Changing the game

Short selling, as you probably know, is when an investor (let’s call them A) is so confident the value of a stock will continue falling that they bet on it. 

They make a deal to sell shares to B at an attractively low price, without actually owning the shares yet. Then they wait for the value to fall, so they can buy the shares at an even lower price, deliver them to B at the price agreed and bank the profits.

This is an arrangement that seems quite strange to people outside the financial markets (how can you sell something you don’t own?) But it’s legal and it has, historically, proved hugely profitable for Hedge Funds. 

The problem is what happens when that bet goes wrong: when the market doesn’t do what you expect and the share price goes up. A is still contractually obliged to give B the shares they’ve paid for, which means A has to acquire those shares at whatever price the market demands. So A makes a loss, not a profit.

That’s what happened last week to a number of Wall Street Hedge Funds, who had taken a short position on GameStop, a loss-making retailer.

Amateur market-watchers noticed so many funds were ‘shorting’ the stock that there weren’t enough actual shares to cover all the exposure. They smelt an opportunity, bought some shares and went on Reddit to urge fellow private investors to do the same.

The result was that, instead of falling, GameStop’s share price surged from $2.57 to nearly $500. It made no sense, but that didn’t matter. By the time the funds had worked out what was happening and bought enough shares to cover their obligations, they’d collectively lost around 19 billion dollars. They’d been beaten at their own game, by amateurs.

What’s interesting is that many of the amateur investors who piled in don’t seem to have been motivated by money. They know the shares they’ve bought are likely to drop in value just as quickly as they’ve risen. And they don’t care.

Because what they really wanted to do was give the Hedge Funds a bloody nose.

I suspect many observers feel some sympathy with that. After all, short-selling is a pretty unsavoury practice: Hedge Funds can buy and sell stock in such significant volumes that the simple act of offering the shares at a lower price often triggers precisely the fall in value they’re betting on. Which hardly seems fair. 

Especially when you consider that, for the Hedge Funds to win, someone else has to lose – which, in this case, includes the real people who work in GameStop’s stores and may lose their real jobs when the company’s value plummets.

That’s why I always think the most important question any business needs to ask (and keep asking) itself is this: what value do we create? What would the world lose if we weren’t here?

If the only answer is ‘money’, you’d better start looking over your shoulder.

Because the real people have figured out how to play your game. And they’re coming for you.

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