What We Learned This Week

History Doesn't Repeat Itself but It Often Rhymes: We thought the GameStop phenomenon was a one-time event, but it has unexpectedly resurfaced. The kind of attention this receives is often problematic due to the extreme hysteria and volatility driven by groups of retail traders treating the stock like casino chips. This is why we’ve refrained from commenting on the action – it doesn’t merit serious investment discussion. However, there is value in understanding how the past relates to the present and future.

To recap, this all started during the COVID pandemic when investing and day trading became popular as people were stuck at home. Groups on social media began targeting stocks that hedge funds were shorting, buying them up to force the price higher and causing significant losses for those hedge funds. GameStop and AMC became the poster children of this movement due to their struggling businesses and heavy short positions. Remarkably, this strategy worked, leading to dramatic price spikes and significant profits for the retail traders (on paper). However, the underlying companies were still fundamentally weak, leading to a quick crash back down, lawsuits, and congressional hearings.

Ironically, the surge in stock prices allowed these companies to issue additional equity at higher prices, giving them a cash infusion that kept them afloat. Fast forward three years, and GameStop is still trying to find relevance. The madness seemed contained until recently, when a major figure from the initial frenzy, known as Roaring Kitty, resurfaced on social media. His revelation that he still holds his position sent GameStop’s stock soaring from around $10 to nearly $50 in a matter of days, before settling around $30—a 300% increase with no fundamental developments.

Roaring Kitty’s original $53,000 investment has grown to nearly $300 million, driven entirely by speculative frenzy. This has led to allegations of stock manipulation and rumors that major online brokerages might ban him to prevent potential pump-and-dump schemes. That said, it doesn’t appear as if he’s sold any of his position at this point. In fact, if he converts his next tranche of options expiring in June, he would become the fourth-largest shareholder in GameStop.

So, why does this matter? While this may seem like a one-off event, it’s important to watch the market's general activity and risk appetite surrounding these events. The 2021 frenzy coincided with a massive speculative bubble, with stocks rising, SPACs proliferating, IPOs booming, and cryptocurrencies surging. This led to unrealistic growth expectations, which eventually culminated in the selloff and bear market of 2022.

Today’s situation doesn’t feel as widespread. It seems more contained to a few stocks like GameStop. However, there’s a noticeable resurgence of interest on social media, and major tech companies are seeing relentless gains on seemingly stale news. These are signs of increasing risk appetite and speculative behavior. Yet, the economic environment—characterized by slower growth and high inflation—may keep a lid on things this time. While there’s no immediate cause for major concern, these trends warrant monitoring, especially as the market continues to move higher.