Episode 14 – Game Stopped: How meme stocks are upending Wall Street

Speakers
Marianna Boyd, Peter Ricchiuti

Marianna Boyd
About two weeks ago, the country was transfixed by the stock of a company that hasn't been thought about much since the 90s and early 2000s, GameStop. Suddenly, it was the hottest stock to have in your portfolio. Or was it? Thanks to a Reddit sub community called WallStreetBets and other internet forums, small investors gobbled up shares in the hopes of seeing astronomical returns overnight. Social media was abuzz with the term “short squeeze” and the idea of small investors writing their stocks to the moon. What actually happened? What led to GameStop becoming a meme stock? And what does this mean for small investors going forward?

Welcome to On Good Authority. I'm your host, Marianna Boyd, with Tulane University Communications and Marketing. Our guest today is Peter Ricchiuti, a senior professor at Tulane University's Freeman School of Business. He is also the founder of Burkenroad Reports, an investment research program at Tulane, and also the host of the business podcast Out to Lunch, featuring founders of Greater New Orleans businesses. Peter Ricchiuti, thank you so much for joining us today.

Peter Ricchiuti
I've always wanted to be on this.

Marianna Boyd
Can you walk us through what led up to the situation with GameStop and summarize how it's unfolded so far?

Peter Ricchiuti
Well, you know, once upon a time, there was a company called GameStop. And they were out of Dallas, Texas, and they had 5,500 stores. And they, their future didn't look very bright. They, you know, for current students around that age, you'd remember GameStop is where your mom took you to get a controller and maybe a new game or a used game. And things have changed over the years. People are buying the controllers, all that equipment online. And new games that were being released, which used to physically be released, are now being released online. And so they have a very different model now and their future is, I wouldn't say bleak, but at best unexciting. There's these investors on Wall Street called short sellers. And what they do is they try to find stocks of companies that they believe will go down. And so, they looked at GameStop as one of those kind of companies, in that it didn't have, had a decent balance sheet but didn't really have great business prospects. And short sellers are kind of an odd part of the market. Oddly enough, we talked about it in class every year. And sometimes it just seems esoteric, it will never be esoteric again, though. Yeah, what they what they do is they come in, it sounds kind of metaphysical what they're doing, but they're betting against the stock. And what they do is they go to a brokerage firm, and they borrow the shares that are held there in the names. In other words, if you have a brokerage account, you might have, let's say, 1000 shares of GameStop at $30 a share. Well, you keep it at the brokerage firm, 99% of all people do. And it's a great deal. The the brokerage firm takes care of all the tax information, it's there to buy and sell. But one of the things that happens, and there's no reason for anyone to know this, is at the very bottom of the account application in a very small font like six, in italics, they, it says you can lend out my securities to short sellers. And really, you're all insured. There's no reason for you to know any of this. But that's one of the little things. And so, these short sellers go to an investment firm, whether it's Merrill Lynch or UBS, Morgan Stanley, any of these, and they go in and they say, “I want to borrow those shares and sell them.” So they go into your account, they hand them over to these folks. Once again, no problem, no need to worry about this. And they go ahead and sell the stocks, let's say the stocks at around $30 a share, they would sell 1000 shares at $30 and get $30,000. And next what they're hoping is the stock drops, so let's say it drops to $20 a share. Now you can buy those 1000 shares at 20 for $20,000. You got 30,000 in your pocket, a $10,000 gain, after which you put the shares back in, you know, Marianna's account, and she never knew what, never knew it hit her. And what happens is, I just gave you a good scenario where you sell the stock, the stock price drops, you buy it back for a profit. But one of the things that can happen in short selling that most people don't know, certainly the short sellers know this, but if the stock starts to rise, you have unlimited loss potential, which is very exciting and very frightening. If you if you buy a stock, which is what you and I would do, we would we would purchase shares at one price hope it goes up and sell it. We have unlimited gain potential, because the stock could go to the moon, but limited loss potential. It could only go to zero, you can only lose all your money, which doesn't sound very comforting, but that's it. And so, but these guys have flipped it upside down, so they have limited gain potential, the stock can only go to zero, that's where they make money on the decline, but unlimited loss potential. So as, as these small investors got together on Reddit, and really armed with next to nothing, you know, people said, it's just some moxie and maybe their stimulus checks. They were all told to buy the stock and drove it up from basically $20 a share up to the mid-400s. Those short sellers were very, very, very nervous. And so, they they did, is that once once the stock started rising, they started to get very nervous and the way they said, “I'm out, I'm not going to risk any more losses.” And the way they get out, of course, is to buy the stock back and put it back in the account where it was. So the only way for this to end is for them to be buyers of the stock. And when they're buyers of the stock, it sends the stock up even higher. And that's the and that's the part, with a term you've heard is a short squeeze. And that is that you're squeezing the shorts, you're you're you've made them so nervous that they're buying the stock back and all those buy orders send the stock up even higher. It's not all fun and GameStops anymore.

