GameStop was a good candidate for a short—that is, a bet that its stock price would decline (a process I’ll describe shortly). And, indeed, if you had shorted GameStop a while back, you could have made a lot of money. The share price skidded from the mid $30s in November 2015 to $3.85 last summer. Then, the price of GameStop started climbing, for no particularly good reason, and shares closed 2020 at about $19, which some short sellers believed was unsustainably high for a brick-and-mortar company that was wallowing in red ink.
This is where the story takes an unusual turn, familiar by now to anyone who follows the stock market. In the course of two weeks, shares of GameStop skyrocketed to $348. The short sellers, mainly hedge funds, were crushed, trading platforms such as Robinhood limited purchases, and politicians and regulators caused an uproar. All I want to say about GameStop is that all stock prices go up and down, but in the long run they reflect the actual underlying value of the company. So, no growth, no earnings, no three-hundred-dollar stock price.
My subject for this column, however, is not the GameStop controversy, which has been portrayed by some as a moral contest between scrappy little investors versus evil Wall Street speculators. My subject is short selling, which was the predicate for the controversy in the first place.
What Gershwin knew. When I was a child, listening to my parents’ records, I was fascinated by a line from the song “I Can’t Get Started,” with lyrics by Ira Gershwin. It went, “In 1929, I sold short.” I thought it meant that the song’s protagonist sold all his stock before the Crash. Later, having learned about short selling, I realized that he did much better than that. When you sell short, you don’t sell before something happens. You sell something you don’t actually have. You are short, in this case, of shares of stock, so you borrow them from someone who owns them.
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