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I am a newbie investor and the GME situation is very interesting for me. I have read many articles about it and could not find an answer to a simple question:

What happens if investors simply hold GME stock for a very long time?

Finviz indicates a Short Float = 121.98% for GME, so the shorting did not reduce significantly over the past days.

I understand that many platforms do not allow buying GME stock (or drastically limit the amount), but this does not prevent the investors to simply hold the stock.

This answer explains the big amounts the shorters must pay in interest if they keep the shorts opened, so I assume that the hedge funds cannot hold forever.

I am puzzled by the fact that no one seems to speak about a possible way of solving this. Is creating stock by the company a solution for this? Or maybe the insiders selling the stocks to either help the company or get rich will reduce the price and allow the hedge funds to reduce the short positions they have?

Bob Baerker
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Alexei
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  • You mention "solving" the issue - what is there to solve? There's no problem at all and everything is fine. Short squeezes happen all the time - this one just made the news. It's totally commonplace that hedge funds (or just traders generally) make bets that lose. It's no big deal. (Famous trader Warren Buffet lost some FIFTY (what!) billion bucks on a few trades this year, ten or twenty times more than the hedge fund in question happened to lose on their bet. What is there to "solve" ? – Fattie Feb 01 '21 at 13:15

1 Answers1

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At about 40% (per year), GME's borrow rate (it fluctuates daily) is high but not crazy high. That would not prevent shorters from keeping a position open for awhile.

As explained in my answer in your link, there are two major problems that shorters face:

  1. The stock remaining borrowable so that they can keep their short position open

  2. Being able to maintain and afford the margin. This is the biggest problem when a short position is moving against you and is the reason for the massive losses incurred by the shorters when GME's price rose.

None of this has any effect on the investor who owns GME shares other than that he made a bundle he can pocket huge gains, if so inclined. It's likely that at some point, reality is going to set in and when it does, GME's price is going to collapse.

The large number of shares short doesn't help or hurt the company. Their day to day operation is unaffected by it. No one makes investment decisions based on wanting to help the the hedge funds to reduce the short positions they have. If the regulators don't step in, the market will solve the problem, eventually. Winners win and losers lose and eventually they move on to another game.

