In case you’ve been hiding under a rock the last month—and especially the last week—GameStop stock ($GME) has seen wild mania on the market. And I’m worried about it. If you’re on the path to financial independence, you probably own some GameStop stock whether you realize it or not. Yes, GameStop is in VTSAX and VTI.
Should you worry? And what does this all mean for future individual investors?
- Do You Own GameStop Stock?
- So Why Am I Worrying?
- Are Shorts Out of GameStop?
- The Future for Individual Investors
Do You Own GameStop Stock?
On the path to FI? You likely invest in broadly diversified index funds. One of the most well known is Vanguard’s mutual fund VTSAX (and its ETF counterpart—VTI).
VTSAX is comprised of some 3,500+ US public company shares.
Guess what company just so happens to appear as part of these holdings?
You guessed it—GameStop.
Vanguard’s ownership of GameStop stock
In fact, Vanguard as an institution owns nearly 8% of GameStop based on recent data.
Any guesses as it which fund comprised the largest portion of Vanguard’s ownership?
About 2% of GameStop is owned through VTSAX—nearly 1.5 million shares at the end of 2020.
As 2021 began, those 1.5 million shares would have been worth about $28.5 million. As VTSAX is market-cap weighted, the fund should still own about the same number of shares today.
With GameStop’s stock price recently closing at $325/share, VTSAX’s 1.5 million shares are worth about $488 million. That’s a return of about 1,712%!
Good job on the …17 bagger, VTSAX!
Vanguard’s total 8% stake is worth about $1.8 billion at a $325/share price.
That’s great for Vanguard, but what about you—an individual owner of a fund like VTSAX. How much do you own through your index funds?
Ownership of GameStop through index funds (VTSAX, VTI, etc.)
We’ll keep going with VTSAX as our example fund, though plenty of other institutions are invested in GameStop through different active and passive funds.
VTSAX has $1.1 trillion under management. As of the end of Q4 2020, their largest holding is Apple with about $57 billion invested—a bit over 5%. If you own VTSAX, a little more than 5% of your total investment amount is really invested in Apple.
If you’ve got a cool $1 million in VTSAX, you effectively have $50K in Apple.
What about GameStop?
With nearly $28 million invested in GameStop of VTSAX’s $1.1 trillion, about 0.00255% of your VTSAX investment is in GameStop.
A million bucks in VTSAX means you had about $25.45 in GameStop as of December 31, 2020.
You’ve got about 1.34 shares of GameStop.
With the recent $325/share price, you’re sitting on about $435 of GameStop stock.
So Why Am I Worrying?
While a whole lot of folks will say “I like the stock”—most of the mania in the share price is really coming from an ideological fight between institutional shorts and individual long investors.
As I read it, much of the focus is on catching hedge funds with their pants down over-shorting GameStop. From a technical perspective—at least at some point—there were more shares that appeared to have been sold short than there were available. If that was really the case, it’s supposed to be illegal. Shorting more shares than are known to be available is called naked shorting.
It’s also a huge risk to the entity that’s on the short side of the equation. If you borrowed shares that don’t actually exist and bet they’d go down in value, what happens if they actually go up? To cover the short position you wind up forced to buy someone’s long position at ever-increasing prices. You also have to cover the value difference itself.
You’re in it deep.
You can see how if a group wanted to put the screws to another group, sniffing out a situation like this offers a pretty tremendous opportunity.
However, due to some confounding technical processes that might not have been the case. This article does a good job of explaining how a combination of brokerage and market maker shares could reveal the “real” short position was less than 100% and no naked shorting occurred.
Since market data for these positions isn’t real-time, it’s hard to say what’s really happened or where the hedge funds are on their positions today.
Late last week, the head of the biggest known short seller of GameStop claims they exited their short position with a complete loss.
While it could just be damage control, at least some of the hedge funds facing backlash seem to be turning a corner on their approach.
This is where I get worried.
An ideological bubble
If (and frankly, it could be a pretty big if with their company at stake) the biggest shorts are out of GameStop, what’s left to support the current price level are the longs. There’s little doubt that there’s a huge number of individual investors with (relatively) small amounts of money in GameStop stock.
A good friend of mine let me know he was in and out of the stock, driven by the hype, early in the week. Paper hands? Maybe.
But he’s not alone. And at least in his case, the money was more of a gamble that he could afford to lose.
But there are countless folks that at least claim to be long on GameStop with money they can’t really afford to lose.
Is GameStop stock fueled by rent money?
