Gregory Bergman

Editor-in-chief, CapitalWatch

If I told you a story about a group of everyday people bound together by a common, albeit fundamentally flawed belief, who pushed one another to extremism in a self-reinforcing internet echo chamber, risking everything to overthrow the powers that be, you might think I was offering a charitable summary of the events on January 6.

But I am not talking about the attack on the Capitol. I am talking about the infinitely more sympathetic squeeze brought to bear on big-shot short sellers this week by an army of bullish retail investors.

Now, to back up, there was a fundamental case to be made that Game Stop was both undervalued and over-shorted. But the impetus to buy based on fundamentals, to the degree that it existed, ended about $100 per share ago.

Now, the momentum trading of GameStop (NYSE: GME) has morphed into metaphor, a rallying cry of the little guys versus the masters of the universe. It is a cry against the end of the brick-and-mortar stores, a wail against the digitization of our lives ironically fueled online.

Initially, the GameStop trading game began by a group on the platform Reddit, an online meeting place that has been home for everything from purely pathetic incels (involuntary celibates) to pernicious white nationalists to groups (now banned) to threads focused on “Best Celebrity Nipples.”

Indeed, Reddit has it all. But while Reddit has been hitherto mostly the world of the weird, it was never a place where retail investors have banned together to stick it to the shorts and send struggling stocks to the moon.

So, did I buy or what?

Admittedly, after buying in on an odd combination of greed and preening proletarianism (I sold and made a measly profit of $15 per share), I almost joined the Dark Side. Hoping to cash in on the collapse, I attempted to buy a put despite myself (but it did not get filled at the limit price I set, thankfully). It would have been a trade in direct opposition to my core populist values—and one I would regret financially, at least temporarily. It was a trade which would have all but confirmed that, while I may not share the hobbies (yachting, golf, donations to the GOP) of a short-selling Wall Streeter, I do share the same selfish willingness to benefit even at the expense of others.

The put option I tried to execute, however, was less motivated by schadenfreude, and more motivated by sanity. Or so I told myself. After all, in the scheme of things, I was not trying to take down the little guy, for I am the little guy. Such is the kind of moral wrestling I expect will be at the heart of every retail investor in this now even more absurdly priced stock.

In this quintessential example of a prisoner’s dilemma, we are witnessing, in the trading of GME, a fascinating sociological experiment unfold. Originally framed by Merrill Flood and Melvin Dresher while working at RAND in 1950, Albert W. Tucker formalized the game with prison sentence rewards and named it “prisoner’s dilemma.”

Here is how the classic example plays out:

Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge, but they have enough to convict both on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The possible outcomes are:

· If A and B each betray the other, each of them serves two years in prison.

· If A betrays B but B remains silent, A will be set free and B will serve three years in prison.

· If A remains silent but B betrays A, A will serve three years in prison and B will be set free.

· If A and B both remain silent, both will serve only one year in prison (on the lesser charge).

Basically, people often do not cooperate even if it is within their best interests to do so. Indeed, it is only a matter of time when members of the Reddit group turn on each other. Twitter support from billionaires like investor Chamath Palihapitiya have only prolonged such a Lord of the Flies-like inevitability. What is good for the goose is good for the gander— until that goose gets a chance to buy her own private pond. Then cooperation breaks down, leaving just a bunch of broke geese and one rich but awfully lonely goose.

To wit, two things can happen: Either the shorts concede, or a selling avalanche occurs, at first one by one, of retail investors. Who will be the first to sell for fear of holding the bag? And how far can the stock go if the shorts do concede? According to those at the center of this trade, there is still plenty of room to run. If the Fed can move the markets, the populist sentiment goes, why can’t we? And what do those hedge fund big shots know, anyhow? How many of them even beat the suburban index investor whose community-college educated broker at Paine Webber just told him to buy the S&P? And don’t these hedge fund guys also act as a herd, jumping in and out of stocks in relative unison just like us?

But while skepticism of financial elites, which underpins this whole retail Robinhood revolution, is a good thing on balance, skepticism towards other elites (like, you know, public health experts) is ill-advised. If only we could contain the rollicking righteousness of populist sentiment to the speculative trading of penny stocks.

As for the financial media this week, someone tell Bloomberg TV anchors that the “Value versus Growth” question is no longer a relevant one—at least not with respect to GameStop. A paradigm shift is underway. So how should we characterize this wild ride?

Momentum versus malice?

No, too harsh on the shorts, and a too supportive of the Reddit bulls.

David versus Goliath?

That’s a bit better.

And I am with you, David. If not with money, in spirit. But please be careful. Remember the biblical hero who shares your namesake could always trust in his mighty slingshot. All you can trust in, on the other hand, are other Davids.

Or can you?

Gregory Bergman

Editor-in-chief, CapitalWatch

CapitalWatch Disclaimer

CapitalWatch has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice.