GME
📉 Melvin Capital’s massive short position on GameStop, amplified by extreme leverage, led to catastrophic losses when retail investors triggered a short squeeze.
⚠️ Using excessive debt (leverage), especially in volatile situations like short selling, is incredibly risky and can lead to ruin even for sophisticated investors, as highlighted by the GameStop event.
⏳ Short selling involves borrowing shares and paying interest, making time a critical factor; unexpected price surges can force margin calls and devastating forced buybacks at high prices.
@adriarivero:
“In 2021, Melvin Capital, a sophisticated hedge fund, invested against GameStop. That’s shorting… Short selling consists of borrowing shares to sell them, betting that their price will fall so you can repurchase them cheaper, then make a profit and return them. But shorts use leverage because the investor borrows those shares and promises to return them in the future. Melvin Capital borrowed GameStop shares from brokers and sold them immediately in the market at $20 per share. Their expectation was that the shares would drop to $5, allowing them to repurchase them cheaply, return them to the broker, and keep the difference as profit. But they made a mistake. They borrowed many more shares than they could cover with their own capital, using extreme leverage… To maintain a short position, you have to keep paying interest because you took out a loan. Of course. And time is key. And thus came the problem. A group of retail investors on Reddit, WallStreetBets, detected that hedge funds had more shares shorted than existed in the market. Thousands of investors began buying GameStop shares en masse, driving its price from $20 to over $400 in a matter of days. As Melvin Capital had so many losses on its position, the brokers made a margin call and closed their positions. To close the position, Melvin had to repurchase the shares at much higher prices, generating billions in losses. Buffett here also says it clearly: The only way an intelligent and disciplined person can go broke is with debt.”
Watch the exact part of the video where @adriarivero talks about GameStop Corp. here:
Watch the video on YouTube
Read more articles analyzing GameStop (GME) at the provided link. GME stock.
