Gamestop Stock CRASHES! But Who Won the Battle?

Well folks, what an amazing ride it has been! But it seems as though the Gamestop saga is finally drawing to a close. So in this video, what we're going to be looking at is who were the winners and who were the losers out of this whole ordeal that saw Gamestop rock it up and then come crashing back down to earth.

So was it the retail investors that won and squeezed out the shorts, or did the shorts get the last laugh and take home the chocolates? That's what we're going to be discussing in this video. Hope you enjoy it; leave a like on it if you do, but for now, let's get started.

Now Gamestop, alongside Blackberry, AMC, etc., all started out this journey as heavily shorted stocks. Now in the case of Gamestop, it was arguably too heavily shorted; at one point, more than 140 percent of their outstanding shares were held in a short position. Now the redditors over on Wall Street Bets actually took note of this, and what they figured out is that they could induce the mother of all short squeezes, and that is exactly what they did.

They banded together; they started buying the stock, they started buying call options in Gamestop, and before you knew it, the stock went from 20 bucks to 40 bucks to 75 dollars to 150 and then to 350, all of this happening in just about two weeks. So they actually did it—they took on the hedge funds, and for the most part, they won.

But this is where things start to get a little bit hairy because, you see, on the 28th of January and then also Friday the 29th of January, some brokers such as Robinhood, Interactive Brokers, Charles Schwab, E-Trade, TD Ameritrade, they all put limits on the purchase of Gamestop shares. The reason they did this is because they had to find a way to reduce the clearinghouse deposits that they had to make; the money that they had to hand over, quite simply, to stop their business going bust.

The problem with this, however, was that it immediately evaporated that buying pressure behind Gamestop stock so much so that on Thursday, the stock crashed 44 percent. However, with one last hurrah, the redditors were able to again add some buying pressure to the stock, now able to spike the share price 67 percent back up to 325. However, in the last four trading days now, the stock has fallen 83 percent all the way back down to 53, which, funnily enough, is actually still up about a hundred and fifty percent from where the stock was just three weeks ago.

So with all that said, with this backstory filled in, who were the actual winners and who were the losers? Well, this is where it gets really interesting because both the retail investors and the hedge funds were winners and were also losers. Because the story kind of plays out in two halves. In the first half of the match, initially, we definitely saw the retail investors winning. They certainly won; they squeezed the hedge funds, they somehow successfully managed to trigger a short squeeze.

We had regular everyday people on the subreddit Wall Street Bets that were making hundreds of thousands, if not literally millions of dollars each day. This guy was able to make 208,000 in one day. Another guy posted that he used his earnings from Gamestop stock to pay off his student loans.

And then, of course, there's the OG Wall Street Bets Gamestop options buying bull, which is of course Deep [ __ ] Value. He bought about 50,000 worth of call options, and at the highest peak, his total portfolio had worked its way up to about 48 million dollars. Now, unfortunately for him, he's still holding on, so that position has still come down quite a bit in recent days.

However, he's still up massively versus where he started, and there's absolutely no doubt that likely thousands of redditors—thousands of retail investors—would have got in on this action early, watching this unfold and would have made just a tremendous amount of money. Even now, as I'm recording this video on the 5th of February, if you have held Gamestop stock since before the 21st of January, so literally like two weeks ago, then you're still going to be up; you still would have made money on your investment.

So there's no doubt that a lot of retail investors made a lot of money on the ramp up of Gamestop stock. And yes, that means that a lot of the hedge funds that were shorting Gamestop shares, they lost a hell of a lot of money. They lost billions and billions and billions of dollars; they got absolutely screwed majorly. Of course, we know the big hedge fund that was making the news during this Gamestop saga was Melvin Capital, and they've recently disclosed that in January they lost 53 percent as they were forced to cover their Gamestop short for just a tremendous loss.

This article says Melvin Capital, founded by star portfolio manager Gabe Plotkin, started the year with 12.5 billion US in assets under management and ended the month with more than eight billion in assets under management—and that was after. So that doesn't sound like 53; that was after including the fact that they got 2.75 billion dollars of extra funding pumped into them during this saga.

So there's a win for the retail investors; Melvin Capital absolutely just went down the drain. But that wasn't all. Data from S3 Partners revealed that at the peak, at the 29th of January, at the worst, short sellers collectively had lost on paper 20 billion dollars. Now that is an insane amount of money, and for a lot of these hedge funds, these short sellers, they would have had to cover their short position like what Melvin Capital did, and they would have just lost billions and billions of dollars.

However, what's really interesting to note that's come out of this article is that the data from S3 Partners shows that during this time, the short interest in Gamestop only declined by eight percent. So what this means is it means for the vast majority of short sellers, either they've been able to hold on through this time where they're getting absolutely screwed, or they've had to cover, but then as they covered, there was a new short seller coming in to take their place.

