportunity to deploy incremental capital at attractive rates (and which can generally be internally funded. The fact that so many "tech" companies don't fund themselves this way is part of what offends so many value people. They fund themselves through having their employees exercise options, instead. Clever approach, but the lack of internal financing seems like a weak business. Thing is the goal of these firms is to grow at hyperspeed and internally generated cash would seriously impede their goal of moving fast to capture the winner-take-all market. At which point, they produce incredible returns on capital.
The coda on the Gamestop story, I think, is that prices have remained sufficiently elevated for a sufficiently long period that they will indeed raise equity.
Finally, I want to say thanks for your incredibly thoughtful comments, you are motivating me to start posting here more frequently; and hopefully with better and clearer thinking than what I have written before this.
I found this video reasonable in length and a really nice take discussion of why GME might not be a cigar butt; that the issue isn't that the industry is dying, but thriving and that GME simply needs to find a way of having some unique relevance in that space and some ideas about how that could be.
Deletehttps://www.youtube.com/watch?v=JWdWCtLMoU0
The upshot of this is that if they do sell this equity, then they will have lots of runway to work to find that new relevant business model (and to survive the COVID).
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