GameStop has been in the news in the last week as the share price jumped from $35 to $350, and is up from an April intraday low of $2.57. There are lots of things going on with this but the one getting the most attention is the “short squeeze.” We’re going to describe what a short is, what a short squeeze is, and how it’s playing out with GameStop.

A short is a bet on a stock decreasing in value. In an effort to improve market efficiency and for some to hedge risk, the SEC allows certain individuals to sell a share of a stock that they don’t really own. For example, say investor A owns $100,000 of Apple, and they plan to hold it for at least a year. Meanwhile, speculator B thinks Apple is overvalued and will go down over the next year. A & B can enter an agreement where B borrows the shares A owns with the promise to give those shares back in one year, plus $1,000 for providing the shares.

Investor A likes this because they will end up with the same long position and they make $1,000. B likes it because B can now sell those shares in the market. Because B has temporarily borrowed these shares and has locked in a value to give them back, they don’t really have exposure to Apple. When B sells the Apple shares on the open market, they now own negative Apple, which is called “being short.” Because B must give A back the shares in a year, B is betting that Apple will go down in value allowing them to buy Apple back at a lower price a year from now.

In our example, if Apple’s price drops in half, B can buy back the Apple position for $50,000. B received $100,000 for selling the borrowed Apple at the start of the year so B nets $49,000. However, if Apple goes up 50% and B has to buy the shares back in a year it will cost B $150,000, for a loss of $51,000.

Shorting a stock is risky for two reasons. Stocks, in theory, have no maximum share price, so there is no limit to the amount of loss one can incur from shorting a stock. The other reason is that stocks as a whole have always gone up over time. The efficient market theory would say engaging in a short position has a negative expected return.

A Short Squeeze is when speculators who have shorted a stock are forced to “cover” their short by buying back the stock. This can lead to a snowballing effect where buying fuels more buying, driving the price of the stock higher. For example, a speculator who is renewing a short on a daily basis may suddenly have the lender decide they don’t want to lend anymore and asks for the share back. Alternatively, the lender of the stock may require the speculator to post margin based on how much the position has moved against the speculator. At some point, if it’s moved so much that the speculator no longer has the cash margin, the speculator will be forced out of the position. Either way, the speculator must buy shares, driving the price up.

There is another phenomenon, called a gamma trap, that is sparked by a different type of speculator who likes the stock. If that speculator buys a call option on the stock, the wall-street trading desk that wrote the option may hedge their position by buying the stock in the open market. If enough speculators are buying calls, that will drive the price higher, which in turn fuels more hedging by the options desk (people describe this in terms of delta and gamma). This is a way for a speculator to magnify the effect their dollars have on the price of a stock. This coupled with the short squeeze can create a cycle of buying that becomes self-fulfilling.

GameStop has become an incredible case study in short squeezes. 10 years ago, GameStop had about $9.5 billion in revenue and was making $400 million a year. Today, GameStop has $6 billion in revenue and is losing about $400 million a year. The book value of equity has shrunk from $3 billion to $600 million. As COVID-19 reduces retail foot traffic and more video games are downloaded directly from the publisher or from companies like Steam and Origin, you can understand how some would speculate the company’s stock will decline.

As a result, many hedge funds and other “Wall Streeters” have shorted GameStop. In fact, so many have shorted the company that the number of shares shorted exceeded the total number of shares available for trading (yes that is possible). This had been effective and lucrative as GameStop’s share price steadily declined from $30 in 2016 to about $4 for most of 2020 (at $4, GameStop has a market capitalization of $280 million).

However, a new board member and an internet forum have shifted the sentiment. What started as a fundamental case for a higher valuation turned into an internet movement to beat Wall Street at their own game. At this moment it looks like the internet trolls are winning. Those who bought GameStop last Friday have seen the share price move from $50 to $350 as of today’s close ($24.5 billion valuation). Meanwhile, short sellers have either taken an enormous mark to market loss or locked in an enormous loss as they’ve exited their position.

The Wall Street Journal reported that hedge fund Melvin Capital is down 30% this year due to shorting companies like GameStop. With $13 billion in assets, that amounts to a loss of nearly $4 billion for the speculators who outsourced their speculating to Melvin.

Where we head from here is anyone’s guess. The $350/share at today’s close could be a stop on its way to $1,000+, it may also be the all-time high. At some point in the future, emoji-filled internet commenting will return to normal, short selling will stabilize, and GameStop’s share price will return to the present value of expected future profits. $25 billion seems high for a company struggling to break even with $6 billion in revenue and no expected revenue growth, but turn arounds do happen and the press around the stock may help drive sales. It will be up to management to try and make that boost permanent rather than temporary, which will be a difficult task.

