“GameStop Mania” hit the news pages like a tidal wave. For me at least, it offered a form of comic relief: a bizarre story of investor protest amid the disheartening daily reports of Capitol Hill riots, unemployment figures and pandemic deaths. We haven’t even reached the end of the story and movies and Congressional hearings are being planned. What does it all mean? Time will tell, but one thing’s for sure, the whole idea never stood a chance. Share prices can be manipulated in the short term but history is a good teacher, and the rationality of markets will not be denied.
Most people, whether active investors or not, know about stock market bubbles. The dot.com rage was the last big one. As a financial analyst during that period, I saw craziness firsthand. Companies with little more than a business plan and crafty bankers issued stock to the public at valuations that would have made Bill Gates proud. The resulting crash was predictable. True, hindsight is 20-20 but many of us knew that hoped-for revenues don’t equate to actual profit and most such stocks were doomed from the start.
More rare and just as interesting is the single-stock bubble. My favorite, and one getting some press right now, was the South Sea Company fiasco of 1720. The scheme was complicated, but the English government essentially agreed to let the company refinance Britain’s public debt, with potential upside if the newly issued shares increased in value. The idea sounded great to politicians and stock “jobbers” alike and in an age before quarterly filings and analyst reports, investors blindly poured their life savings into a company they knew virtually nothing about. The bill finally came due, and many lost everything when the bubble finally burst; the only clear winner in the aftermath was Robert Walpole who covered up the government’s complicity and went on to become England’s first prime minister.
Another possible parallel to the GameStop phenomenon is the occasional manipulation of the commodity markets. In 1869 that most hated of “Robber Barons”, Jay Fisk, attempted to corner the market in gold. What made such a nefarious scheme worse was Fisk’s use of his new best friend, Ulysses S. Grant. The U.S. president was famously naïve about all things financial (other scandals would follow) and apparently disclosed information to Fisk and his co-conspirators about government gold trades. The cabal’s efforts were initially successful, but on “Black Friday” the market collapsed and the ensuing panic on Wall Street nearly caused an economic depression.
This type of blatant, unrepentant greed still exists. Indeed, as Gordon Gekko would tell us, it is what drives the market and makes capitalism work. Fortunately, over the past century or so, the government implemented safeguards that protect us from market manipulators like Jay Fisk. Insider trading is illegal, and companies are required to rapidly disseminate financial and other information that allow investors to make informed decisions. In addition, the markets regulate themselves to a degree, with restrictions on certain trading activity and disclosure rules for large investors.
Such protections create greater confidence in the markets and allow investors more latitude in what to do with their money. The GameStop trading activity designed to punish hedge funds resembles “impact investing” — a relatively new phenomenon where investors put their hard earned money in companies based on perceived socially beneficial or altruistic goals. “Woke” investors, including some private equity firms with this orientation, help fund renewable energy companies. The obverse is true also. Many investors withhold their funds from tobacco companies or firms engaged in animal testing.
That type of investment activity is laudable and we can expect to see more of it. But most individuals engaged in it are savvy enough to understand the nature of capital markets. There is no attempt to manipulate trades because such a plan is doomed to fail. Investing can be personal, but the market is not.
In the end, stock prices are a function of supply and demand. GameStop investors understood this much and tried to manipulate the market by artificially overweighting one side of the equation. But in an efficient market, the demand for a stock must be based on something. In most cases that is quite simply future earnings capacity. We’re not talking here about a simple price to earnings ratio which many day traders might know about; that isn’t even a possible measure given GameStop’s losses. As a professional stock appraiser, I spent much of my career estimating the intrinsic value of stocks based on fundamentals and projected earnings. The list of variables considered in that exercise is too lengthy to discuss in a column like this, but it includes everything from qualitative factors like the management competence to strictly financial measures including profit margins, debt ratios and asset returns. All these factors are considered by the sophisticated, unemotional investors that ultimately determine stock demand. They are logical, rational determinants of stock prices and they cannot be manipulated, no matter what the goal might be.
As we are seeing in real time with GameStop, the market doesn’t care why you put your money in a particular company. It is an amorphous collection of millions of “greedy” individuals, banks, pension plans, trading clubs, private equity firms and other organizations that have a singular goal of making money (or at least not losing it) through the informed selection of sound investments. Attempting to chastise a perceived financial bully through whimsical, irrational investing will always fail because stock prices stubbornly refuse to cooperate. History has proven, time after time, the overriding economic logic of financial markets.
Steven Krug is a Ph.D. student at the University of Georgia specializing in colonial American and early modern European intellectual and economic history.
