The justification for buying GME, and how GME is manipulated

Added to some GameStop (ticker: GME) a month ago when Keith Gill (aka Roaring Kitty) first returned, at around $26/share. So far I’m up considerably on the position. It was a small allocation relative to my overall portfolio, but it did contribute probably a few percentage points to my overall year-over-year return, so it was not entirely insignificant.

Kitty’s return is not a fluke. He has staying power. As long as he’s hyping GME, the stock will go up. Regarding the SEC and the legality of his actions, Kitty can pump/hype GME as much as he wants provided he does not make materially false statements about GameStop’s business, or unbeknownst to his followers, sell GME whilst pumping it. Taking advantage of the credulity of the media and the public is not illegal. So this leaves a lot of leeway or levity for him to pump the price to his heart’s content.

My justification for buying GME despite the poor fundamentals of the underlying business is that it has ‘meme power’, which works in two ways. First, by providing the initial hype or catalyst to make the affected stock go up. Second, the hype feeds on itself leading to secondary follow-on effects, such as short-covering and ‘FOMO’. Initial gains from Kitty’s audience begets significantly more outside buying as short-sellers scramble to cover and the Twitter/financial-media hype-machine kicks into overdrive.

‘Meme power’ is much more explosive as a catalyst or propellant for upside compared to billionaire activists, who are comparably ineffectual and easily ignored. A sub-billionaire like Mr. Gill with his huge online fandom and the endless media coverage he attracts, engenders far more buying power than billionaire activists such as Bill Ackman or Carl Icahn. Indeed, see what happened to Herbalife short-sellers who copied Ackman; it did not end well for them, or for Ackman, who lost $1 billion.

The process of the manipulation is predictable. It starts with the initial tweet by Mr. Gill, which leads to media coverage and GME rising overnight on Robinhood, which allows for extended-hour trading on weekends for select stocks. Kitty times his tweets early in the morning, which leads to premarket buying on Robinhood, where the volume is thinner and thus it takes less buying power to force GME to ‘gap’ higher. This gap leads to a huge mark-to-market loss for short-sellers, who are forced to cover after GME opens much higher.

So the idea is maybe only $20-30 million of overnight buying in the thinly-traded Robinhood market is enough to lead to potentially hundreds of millions or even billions of dollars of unrealized losses by short sellers the following morning. As a contrived example, imagine a company has a billion shares trading at $1, and then a single share changes hands at $2 in the premarket; overnight the entire firm doubles in value and short-sellers have a 100% mark-to-market loss and must buy the stock at $2 to cover.

Even billion-dollar hedge funds are at the mercy of the social media tsunami. I think this puts a dent in the common populist narrative that lawmakers protect the rich or that the wealthy are uniquely protected or privileged. As we see with GME manipulation, lawmakers are typically not that sympathetic to short-sellers, who suddenly find themselves crushed by a freight train of buying. By the time lawmakers notice, the damage has already been done.

And given that Mr. Gill is still allowed in 2024 to pump GME despite all the controversy in 2021, which famously doomed the hedge fund Melvin Capital, again, shows that protecting the Wall St. elite from their poor risk management and the collusion of social media to pump stock prices, is not a top priority of lawmakers.