<p><img src="https://static1.businessinsider.com/image/6011eebd6dfbe10018e0061f-2400/GettyImages-1230183315.jpg" border="0" alt="gamestop" data-mce-source="Brianna Soukup/Portland Press Herald/Getty Images" data-mce-caption="A handful of teens wait outside of a GameStop on Friday, November 27, 2020. The teens have been outside waiting since Wednesday night in hopes of getting their hands on the only two new PlayStation5s the store had in-stock."></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>There is this bizarre narrative that the Reddit-driven GameStop stock bubble amounts to a way for ordinary investors to "stick it to the man" by causing some hedge funds to lose moneythat those funds have been taught a lesson for selling short. Like GameStop's current share price, this narrative doesn't make any sense.</p><p>As of this writing, GameStop's share price of about $340 gives it a market capitalization of roughly $23 billion. For comparison, Best Buy is worth $29.5 billion. But Best Buy is a far larger enterpriseit has about three times as many employees as GameStopand more importantly, Best Buy makes money. It earned profits of $1.5 billion in 2019, while GameStop lost $471 million.</p><p>The original, putative theory behind the Reddit-driven push to buy GameStop was that <a href="https://www.reddit.com/r/wallstreetbets/comments/l0yzb5/a_venture_capital_perspective_on_gme/">the company had a good turnaround plan</a> and would successfully shift to online game sales and start making money again. Whatever the merits of that theory when the markets valued GameStop at less than $1 billion, it's out the window at a market cap of $23 billion. Even with a turnaround and rosy expectations of profits from the GameStop business, the valuation of the company at this point is not justified by business fundamentals.</p><h2>Retail investors getting caught up in a ridiculous bubble is not a win for the little guy</h2><p>Given the divorce of the price from the underlying business, GameStop's stock has been turned into a purely speculative asset, like a cryptocurrency. </p><p><em><strong>Read more:</strong> <a href="https://www.businessinsider.com/hedge-funds-data-reddit-tracking-wallstreetbets-tickers-gamestop-short-yolo-2021-1'r=nd-sub" data-analytics-module="body_link" data-analytics-post-depth="60" data-uri="97ce1e686eac7b822bef274b2c30bc72">How hedge funds are tracking Reddit posts to protect their portfolios after the Wall Street Bets crowd helped tank Melvin Capital's short positions</a></em></p><p>Yes, some hedge funds lost money, and a lot of retail investors are up,<em> for now</em>. But they can't access those gains until they sell. When they sell, the price of GameStop will fall, and the retail investors who bought late will lose money because there's no fundamental reason for other people to buy in at such a high price.</p><p>And why should we assume the net losses on this price roller coaster will accrue to institutional investors' Some shorts got popped with the run-up in GameStop, but a fading, money-losing business with a sudden market cap over $20 billion for no good reason is surely attractive to new short sellers, who will gain as the new retail buyers lose.</p><p>If GameStop is overvalued by $20 billion right now, that's $20 billion of losses waiting to accrue, largely to ordinary investors who got caught up in a fad. And while some of the traders <a href="https://twitter.com/RobinWigg/status/1353783481646657538">have gotten cheered for buying at the top</a> by their internet friends, this is far from a desirable democratization of Wall Streetthis is just a new way for regular people to lose their shirts.</p><h2>I am not a salty loser</h2><p>Before you call <em>me</em> a "crybaby loser" whose short position blew upas a number of you have been doing on Twitter for the past couple of daysI want to be clear: I don't do any short investing, which is prohibited anyway by Insider policies. This rule is so that I can call you an idiot from a position of objectivity. I have <em>never</em> had any financial interest in GameStop, except for the very small <em>long</em> position I hold because of my ownership of total market index funds. My shirt is not the one getting lost here.</p><p>And who decided short selling was a bad thing' Shorts play a valuable role: They help identify companies that aren't worth what they appear to be, so those companies don't waste more of investors' money.</p><h2>Actually, short selling is good</h2><p>I realize shorts seem like huge spoilsports and killjoys for betting against the futures of specific businesses. But the purpose of the stock market is to allocate capital to productive businesses so that useful investments are made in the real economy. It doesn't always work perfectly, but fomenting irrational froth in businesses with no fundamental reason to soar in value makes the markets only less effective at that goal, while short campaigns against overvalued companies <a href="https://www.cnbc.com/2018/10/05/experts-including-warren-buffett--say-short-selling-can-be-beneficial-for-markets.html">make it <em>more</em> effective</a>.</p><p>"Short sellers have alerted us to problems in companies before the government and others did, like at Enron," said Jason Furman, a professor of practice of economic policy at Harvard and former chairman of President Barack Obama's Council of Economic Advisers.</p><p>Shorts more recently helped reveal the <a href="https://markets.businessinsider.com/news/stocks/wirecard-collapse-earned-hedge-funds-more-than-1-billion-week-2020-6-1029345288">financial fraud at Wirecard</a>over the objection of German regulators who defended the payments company when short sellers accused it of accounting shenanigans.</p><p>If you want to see what a market without short selling looks like, look at the private markets, which have in recent years blown bubbles public investors wouldn't tolerate, like at WeWork and Theranos. If it had been possible to sell Theranos stock short, maybe it wouldn't have taken a decade to figure out the company didn't have a product.</p><h2>Not everything should be democratized</h2><p>I understand people feel frustrated by low interest rates, which mean you can't park money in a risk-free asset and earn a significant return. This encourages investors to seek risk.</p><p>But the idea that retail investors have been deprived of the opportunity to make real money through vanilla investments isn't true. If you bought broad stock funds three months ago or a year ago or five years ago, you've done quite nicely. And since the GameStop speculators by definition are people who had some money to put in the stock market, that avenue was available to them. So the idea that these peoplebored people with moneyare a downtrodden class engaged in a righteous fight against Wall Street just doesn't wash.</p><p>The best thing to do to improve returns to vanilla investments that are appropriate for retail investors is to improve the long-run growth of the economy. And I do have <em>one</em> note of sympathy for the investors who complain there's no yield to be had without nonsense like this.</p><p>One reason to favor a significant fiscal stimulus package (besides that it will provide relief to the sort of people who don't have money sitting around to throw at Reddit investing trends) is that if it "overheats" the economytightening the labor market and causing prices to risethat might tend to push interest rates up. This is not a switch the Fed itself can just decide to throw; rates are low because growth expectations are low. But boosting demand and output can boost those growth expectations and make higher rates appropriate again.</p><p>And in addition to increasing the return on safe assets, a rise in interest rates would, hopefully, take the gas out of investing bubbles, like this especially ridiculous one.</p><p><a href="https://www.businessinsider.com/the-gamestop-wallstreetbets-reddit-thing-isnt-funny-its-stupid-2021-1#comments">Join the conversation about this story »</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/what-its-like-make-beer-with-picobrew-c-home-brew-2020-3">We tested a machine that brews beer at the push of a button</a></p>
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