German lesson: Why the Gamestop trade was bad for retail investing

By Andrew Bulkeley

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Watching the Gamestop short stop drama unfold from Germany last month sparked memories of the world’s last high-profile short squeeze, which briefly made Volkswagen the world’s most valuable company in 2008. But that squeeze is not the lesson Germany can teach us about this blip in stock market history. For the broader public, the event is more closely connected to the hype surrounding the 1996 privatization of Deutsche Telekom, the country’s former monopoly telephone company, which soured an entire German generation on equity investments.

But first, Gamestop. The short squeeze was organized by a group of self-proclaimed traders on Reddit, a top social media platform, who took umbrage to a hedge fund heavily shorting video game retailer Gamestop. The traders claimed Gamestop had a bright future and thought it unfair that strong short interest was hurting the company’s share price. The Reddit traders wanted to help but also profit from the company while punishing hedge funds.

They convinced fellow Redditors to buy both Gamestop shares as well as options, amplifying the upward pressure on the stock at a time when more shares had been shorted than even existed, creating a short squeeze. The results were a leap in Gamestop shares from $18.87 on Dec. 31 to $483 in less than a month. The stock has since stalled around the $50 mark. Observers were quick to point to the last most famous short squeeze in late 2008.

At the time Porsche, the sports car maker, had been quietly buying its historic sibling Volkswagen just as it was popular to short VW. A bombshell off-hours announcement that Porsche directly and indirectly owned nearly 75 percent of the company in late 2008 meant only 6 percent of VW shares were available to cover shorts because a local German government owned the remaining 20 percent.

The announcement panicked the short sellers and VW shares went from about €210 to €999 as international funds scrambled to cover, briefly making VW the world’s most valuable company. Gamestop didn’t get anywhere near the world’s most valuable company during the Reddit play but the carnage in both squeezes is similar – bankers suffered deep financial wounds and critics gave regulators a hard look for not doing more to protect the market. But little sympathy is needed for financial players – hedge funds run on risk and the basis of market speculation is caveat emptor.

But the problem is the effect on minor Redditors and other first-time investors who fell prey to the hype. The trade was sold on Reddit as David versus Goliath where, even if the investment failed, the traders would be making a statement and possibly changing financial market regulation. The situation was exacerbated by the ease of opening and using discount brokerage accounts. But anyone with just a blip of trading experience knows that the story doesn’t matter – fundamentals and share prices do. At the time, I worried that it was an old-fashioned pump and dump with the Reddit posters just hyping the room in hopes of selling at a profit. Their political change story still seems thin.

The same forums – called subreddits on the site – that were hyping the stock in un-PC language now also hold tales of woe, of young investors who risked their life savings based on the hype and got in too late. They’re now faced with swallowing thousands in losses or holding onto a stock with an uncertain future.

Although the VW/Porsche story is worth remembering, Germany offers a better cautionary tale for the Gamestop trade. In the late ‘90s, Berlin was privatizing Telekom, as it’s called, and even hired actors in advertisements to increase interest in the stock among traditionally cautious Germans. The public offerings of the phone company dovetailed nicely with the tales of wealth creation alongside the dotcom boom. Investors bought Telekom in a first tranche in late 1996 at €14.50 each. A third tranche was sold nearly three years later at €39.50 each, highlighting the gain in value for investors.

But the company’s stock peaked at €103.50 in 2000 and hasn’t been remotely close since. A third offering peddled shares at €66.50 in mid-2000 but by then the stock was a falling knife. They closed 2000 at about €32 and were in single digits two years later. The promise of buying into what seemed like a stable former government company on its way to the stratosphere had lured cautious German investors to the market but in the end, most felt burned despite the stock’s reliable dividends and sold at a loss. In a 2008 article, the venerable Süddeutsche Zeitung estimated that Germany lost 2 million share owners through the debacle and quoted a study by the since-defunct Dresdner Bank that other Germans had pulled money out of shares as well.

Only a little over 13 percent of the German population invests in shares, according to the DAI German share institute, compared with 52 percent of Americans, according to the Federal Reserve. Finder.com says one-third of UK households hold stock. As Europe’s most populous nation and largest economy, that’s a lot of liquidity missing from Frankfurt.

While the media and regulators focus on the ringleaders and the hedge funds, German financial history would say we should be focusing on reassuring the small retail investors instead.