Bob Baerker
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  • "reality is going to set in and when it does, GME's price is going to collapse." - I agree. However, this situation is far from being rational. I personally know a few colleagues that bought some shares just to "screw the greedy hedge funds". Also noticed hundreds of posts made by users who bought thousands of dollars worth of shares. I assume it is way less expensive for the buyers to simply keep the stock (opportunity cost only for now) than it is for hedge funds to maintain their shorts. – Alexei Jan 31 '21 at 14:19
  • "the regulators don't step in," - this might contain the answer I am looking for. What can regulators do to unstuck this situation? – Alexei Jan 31 '21 at 14:23
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    Irrational will eventually end but at what price for GME? $500? $1,000? Share price will drop like the speed of gravity if regulatory agencies get involved in a major way. There is no cost for buyers to keep the stock unless they bought it on margin. The heavy burden is on shorters who must add $1.30 for every dollar the short share's price drops after it reaches the 30 margin maintenance level (that's assuming that the broker hasn't imposed margin requirements stricter than Reg T). – Bob Baerker Jan 31 '21 at 14:26
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    During the global financial crisis in 2008, the SEC banned the short selling of 800 financial stocks for about a month. Price would plummet if that happened with GME. It wouldn't do well either if a number of brokers did the same. I doubt that it happens but it could. – Bob Baerker Jan 31 '21 at 14:29
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    but before the nature takes its course and GME price goes to wherever it belongs, its a game of chicken. Either people will sell (for profits or losses) or the hedge funds might start closing some of the short positions which will increase the price for ~2 days (short ratio = 2.34). – Claudiu A Jan 31 '21 at 18:57
  • @Alexei : "However, this situation is far from being rational." In what way? It's all absolutely, totally, perfectly rational. Indeed it is normal, common, everyday, and totally uninteresting. It's just not clear what you mean. Often when someone says "a stock price is irrational" they just mean "In my opinion it is way too high(/low)." I mean it's just an opinion, who cares? (A great and major current example is that many folks think the price of APPL is wildly too high, it is "irrational". OK - whatever. It's just an opinion.) – Fattie Feb 01 '21 at 13:18
  • The hedge funds in question, in between hookers, made a completely rational, fair, reasonable bet that the price would go down. Nothing irrational there. You may or may not agree, but - so what? Of the trillions of trades made every day, one would (obviously) either agree or disagree with each one. So what? Their down-bet was perfectly rational. When the price started heading up, it was perfectly rational that they say "Bummer, that bet goes in the loss column!" and took the loss. Which is again utterly, totally normal and uninteresting. It's unclear what you think is "wrong" – Fattie Feb 01 '21 at 13:20
  • @Fattie By "rational" I meant based on fundamental + technical analysis. Of course, those hedge funds hugely underestimated the social media drive against them. I cannot say I feel sorry for them. – Alexei Feb 01 '21 at 13:33
  • "based on fundamental + technical analysis" I'm afraid that makes no sense, @Alexei . "technical" analysis (ie: charting) is pure witchcraft. "fundamental" analysis is meaningless. (1, you guess the "value" or a company, and 2 you pull out of a hat a "multiplier" - and you multiply those two numbers. For example, many folks believe that Apple (for goodness sake) is wildly, ridiculously "overvalued" ("by their calculations") at the moment. Who knows. Note that everyone involved acted perfectly, flawlessly rational, at all steps. The "squeezers" recognized an opportunity and tried it, – Fattie Feb 01 '21 at 13:38
  • and as it happens on this occasion it worked. (It's completely, totally, normal that short squeezes fail, and then that bet is lost.) The shorters initially made a perfectly reasonable rational bet feeling the price would go down. When they got short squeezed, they made perfectly rational, everyday, uninteresting and unsurprising decisions on whether or not to give up and take a loss (which is utterly normal and uninteresting - around half of their bets lose) or to take a risk they would win. And so on. Everything's fine and normal. – Fattie Feb 01 '21 at 13:42
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    Something is only worth what someone is willing to pay for it - Publilius Syrus, 1st century BC. Could he have been trading LudoConsto? – Bob Baerker Feb 01 '21 at 13:56
  • @Fattie: Would the short squeeze have come close to working in the absence of a sea of suckers on Reddit who bought the stock at prices far above anything they'll be able to cash out? – supercat Feb 05 '21 at 17:38
  • @supercat one interpretation is: (A) there was the "hedge fund" who turned away from their team of hookers long enough to try to destroy some target (GME in this case). obviously that's "a risk", sometimes it works, sometimes not. {This is an utterly normal, utterly uninteresting thing that happens every week in the markets. It is utterly, utterly, utterly normal and totally uninteresting.} (B) there was a "short squeeze group" who tried to destroy that short play. obviously that's "a risk", sometimes it works, sometimes not. {This is an utterly normal, utterly uninteresting ... – Fattie Feb 05 '21 at 18:56
  • ... thing that happens every week in the markets. It is utterly, utterly, utterly normal and totally uninteresting.} Finally, (C) I believe what you may be referring to in the comment just there, there is a group (call them "fools") who saw something about "stock" or something on Maury Povich on TV, they called a "broker" and (as you say) bought very likely too high. (This group, the "fools" are so utterly, utterly ignorant, so random, so totally unaware of the minimum basics of reality that discussing them is completely pointless.) Once again, part "C" is totally, utterly, completely... – Fattie Feb 05 '21 at 18:59
  • ... normal in markets, happens literally every week, and is of, simply, utterly no consequence or interest in any way. In answer to your question I believe but don't know that "C" is distinct from "B". In the sense you are asking: IMO, "B" would have failed if "B" had "given up too early". The actions of "C" did not, I would say, affect the "outcome". The "C" thing was just "another thing that happened after the "B" guys were successful". That's my opinion. {Of course, obviously, one couldn't perfectly demarcate B/C, but I believe what I have said here is the spirit of your question.} – Fattie Feb 05 '21 at 19:01
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    @supercat - Would the short squeeze have come close to working in the absence of a sea of suckers on Reddit who bought the stock at prices far above anything they'll be able to cash out?. Your logic is incorrect. The sea of suckers that you're referring to is a separate group from the sea of savvy buyers who bought and created the short squeeze up move of nearly $500. In the spirit of Fattie's correct description, the "C" guys buying high were just another thing that happened after the "B" guys were successful at raising the price. "B" is savvy. "C" is the sucker late to the game. – Bob Baerker Feb 05 '21 at 19:12
  • @BobBaerker: Would the price have risen to even $150 in the absence of retail investors who bought at over $100? – supercat Feb 05 '21 at 19:43
  • @supercat - That's a silly question. Except when there were gaps, there were buyers at every price one penny higher when GME rose from $20 to $20.01 to $20.02 all the way to up $500. All that proves is that there had to be buyers for price to rise, something that occurs in every single stock whose share price increases. – Bob Baerker Feb 05 '21 at 20:01