There is an ever-increasing number of commenters on /r/WallStreetBets saying they’re paying their rent with a credit card and buying a share or three of GameStop. Others have taken downpayment money or college funds and put it in. Many, many people suggest they’re paycheck-to-paycheck and are doubling-down on GameStop with any funds they can come up with.
Now, the reality is that WSB is usually filled with jokes and memes. And I suspect there are a lot of users that are exaggerating the extremes of their investment situation.
…And of course there are still plenty of high quality memes.
This one sums up the culture of WSB and the GameStop drama pretty well:
But I think that there’s a lot of people getting caught up in the hype and are genuine. The subreddit that started it all has seen a huge influx of users. New users are undoubtedly less familiar with the …culture of the forum.
What I’m worried about is how many people have their next paycheck, last month’s rent payment, next month’s credit card bill, and all their savings tied up in GameStop.
Users that claim to be all-in like this are heavily upvoted.
And of course the mania has spread far beyond WSB.
Are institutional investors riding both sides of this bubble?
Is GameStop’s stock price no longer resting on short sellers getting squeezed?
Might individual long investors now just be selling to each other to keep the price going higher?
Is it instead today’s Tulipmania?
I don’t know. There’s not enough data to be able to analyze this. The folks who do have the data or at least an inkling of it are almost certainly taking advantage. Are the hedge funds now riding the stock price up, making a killing on the backs of regular Joes and Janes that have been trying to put the screws to them?
And if they are, they’ll get out when the price comes back to reality before all those regular Joes and Janes can avoid catching the falling knife.
That’s what they do.
This market reality makes me sad. And it also makes me root on the little guy.
The case for shorts
Here’s the thing: hedge funds really have been screwing some companies by putting out hit pieces and shorting them to hell. There are a couple of recent cases as cited in this Reuters report where the SEC is investigating.
Of course there’s two sides to the coin.
Betting against companies has been around for a long time. It has served as a way for investors to reveal genuine malice and coverups by bad actors.
If you popped open that Reuters report from 2019 I linked above, you might have noticed a familiar name: Andrew Left. He’s none other than the head of the big short seller (Citron Capital) that’s been getting squeezed with the GameStop mania.
Reuters suggested that Left’s negative reporting in 2015 of Valeant Pharmaceuticals International, Inc and subsequent short selling helped make a name for him and Citron. In fact, eventually, some folks involved with Valeant were sentenced to prison in 2018.
There are some positive aspects to ensuring that short selling remains part of our capitalist society.
Are Shorts Out of GameStop?
We’re left with two possible outcomes with the current GameStop stock mania.
- There’s still a lot of shorts that need to cover, so if the longs don’t sell, prices will continue to rise and the remaining longs will make more money
- Not many shorts remain and most price growth is coming from longs selling to other new investors as they cash out
I think that leaves us with some incredibly interesting behavioral economic experiments that are going to playout.
What if shorts are still covering?
If it’s the first case and there’s still a lot of hedge fund money sloshing around in shorts, those individual investors might still make a lot more money. If they don’t sell.
Normally, my faith in investors not taking money off the table to keep the price elevated would be pretty low.
Game theory and the Prisoner’s Dilemma
If you’re familiar with the paradox, the Prisoner’s Dilemma, you’ll understand why self-interest would usually suggest that individual GameStop stock investors would sellout as the price goes parabolic.
Basically, in this paradox, individuals act in their own self-interests naturally. When they do so, they don’t produce the optimal outcome. As a result, they find themselves in a worse state than if they had cooperated with each other.
Just look at this chart:
Individual investors holding GameStop are driven to sell by their own self-interests as the price rises. But if they do so, the selling pressure will drive down the price for everyone else. If they cooperate and hold, they might be able to keep the price from collapsing.
Extending the idea of the Prisoner’s Dilemma to our GameStop scenario here, we could think of it as a Public Goods Game.
Winning the Public Goods Game
I’ll try to summarize this game.
Players are given a sum of money they can choose to contribute to a shared pot or keep for themselves. The sum of money that is contributed is then multiplied by a variable factor. The resulting balance is then divided amongst the players no matter how much they contributed.
Here’s a simple example:
Let’s say there are 4 players given $10 each and the pot multiplier is 2x. If everyone contributes their full $10, the total shared pot is $40. It’s multiplied by 2 and the total is $80 which is then divided amongst the 4 players.
Everyone walks away with $20 instead of the $10 they started with.
