GameStop & Hedge Funds

What do you think about GameStop?

I have been asked that question a lot this week.  And prior to 2021, I had probably never thought about GameStop even once – ever. 

In case you haven’t heard the news reports on GameStop lately, the company’s stock has been at the center of a battle between small investors and some well-known hedge funds.  The 52-week price range for the stock has swung wildly between $2.57 – $483.00, which caught the attention of the media and regulators. 

So, here’s what I think about GameStop, in case you’re wondering.  You have owned GameStop (GME) for years if you have a well-diversified global portfolio.  In fact, the Dimensional Funds Small Cap Value fund is the 6th largest shareholder of GME; Dimensional’s Target Value fund is the 12th largest shareholder, and their Small Cap fund is number 15.

The Dimensional Core II mutual fund, which is the broadest US stock fund at DFA, held a position in GME worth $5,783,762 according to the annual report dated November 30, 2020.  It represented 0.02% of the US Core II portfolio and was the 1054th largest holding (out of 2628).  The value of the shares in the fund on 11/30 would have risen to around $113 million by last Friday, and then plummeted to only $18 million as of last night.

Here’s what the price for the DFA Core II Exchange Traded Fund (DFAU) and GameStop (GME) looked like from 11/30/2020 to 2/04/2021:

Source: Microsoft Excel stockhistory function (DFAU, GME) 11/30/2020 to 2/4/2021

In the past few weeks, you may have said to yourself, “I wish I had bought GME!”  Well, you have likely owned GME in one of your DFA mutual funds for years.  When you bought a diversified portfolio, you made a decision to buy the entire global market.  It wasn’t a gamble, or a bet, it was the culmination of a process that led you to realize owning the entire market is more successful in the long run than betting on any one piece of it. Notice that steady flat blue line below $50 – that’s what diversification gives you.

The DFA US Core II mutual fund had approximately $28.5 billion invested in stocks as of 11/30/2020.  If no shares of GME were bought or sold between 11/30/2020 and 1/29/2021, I estimate the gain on GME would have been almost $108 million on that 11/30 total market position of $5.78 million.* That’s a really big number, but it would have only added 0.38% to the fund’s total value.  Yes, you bought GME long before it started appreciating, and you still own it.  No, it didn’t make you a millionaire overnight. 

Diversification, like most things, has a cost and a benefit.  The benefit is that stock markets have trended upward for more than 100 years, and you own a globally diversified piece of those markets.  The cost is that owning many, many stocks will grow your wealth slowly over time, not overnight.

* This is a hypothetical scenario to illustrate a point.  I don’t know how many shares were bought or sold in any of the DFA funds over the last few months. 

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Always read a prospectus before investing in an investment product.

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