Marianna Boyd
It's playing out right before our eyes, which I mean, that's that sort of leads to another question of the influence of social media and the Reddit community on this, how much do you think that that played a part?

Peter Ricchiuti
This could only happen because of social media, which is why it's why it's a new ballgame out there. To get small investors to act as an army, you really could never, ever have done this without social media. And, and so it's a force to be reckoned with. And I think down the road, it's going to have a couple of different impacts on the markets in general. The good thing is people are really interested in the stock market. Now I'm like, at parties, I you know, actually people want to talk to me and things like that, things are really, really better. On the bad side, I think that investors are going to get really burnt in here. And I mean, the short sellers and the the little people buying the stock, I think there's going to be tears on both sides. And, and I think it's going to make people shy away from being investors again. And the reason they got killed either way, is they were tremendously speculating. And it, but that, they've gamified it, that's what's happened in here. And so I think that's going to be the problem going forward, just like they're going to be burned. You know, you whenever you run into people and you tell them you're an investor in the stock market, you always run into people go, “I would never do that again. I was I was almost killed.” Well, what did they do? They were following hot tips. And they were getting involved in some crazy speculation. My own family, you know, my parents grew up in the Great Depression. And let me just tell you, I mean, there was no discussion of stocks at the dinner table. You know, this was once you get clobbered, you're sort of out for life, psychologically. So but no way you could do without social media.

Marianna Boyd
And it's interesting that you mentioned the gamification because I heard that as one of the critiques specifically about the Robinhood app, it's built to be gamified. So it's supposed to make it more accessible to small investors. But I think we've seen that people have jumped on the bandwagon with it, and and maybe they don't quite know what they're doing.

Peter Ricchiuti
Yeah, it's the same device that you're using to play all those games. So it does seem like it's the same thing. But it's big money for whoever is investing. I mean, you know, even if it's just a few hundred dollars, for instance, our students, I mean, that, that wipes you out, you know, it doesn't it and I think in this, this whole thing is really been, I think it's been predicated by a couple of things. You have social media, you've got all this financial news. When I was, I've been in the business for 40 years. And when I started, nobody cared about financial news. I mean, you know, there wasn't a CNBC and Bloomberg and all this kind of, kind of thing. But now there is, and I just, I just don't know where it where it goes from here. I do think that this end is potentially at least dented because the people who are writing it up, those young people are running up, they really thought it would go to the sky. And they forgot one important message. And that is you don't make a profit until you sell. And so, and then when they started to see a drop, they all all sold and dropped it back, back down again. So I don't think social media will ever be able to just juice people up like this anymore. There's going to be a hesitancy and and the other hand, I think, short sellers, they're still going to be short sellers. But in the back of their mind they're just thinking, “You know, I don't know. Yeah. I'm a little more queasy about this.”

Marianna Boyd
So how much do you think COVID and people being in quarantine influenced the conditions that led to this situation?