Let’s say this experiment is run again with the same players.
Having seen how things worked out, a player might rightly see that in their own self interest they could contribute none of their initial $10 and assume other players will contribute their full $10 again. Assuming so, the pot will be $30, multiplied by 2 to become $60 and divided amongst all players so each receives $15.
The player who contributed nothing will walk away with $25 (more than when they contributed in the first iteration). Other players only receive $15.
You can imagine how a third iteration may result in no one contributing anything and everyone getting just $10.
In fact, that’s what experiments in this game often show—different multipliers and group size affect the result but subsequent iterations tend to decrease contributions.
If GameStop investors continue to hold, they won’t see any monetary value from the increased share price. They’re effectively keeping as much money “in the pot” as they can.
Their self-interest pushes them toward selling as each day passes and more shares change hands in a sort of iteration of the public goods game.
Will our “players” in this game be able to hold through more iterations that have been found to be experimentally “normal”?
I think they might, and my reasoning is perhaps the most interesting part of this whole event.
The players don’t seem to care about maximizing their own personal self-interest.
They want Wall Street—specifically activist shorting hedge funds—to burn.
It’s an ideological war they’re waging more than it is an opportunity to make money.
Or at least, that’s what they say!
What if most of the shorts are out of Gamestop?
If you read through the popular posts and social media making the rounds on GameStop, you’d think that the greatest short squeeze is 100% still yet to come.
That’s the big motivation for the first possibility above. Individual investors are banding together to try to divert billions of dollars invested short on GameStop away from Wall Street.
But what’s most surprising about this is that the motivation really doesn’t seem to be to make a profit. The profit seems to be a nice side effect.
What this rag-tag group seem to want is to teach the hedge funds a lesson.
It’s Occupy Wall Street 2.0.
If they’re right and there’s still a lot of short interest in GameStop, I can see how increasing prices may not shake the resolve of all the individual investors.
Diamond hands is their mantra for a reason. They might just keep holding.
But if they’re wrong and most of the shorts are out of GameStop, I’m worried.
If the shorts are out, the ideological war is already over against the hedge funds and they’ve suffered their loss.
If there’s no enemy left to fight, then what?
Then we’re back to all the people who have bet their credit card debt, rent payments, and little cash they have in a public goods game where the multiplier might be 1x.
How many iterations does it take for people to start to realize that the best course of action is to keep their contribution?
The short money is what’s been creating that >1x multiplier that’s kept the iterations going and a profitable outcome to contribute.
Whether the shorts are already mostly out or not, at some point they will be. And when they are, what happens to $GME when it’s most individual investors buying shares from each other?
The Future for Individual Investors
I don’t know what is going to happen with GameStop’s stock price in the coming weeks. No one can predict that. I’ve outlined some possibilities and concerns I have about individual investor’s funding sources.
Personally, I learned my lesson investing in individual stocks long ago.
But I’ve also missed all the explosive growth in crypto, Tesla, and countless others. We can add GameStop to that list. I consider myself a disciplined investor and try to avoid the behavior gap.
But still, I’m rooting for the success of WSB’s attempt to level the playing field with Wall Street.
Individual investors are hobbled by high-frequency trading, lobbying for favorable regulation, and the power which gobs of coordinated money come with.
On the other side of this, GameStop winners who have taken some money off the table are trying to do good with it.
WSB may be filled with memes, but it’s also become a place of some very positive stories.
- Nintendo Switches bought from GameStop with $GME profits donated to Children’s Hospital
- Paying for heart surgery for 2 children around the world with $GME profits
- Blowback from potential market manipulation against individual investors is uniting members of Congress
And lastly, I’ll leave you with one more hopeful note expanding on the behavioral economics side of the equation.
Despite the economics concepts I mentioned (the Prisoner’s Dilemma, the Public Goods Game, and the Tragedy of the Commons) showing that all too often we as humans act in our own self-interest at the detriment of the common good, sometimes we figure out a way around it.
There was a popular British game show years ago called Golden Balls. In it, players would build up a jackpot through various game mechanisms. In a type of final round called Split or Steal two contestants would decide their fate together and what would happen to the jackpot.
It worked like this:
Each contestant must choose whether to “Split” or “Steal”. They can speak to each other for a short period while deciding.
- If both choose Split, they each receive half the jackpot
- When one chooses to Steal and the other Split, the Steal contestant wins the whole jackpot and the Split contestant wins nothing
- If both choose Steal, neither win anything
As you might imagine from our behavioral psychology examples earlier in this post, lots of people would try to trick the other person and secretly look out for their own self-interest. Occasionally, we’d see some good and both would verbally agree to Split and actually do so.
