The Big Squeeze: How Main Street Beat Wall Street

by Curtis Kosic
June 11, 2021

If you have spent any amount of time on social media or news outlets recently, you probably have seen the news about Gamestop and the stock market. You have also probably recently learned about the Reddit discussion board known as WallStreetBets and how it caused bailouts of several hedge funds.

This event, however, now categorized as a “black swan” (an event of extreme improbability), goes deeper than most realize. And the true history of it, spanning more than a decade, needs to be uncovered.

First, before any events can be discussed, there needs to be a bit of background. Since many people, especially newly minted Gen-Z investors, are in the dark about what makes Wall Street tick, some very basic terms and education is needed.  

The first key is understanding what makes a stock price rise or fall. A stock price is typically a reflection of a company's overall performance and outlook. If a company has solid financials and strategies for the future, the price per share will rise. And as more money is being put into the stock, the higher it will go. The inverse is true as well: if a company is failing and has bad publicity, investors will want to take their money out of that stock, causing it to fall.

The second key is knowing what short selling a stock is. When you short a stock, you are making a bet against that company. For example, if Apple’s stock has a value of $140 a share, and you believe it is going to go down in the near or distant future to $130 a share, you would bet against it and sell the shares to a buyer at a lower price. The lower it goes within the time frame you bet on, the more money you make. The main downside to shorting is that it carries unlimited risk. Say instead of going down to $130, those same shares of Apple skyrocket up to $200 a share. Now, to stop the bleeding and cover your losses, you are forced to buy the stock at a much higher price, losing a ton of money.

The final key is learning about market volatility. In chemistry, when a reaction is said to be volatile, it can be unpredictable, borderline explosive. The same principle applies to trading. If a stock or the market itself shows massive price swings from weekly or monthly highs and lows in a single day or few days, that stock is considered volatile. The graph would look like a series of hills, or peaks, followed by shallow troughs, and the more volatile a stock is, the higher the profit potential could be, and the loss potential can be just as severe.

Now that you are caught up to speed on the fundamentals of trading, and the key financial components of this story so far, it’s time to examine where the beginnings of the Gamestop saga originates: a black swan event that occurred over a decade ago.

Back in 2008, one of the worst financial crises in history led to millions unemployed, millions foreclosing and defaulting on their homes, and some of the largest bank and financial bailouts in U.S. history. The person who benefitted the most from betting against Wall Street’s greed was Michael Burry. After betting against the housing market and the shady banks at the time, when it was all said and done, he made over $750 million in profit.

Contrary to popular belief, Burry never liked shorting any investment. From 2008 and on, Burry invested in the long term, especially in companies that he believed could make a comeback from hard times.

And that is where Gamestop comes in. For years, Gamestop was the go-to place to purchase video games, hardware, and gaming equipment during the 2000s and the early to mid-2010s. This started to end as Amazon and digital media began to take hold in the video game world. With two-day shipping and other incentives, more and more people purchased the physical copies of games or controllers through Amazon, and once consoles like Xbox and Playstation began to offer downloadable titles, the need for a physical video game retailer began to falter. And as the period from 2017 to 2019 saw Gamestop go through 5 interim CEOs, many believed that it was only a matter of time before the distributor went bust.

Everyone except two people: Michael Burry and Keith Gill. In August 2019 Burry announced that his investment fund had purchased 3.3% of Gamestop, a $16.56 million stake in the company, and had written a personal letter to senior management on strategies to save the firm for the long term.  

Not long after, a user on Reddit decided to post that he was investing a large sum of his money into Gamestop for the long term. Keith Gill, a 33-year-old chartered financial analyst (one of the highest and most difficult certifications in finance) living in Massachusetts, father of two, saw very similar potential in Gamestop as Burry did. Through his technical analysis, he deduced that the value of around $4 a share at the time was undervalued and that it would rise in the future, especially with Burry’s endorsement and moves to transform certain Gamestops in more interactive stores, such as PC building shops or more hands-on demos of new games and systems. As a result, Gill invested around $53,000 into Gamestop in September 2019.