Peter Ricchiuti
Oh, absolutely. That was that was a big function. You know what if you look back, a lot of people like to bet. And traditionally the betting, if you listen around campus, its people betting on a sports event or something like that, and sports just stopped. You couldn't bet on the Celtics if they weren't playing, you know, and, and so they began to wonder where I could keep this adrenaline going. And they found the stock market. And, and they thought it was sort of the same thing. And they did. And so you get to a group of investors now that, you know, I'm talking about the fact in class that the on an average year, the stock market will go up 10%, sometimes it'd be higher than that, sometimes be lower than that. And they think they can make 150% in a in a day. And not only that, not only did they find that, this is why they found the stock market, because it's a very odd time because the stock market is at new highs. It's quite frankly, very expensive. And it's a very dangerous time to have found this new addiction. And I think that that's one of the real problems. I think one of the things that really appealed to people here was this, this idea that the little guys could kill the big guys. You know what I would advise anyone to do? It is something I do in class every year, which is I take, I have the students, I show in class, the last eight minutes of the movie Trading Places with Eddie Murphy and Dan Aykroyd.

Marianna Boyd
Yes! Great movie.

Peter Ricchiuti
Yes, it is. And I tell my students tuition is entirely worth it, if just so you can know what's going on in the very end part, of the end part of the movie. But you basically get Dan Aykroyd and Eddie Murphy, and they’re short selling. And then the price of, in this case, frozen concentrated orange juice, drops, and they cover their short, they buy back and make the profit. And the thing that Eddie Murphy says at the end is exactly what all these young investors are thinking. He said that, he says, he says to the Duke brothers, the wealthy people, he says, “You know, you see, Dan and I are, you know, my my friend and I had this bet that we couldn't get rich and put y'all on the poorhouse at the same time, and I didn't think we could do it.” And he, it’s a $1 bet. But that's exactly what's going on here. So you know, I guess we could quote some financial journals. But why not just go back to Eddie Murphy and Dan Aykroyd where where it belongs.

Marianna Boyd
It's amazing. It's a holiday movie and a stock market movie.

Peter Ricchiuti
Yes.

Marianna Boyd
I guess, what were the stock market conditions that led to GameStop becoming a meme, a meme stock?

Peter Ricchiuti
Well, I mean, I think that first of all, they didn't pick just any stock. If you look at what they've done, they've picked GameStop, which the fortunes don't look all that great. So what, if they do it again, is very easy to figure out where their next targets will be. And they'll be in stocks with a large amount of short selling. And then the other thing, really, the underlying part is that interest rates are so low, that there's nowhere to go to, you know, you either go to the stock market, or just, I mean, that's really your last avenue. I will like to tell you one thing that people don't get right is what's going on here has no effect whatsoever on GameStop, the company. But it has no effect, it doesn't change their their capital formation. It doesn't make them more attractive as a business or hurt their business. And I'm gonna say this, I've known hundreds and hundreds and hundreds of people that have made millions and millions of dollars in the market. And they've all made it one way. They bought a few good companies and maybe a good few mutual funds and held on. And the rest of it, you make money and you and you lose it again. It's you know, it's like gambling in a casino, you know, sometimes just want to say to people, “The reason, the reason there's a house is the house ends up winning.”

Marianna Boyd
There's this feeling from small investors that during this whole situation, that the rules changed on them, and that the goal posts were moved. What would you say to that, in terms of how things are regulated?

Peter Ricchiuti
I would say that that really is true if they’re thinking of the Robinhood situation. And these once again, they’re, folks were on their side and all of that, but when they restricted trading, and stopped the stock from going any higher by eliminating the buy orders, I can definitely see why they feel like this. Now on the other hand, the 180 from this is the comparison of when I first started in the business. Two things that make, I think the individual investor has a huge advantage now over the big institutional money managers. A couple of reasons. One is, you know, 20 years ago, if you bought 1000 shares of a stock at 30, you might pay $700 in commission to buy it and another 700 to sell it. So you were behind the eight ball no matter what happened, you really had to get a big move. And then now you do the trades for absolutely nothing. And so that is amazing. That's allowed the individuals, before the institutions, the big guys paid very little commissions and you paid a ton. Now you're both paying next to, next to nothing. The other thing is is such a free flow of information. That's that's the, the freedom has been unbelievable. And the other thing is, if you look at what we follow at Burkenroad Reports, where the students write investment research reports, we, we focus on smaller companies from Texas over to Florida, small public companies. And in that area, I think the individual has a big investor, it has a big advantage. And the reason is, these little companies, an individual can get in and out, in and out without affecting the price. But an institution is so big that if they went to buy these same companies, they would move the stock up when they got in and move the stock down when it when it got out. So I think it's a lot better than it used to be.