But might we figure out a way to ensure everyone wins?
Here’s the craziest end to an episode of Golden Balls that broke the game:
Ultimately, it’s going to up to investors of GameStop to decide how all this comes to a conclusion.
Power to the players.
Disclaimer: None of this is financial advice. I’m not a financial advisor. My back of a napkin calculation suggests Jenni and I own around 2 shares of $GME via index funds, which we’re holding.
Have you got involved with the GameStop hype over the last few months?
What are your thoughts about all of this and where’d I get it wrong (or right!)?
Do you own more GameStop via VTSAX or other index funds than you thought?
Let us know in the comments!
14 replies on “GameStop Stock: Why I Worry About the Mania (And VTSAX)”
This is some excellent analysis, Chris. Thank you for catching me up on the Gamestop situation and providng your view.
In my opinion, whether people can “afford to lose” money on Gamestop is beside the point. What we have here is thousands of rather young, impressionable millenials being convinced that they should treat the stock market as a casino. I worry that large segments of the population are on a path that will cause them to underperform over the long term… time will tell, I suppose!
Yea, glad it was helpful and interesting! I thought folks might enjoy seeing they’re involved with broad US index funds (like VTSAX or VTI), at least!
Seems Canada managed to keep part of their branding up there when, years ago, GameStop bought Electronics Boutique. That’s the place I remember going to for games as a kid, and apparently you all still have EB Games branded stores :).
At the end of this, to your point, I imagine there will be some folks who got out at the right time (whether that’s before today or in the future!) that made a bunch of money. But, there will also be a bunch of people who didn’t—and lost a lot—to fund the ones who got out at the right time. Hedge funds will provide some of that funding, but I’m worried that at this point the bubble is being traded by retail investors amongst eachother. And then, just like you said, we wind up with very hopeful and hurting folks *feeling* further stung by the economy, taking advantage of, and even more delayed into successful investing for the long term.
It’s Tulip Mania all over again. At some point that golden carriage is going to turn into a tulip again because that’s all it really is.
Irrational pricing can exist supported by markets for a *very* long time, but at some point the clock will strike twelve and everyone will rush for the doors.
When will that be? I haven’t a guess, but it’s a game I’m not interested in playing.
You’re probably not wrong, Tako. And I’m with you—who knows when it’ll prove itself out. My hope has been that individual, and often novice, retail investors will get out before things come crashing down. It was an ugly week on GME and there’s still a lot of “hold!” sentiment. Maybe that’ll prove out and they can bust more shorting, but maybe not. Either way, I worry that either:
1) People learn to participate in bubbles (if they win big) and go even harder on the next one (where they potentially get caught out)
2) Folks lose now, buying high and selling low while also being taught to avoid the stock market generally—which will make their reach for FI in the future much harder
No matter the outcome, I’m just saddened for those folks getting caught in the turmoil of the drama, hype, and frenzy.
As I’ve admitted, I got myself sucked into the craze chasing after Tulips haha. It was money I could afford to lose, but nonetheless I did take a small loss. To me, recognizing it for the gambling that it was, I still think it was a decent risk/reward proposition had Robinhood not locked out traders on that fateful morning. As with an non VTSAX stock market purchases, you win some, you lose most!
Thanks for coming by and sharing your experience. It’s tough coming out and explaining personal investments—and that’s doubly so if it’s a losing one!
And indeed, with any high-risk speculation (stock market or not!), you’ve got to rely on the occasional homerun to cancel out all the …outs. That’s okay as long as you understand it, and have plenty of innings left to participate. And batters. Lots of batters left, too. 😉
As I was replying to Tako, my main concern is how badly this could (could have?) gone for GME investors no matter whether the bubble went to infinity or crashed and burned even more quickly than it has. Either folks get the idea they should try to ride these waves (and bet bigger and bigger until they lose it all on future bubbles) or they feel slighted by the market and don’t participate—pushing off retirement and financial independence for years.
Of course, it’s very different when it’s (relatively) small sums of gambling or speculation like you have, or the buddy I mentioned in the article. Hopefully it’s just a little sting the serves as a reminder to keep things in check. It’s why you don’t take a bet with a margin draw against your home equity and go all-in. Heh.
Cheers for keeping us all honest, IF!
What a great article on this fascinating story. Wow so I guess I was in on that gamestop mania through my beloved VTSAX without realizing it lol. If that’s true about people paying rent with credit cards so they could purchase stock…that’s sad. Some people need to touch the stove to learn. This might be a great thing for the market/investors who might now see the value of long term investing. As a long term investor, I feel a bit insulated from this turbulence at the foamy top of the “beer” as JL might put it. I am picking a few stocks here and there for fun/diversification as of late…though its a long term buy for me…Diamond hands…
Thanks Noel! Yep, lots of institutional ownership out there shows many of us have been ever so slightly along for the ride! 🙂
I agree with you about hard lessons…and people need to learn…but it’s like this stove is egging them on to get burned. It’s not just a hot stove. It’s egging them on, whispering in their ear how the stove feels great to the touch and it won’t hurt even if their instict is “hot”. As I said to Freddy in another comment, I’m worried the group is likely getting heavily manipulated by “outsiders” and “pretenders” at this point. Sure, they shouldn’t touch the stove…but it’s more than just that…sadly.
Ha, yea, Diamond Hands still work for those nice long picks that you *might* start to harvest 10…20…30… years from now. I still haven’t driven out my BRK shares quite yet.
i’m pretty sure i benefitted from a short squeeze recently in APPN stock during all the amateur hour kid trading mania. this article explains it: https://www.fool.com/investing/2021/02/02/why-appian-stock-pulled-back-today/
i bought my shares last april for 42 bucks. a week or two it touched $250 and was up 20+% on a huge down day in the markets. i did something i normally don’t do: i sold half my shares for 250 and said thanks to whomever bought them at that elevated price. i still believe in the company so i did not sell it all but everything looked and continues to look fishy with lots of wild swings.
my issue with something i consider idiotic like “investing” money because you read it on some forum like reddit is how do you verify whether these keyboard warriors know their ass from a hole in the ground? what are their track records? all i can say is good luck to anyone using a forum like this as a model. good investing should not be so “exciting.” buy the shares of good businesses and wait is pretty boring but tends to work better. mostly we live by the philosophy of “do it any way you like” but those lessons can be expensive.
Haha, yea, there’s been a handful of stuff targeted that have seen little bubbles forming. Sometimes it can make sense to ride the bubble… You made it work 😉
And so far as investing based around what random people say on the internet…well you’re right 🙂 We don’t encourage folks to invest based on our advice, either. Ha. But hopefully it encourages folks to evaluate what their investment strategies are, learn about the ins and outs, and make decisions for themselves from an educated position. To your point specifically about Reddit (and presumably WSB)—what I worry the most about there is that I think it started as a somewhat small group who got kicks posting their (often genuine) investment thesis and frequent investment losses. That’s fine—it made for fun memes, great stories, and a community. What I’m worried about is that they’ve likely been “invaded” by people who will play along but now manipulate the group to make a buck off it anyway they can.
Thanks for coming by Freddy 🙂 Nice to hear from you again.
Wow, Chris! For someone with a background in communication and computers, I am so impressed with your fundamental knowledge of investing. I love all of the helpful and clean graphics you provide in your posts. Going the extra mile and calculating how you GME you would own if you had $1 million in VTSAX was the icing on the cake. Really enjoyed this one!
Haha, thanks FLA! 🙂
I’ve been learning about investing, in general, since around 2008 as both a way to improve our returns on capital but also out of a hobby-type interest. I’m the type that would happily play “spreadsheet games”–min/maxing economic systems and market dynamics is fun to me. So, investing has always been fun to learn about.
But, I’ve also learned it’s not “good” for me financially to start picking individual stocks. Or at least, the risk isn’t worth it. We don’t need more than “enough”. And enough is pretty close to simple average market returns for us. 🙂
I love drilling into VTSAX and seeing how much they own of a particular company!
I agree generally agree with your concern that inexperienced investors who don’t understand the culture of the forum could be all in with their rent check or credit card bill. My wife and I have talked a lot about that the last few weeks and ‘market’ vs. ‘regulation’. That said, getting burned just might put them on your path of learning the lesson, and becoming a disciplined investor.
Roaring Max Attack
Ah yes I remember the GameStop trades.
Got in like early December with 1 call contract for the fun of it, expecting nothing would happen. And then the week of Jan 25th came and it went quite a bit up.
Since I only had 1 contract, there’s not much I could do other than take profits around the ~1000% mark. Of course, the same contract would have had gone up +3000% if I had held for a couple more days…oh well.