GameStop, Short Sellers, Hedge Funds, Robinhood and Main Street Investors– Reputation Winners and Losers

I have absolutely no skin in this game – I have never owned GameStop nor have I ever shorted a stock – it is still instructive to speculate about the reputation management strategies of the various players in last week’s astonishing events.   

An internet inspired mob orchestrated a short squeeze that led to a maddening crowd of Main Street investors buying up the stock of a fundamentally struggling company and forcing a comeuppance on Wall Street short sellers and hedge funds.   

News media vacillated between cheering on the everyday investors profiting at the expense of the evil hedge funds and cautioning those same investors of the perils of a classic investment bubble. 

But one must imagine that many of the players involved are now contemplating how these events will affect their reputations and what they should do next: 

GameStop – Almost innocent bystanders, the management of GameStop saw their stock go from around $4 up to more than $400 at one point. The fundamentals of this company – a mostly brick and mortar retailer of videogames whose primary business has been decimated by online gaming and the pandemic – have not improved.  But now the company has a ridiculous valuation – at one point worth more than 90% of the companies on the Russell 3000 index. 

Now more than ever, GameStop should be embracing this unwanted attention to tell the story about how they envision being a part of a digital gaming future.  Gamers – like everyone – may welcome the opportunity to be part of a community. GameStop should do everything they can to embrace their 10 minutes of fame to share their vision of the future. 

Short Sellers  There is no love lost between large investorssmall investors – really any investors – and the short selling community.  Years of establishing short positions and then later telling the world why they are short in order to manipulate prices has not engendered much goodwill.   

But if we were advising an association of short sellers today on what to do to redeem their reputation, we’d suggest talking about how hedging and short sales contribute to an efficiently functioning market at some point.  But for now, I’d maybe lay low for a while to let the dust settle. 

Hedge Funds – Like short-sellers, a collective cheer rose up for the crowd who effectively squeezed the oh-so-smart hedge fund investors betting that GameStop and any number of other companies would fail. Hedge fund magnates and their privilege have been poster children for a widening wealth gap.   

While there are as many flavors of hedge funds as there are mutual funds, all were tarred and feathered with the same brush when a few hedge funds engaged in short selling GameStop.  Rebuilding a reputation might require delineating the wide range of approaches, many of which had no positions in GameStop.   

Robinhood – As a company whose brand revolves around average Joe’s sticking it to the powers that be, the fact that many of the everyday investors who effected the short squeeze traded on Robinhood was no surprise.  But when Robinhood apparently needed additional capital and froze trading in GameStop and other names on Thursday for some investors while allowing others to continue to trade, the company’s reputation suffered. When both Rep. Alexandria Ocasio-Cortezand Sen. Ted Cruz publicly call for congressional hearings, it might be smart to tread carefully.   

With both good and bad attention resulting from the situation, Robinhood has an opportunity to define its future and clarify its mission.  A lot of people will be paying attention.  A careful evaluation of processes that allowed the kind of leverage that resulted in the dramatic run up in GameStop might be warranted. It might be smart to gather and share data that tells a fuller picture about the range of investors responsibly using the platform – and any guardrails that can be put in place to prevent unintended outcomes.   

Main Street Investors – Investors active on Reddit message boards and Robinhood are the heroes of this moment. But it is hard to imagine how this can end well.  Many small investors who jumped in even as late as Friday when the stock jumped up another 200% could lose big when this bubble eventually bursts.  It will be interesting to watch the Reddit crowd turn their attention to their next target whether it be SPACs or silver. 

While a small number of day traders garnered a huge amount of attention in the last week, millions of others did not participate in the run up.  In fact, many small investors have missed out on the bull markets over the last decade after being burned in 2008-09 

We’d like to see smart FinTech firms, thoughtful advisors, and the many financial services firms serving everyday investors harness the excitement that this episode generated to help more Main Street investors get engaged in investing.  There is an opportunity for more and better apps to help these investors learn about investing, understand the behavioral tendencies that lead to unhealthy bubbles, get meaningful advice, and engage in the disciplined practices that result in prudent longterm growth. 

The jury is out on how these Main Street investors land when the bubble burstsWe’ll be watching how all of these groups do at salvaging or burnishing their reputations.