You know, I started teaching at Tulane 35 years ago. And at 27 years ago, I came up with this idea of what is now Burkenroad Reports. And what it is, it's a, I came out, I was teaching part time in the beginning. And I noticed we have all these students that would love to have some sort of experiential learning, really get their hands dirty. And yet in the South, particularly in the South, there were all these companies that had no coverage. Wall Street didn't even know they existed. And we were a long way from Wall Street and, and they weren't that large, they had everything going against them. And I thought if we could provide research coverage for them. And it's really, really worked out. What I do is I take 200 students. I divide them up into teams of five. And each team is assigned to one of 40 different small cap publicly traded companies that nobody cares about. And there, we call them stocks under rocks. And we get and they are, part of the thing, is that part of the whole program, is they, not during COVID, we've been able to have to do it by Zoom. But basically, we put them on a plane, and we send them out to spend the day with management, which is incredible. And that's one of the reasons we follow these small companies. I was once talking to a professor from an Ivy League school that saw a write up we had, I think in the New York Times, and he wanted to replicate it up there. But he didn't get why we're following the little ones. He goes, “We would do that. That is an excellent idea. I believe we would do that with Microsoft.” I was thinking yeah, that's what the world needs an 85th analyst on Microsoft. We visit companies that are so small that they have signs in the windows sometimes “Welcome Burkenroad Company,” Welcome Burkenroad Students.” You know, “No one's visited for five years, get the doughnuts, they're almost here.” I get and they write these investment research reports. And the thing I'm most proud of is it's differentiated them in the workforce. So now, everybody has a resume and a lot of people come from a great school and like Tulane. A lot of people have good GPAs. But now, they can plop down that report, and 1,100 students have gone to work on Wall Street from this program, and Wall Street could be anywhere in the country, but the investment field. And a couple of years ago were named the number one experiential learning program in the world. We beat 500 of the universities in 43 countries, we've been written up in the New York Times, Barron's, The Wall Street Journal, CNBC Nightly Business Report. Across the board, I think we've probably been the most externally recognized program in the country. And we have a great time with it.

Marianna Boyd
For Burkenroad Reports, is there a way that the public can like follow along?

Peter Ricchiuti
We have a conference every year, and it's always the first weekend of Jazz Fest. So we call it Jazz Fest for capitalists. And what happens there is all the companies that we've written these reports on and visited and met with management come to New Orleans, a little different this year, but they come to New Orleans and make a presentation about how their company is doing and what the outlook looks like. And it's very exciting. I mean, you never get, and it's open to everybody, we get 6-700 investors that come. Some are big money managers, mainly they're just people from the community that like to invest. And you never get to see those folks and hear from them. And we've really, really very much enjoyed it. And so, this one is going to be on April 23. It is going to be virtual, which is actually going to be fine. And we've been working on this for a long time. I think you're going to hear from, we're going to have more companies presenting. We're going to have more more of an audience, so we're we're very, very encouraged. I think, I think this year is going to be great. And if they just go to burkenroad.org, they can they can not only registered for the conference pretty soon, we haven't got it got it up yet, but they can also read the reports the students wrote, which is I think, just kind of terrific.

Marianna Boyd
Peter, thank you so much for lending your expertise and joining us today.

Peter Ricchiuti
It was a lot of fun.

Marianna Boyd
Thank you for listening to On Good Authority. For more information on this and other episodes, visit tulane.edu/on-good-authority.