GameStop investors chase the Greater Fool Theory | Jeffrey Scharf, Everybody’s Business

When Roaring Kitty talks, people listen.

Roaring Kitty, the famous or infamous stock market influencer, resurfaced in May after a three-year hiatus. Just as he did in 2021, Kitty, whose real name is Keith Gill, ignited a rally in the shares of GameStop.

For those new to the story, GameStop is a troubled retailer primarily involved in the brick-and-mortar business of selling new and used video games and equipment. Like many stores, it is suffering from the ascendency of Amazon and other e-tailers. The migration of video games from discs to downloads is a further burden.

GameStop’s revenue peaked at $9.6 billion in fiscal 2011 and drifted steadily downward to $8.3 billion in fiscal 2019. Then Covid struck. Shoppers stayed home. Sales collapsed to $5.1 billion in fiscal 2021. The company lost about $1.3 billion in calendar 2019-2021. Bankruptcy loomed.

This is when Gill stepped in. The stock was trading for about $1 per share in July 2020. Short sellers – who borrow stock and sell it today in the hope of repurchasing it for less tomorrow – swarmed. Gill began touting the stock. He developed a devoted online following and his followers joined him in buying the stock. The buying became a tsunami spilling over into other “meme” stocks such as AMC and Blackberry.

Even as its business deteriorated, GameStop’s stock soared. Short sellers were forced to buy back borrowed shares at ever higher prices. GameStop topped out at $120 per share on Jan. 28, 2021. Trading volume often exceeded 700 million shares, meaning that every share changed hands twice a day.

Eventually, the short sellers were cleaned out and reality set in. Gill went dark, reportedly pocketing $34 million in gains. With the company losing another $700 million in 2022 and 2023 before turning a meager $7 million profit last year, the stock drifted down to $11 per share this past April.

That all changed when Gill returned. Especially when he shared a screenshot purportedly showing his $175 million investment in 5 million shares of GameStop and 120,000 options to buy another 12 million shares.

Roaring Kiitty’s acolytes treated this as the second coming. The stock rocketed to an intra-day high of $65 on May 14. It then crashed to $18 on May 24 before rallying to $48 on June 7 when Roaring Kitty livestreamed a YouTube video which now has 2.5 million views. Despite reporting a $32 million first-quarter loss last Friday, GameStop stock remains above its April level at this writing.

It’s flabbergasting to think that anyone watching Gill’s nearly incoherent rambling would take his financial advice.

Gill and his followers epitomize the Greater Fool Theory. Paying a foolish price is not at all foolish if you can sell at a higher price to a greater fool.

In the Greater Fool universe, assets levitate unmoored to logic or intrinsic value. Somebody is going to make money just as somebody is going to win the lottery. But please – whether it’s GameStop or something equally foolish and unmoored such as Bitcoin – don’t call it investing.

Jeffrey Scharf welcomes your comments. Contact him at jeffreyrscharf@gmail.com.