And this now leads us into the second half of the Gamestop match, where things start to look a little bit different because, of course, this is where the brokerage sites step in because essentially they have to; and they put a limit—they essentially stop investors from buying into Gamestop stock. This, of course, evaporates the buying pressure as I was talking about before, and the stock falls rapidly.

At this point in time, those that hold the stock or hold call options in the stock start to lose, and on the flip side, the short sellers start to win. If the short sellers were just holding on, their losses start to come down, or if it's a new short seller that's just made a position at the high point, then they start to make money.

And as we've seen in literally the last four trading days, the stock has fallen 83 percent. So essentially, the first half of this Gamestop match has been completely flipped around in the second half. If you're holding the stock now, you're suffering, and if you're short the stock, now you're making money.

And I guess the sad thing about this is that we basically all saw this coming, right? Because Gamestop isn't worth 350 dollars per share. If a stock goes from 20 up to 350 dollars in the space of two weeks for no fundamental reason, then you can rest assured that that thing is going to come down.

You may not know the exact timing of when the house of cards comes crashing down, but you do know it's going to happen at some stage in the future. And I think that's what a lot of investors were banking on; they were banking on the fact that, "Oh, okay, you know Gamestop has really caught on; it's now a meme, the whole world knows about it," okay? And is buying it to screw over the hedge funds.

So a lot of investors were still buying the shares even after they were seeing the share price jump up, have a daily gain of like 90 or 100, but ultimately it's this sort of speculation, it's this sort of gambling that very frequently leads investors to just massive losses in the stock market.

This is why, not a week ago, I was talking about how, as value investors, people that are proper investors thinking about the long term and want to build wealth over decades, situations like this we just do not get involved at all. We don't take either side; we just step aside and let it play out and just watch along with interest.

Remember Warren Buffett's first rule of investing is, "Don't lose money." So if you're someone that's getting tempted to buy in and speculate on this stock after it's gone up 1500 in two weeks because maybe the trend is going to continue, because the world seems to be supporting Gamestop stock, you're just not really following that timeless advice from Warren Buffett that has helped him create wealth over decades and decades and decades.

You're speculating; you're gambling. And once you start doing that in the stock market, you reasonably have to go in with the expectations that you're going to come out like any other gambler would. If you do it over a long period of time, if you keep speculating, you're going to lose.

So ultimately, the people that won the second half of the Gamestop match were the short sellers, particularly the short sellers that created new short positions near the top, and the big losers in the second half of the match were, unfortunately, the retail investors betting with their own money after the stock price had just run up incredibly high in a very short period of time.

And the sad thing about it is what I just said is that the retail investors, they are playing with their own money. So in the end, they're the people that are getting screwed, and they're actually losing the money that they've gone to work to build. You know, the hedge funds, the hedge fund managers, they get paid no matter what. Like, if their hedge fund goes up, they get paid; if their hedge fund goes down, they get paid.

So at the end of the day, the sad thing about it is that the hedge fund managers, while yeah, sure, they would have been stressed at work over the past couple of weeks as their hedge fund bounces around in value, at the end of the day, fortnight after fortnight, they're still getting their massive fat salaries. And that's just the reality of it.

But overall, retail investors didn't all get screwed over, and hedge funds certainly didn't all win. As I said at the top of the video, there were winners and losers on both sides. Certainly at the beginning, there were plenty of retail investors that made absolute bank backing Gamestop and buying call options, and there were a lot of hedge funds, aka Melvin Capital, that just got screwed over because they had to cover their short positions at massive losses.

It's just, unfortunately, in the second half of the piece where the stock price comes crashing down, that's when retail investors feel the pinch as the trajectory that they were expecting doesn't play out, and the hedge funds that were either able to hold on, they get to recoup some of their losses, or the hedge funds and other entities that started new short positions right at the top, they start to make a lot of money.

But overall, I hope that was an interesting video, and I hope that explained to you guys who the winners and losers were out of the situation. I hope it kind of makes sense that there are winners and losers on both sides.

I'd love to hear your thoughts and opinions on the Gamestop saga now that it's— I think it's drawing to a close. I don't believe we will see another massive run-up, although there are, of course, people speculating that that is going to happen.

So, you know, just take everybody's opinion with a grain of salt and just go with what you think is going to happen at the end of the day, based on your own research, D-Y-O-R: do your own research. But anyway, guys, hope you enjoyed the video; leave a like on it if you did enjoy or if you found it useful. Check out profitful links down in the description if you'd like to learn about my investing strategies—both passive investing and active investing—but that will do me for today, guys. Thank you very much for watching, and I'll see you guys next time.