I see a few glaring takeaways. First, this isn’t investing, it’s playing a game. Providing capital so a company can produce a good or service and generate wealth for society provides an expected return for an investor. Shorting a company, or trying to squeeze a short, or buying options, does not generate wealth and does not come with an expected return. As every trade has a bid/ask spread, you must win a little more than half the time just to break even and the sum of all players is negative.

It’s also a reminder of why paying a lot for active management is a bad idea. While those who gave their money to Melvin are down 30% in 2021, the owners of Melvin are up 0.16% this month because they charge a 2% management fee. Paying 2 & 20, or even 1% for active management is unlikely to benefit you. Remember, the average of all investors, not including management fees, is the market average. Math dictates the majority of active management must underperform a low-cost fund after taking into account the fees they charge.

Lastly, if you want to buy an individual stock (which Rockbridge doesn’t recommend), do so because you plan to hold it for many years. Buying a company now because you think you think it will make you rich later today or next week is not a prudent way to manage your money.

As others speculate on things they can’t control like the price of GameStop’s stock, instead focus on things you can. Are you taking full advantage of your 401(k) or Roth IRA this year? What about a 529? Do you have enough term life insurance? Do you have any 1099 income that can be saved in a self-employed retirement account? Do you feel comfortable with your Social Security claiming and portfolio distribution strategies in retirement? Reach out to your Rockbridge advisor so we can make sure you’re on the right path in these areas and don’t worry about GameStop, which has fallen 31% to $240 as I type this…

The defense and aerospace company, Saab Inc., has their US Headquarters, and several hundred employees in our hometown of Syracuse, NY. In addition to their 401(k) match and great pay, they offer one of the most appealing Employee Stock Purchase Plans we’ve ever seen.

At its core, this is an employee stock purchase plan that provides a match if the shares are held for 3 years. In order to get the free doubling of your investment, you must take on additional risk related to the health of your employer and currency risk. Still, it’s a tradeoff worth taking.

In this piece we go into detail on how it works, the financial aspects that make it so great, and a recommended strategy for it.

How it Works: For U.S. employees, you must either enroll in the plan in November or May. At enrollment you choose to have between 1% and 5% of your paycheck withheld for the Share Matching Plan. Once enrolled, you will have money taken out of each paycheck and set aside for purchases of Saab AB B. These purchases happen each month.  

The stock, Saab series B shares, is custodied in an account in your name at Computershare. The shares carry both market risk and currency risk as they are held in Swedish Krona. The shares bought with money withheld from your paycheck are 100% yours the moment they are invested. You can sell the shares and withdraw the money at any time and pay the applicable taxes. If you sell them within a year, you will pay short-term gains or losses. If you sell them after holding them for a year, you will pay long-term gains or losses. If you sell them at the exact price you purchased them, you will owe nothing as the purchase was made with after-tax dollars from your paycheck. While you hold the shares, you will receive a cash dividend that you will pay taxes on.

Once the shares are held for three years, you will be matched 1 for 1, doubling your position.  You will owe ordinary income taxes on the value of the match you are receiving at the time it is received. Taxes on the sale of the matched shares will be short-term gains/losses if done in the first year, and long-term gains/losses if done after one-year. If you sell the matched shares as soon as they become yours, your taxable gain/loss will be minimal.

The Benefit: You could think of this as free money, though it comes with risk. We will look to quantify how much the extra benefit is worth and how much Saab can underperform the market and still be profitable.

The following table outlines how the Share Matching Plan would work assuming a hypothetical employee with a $200,000 salary and doing the full 5% match. We assumed a 6% price appreciation and ignored dividends. We also assumed the employee sells all the stock as soon as it is matched in year 3. In reality payments are made each month, but we analyzed the data as if it were a year-long program to help visualize what is happening.

In this scenario, $10,000 worth of Saab stock grows to $11,910 by the end of the third year. When that is sold the employee pays long-term capital gains on the $1,910 of growth. Assuming a combined federal and state tax rate of 21%, they would owe $401 of taxes, leaving them with $11,509. At the same time, they also receive $11,910 worth of matched shares. That entire amount is taxable as ordinary income, at an assumed rate of 33%. That means $3,930 of taxes are paid on the $11,910 of benefit, for an after-tax net of $7,980. In total the employee is left with $19,489 at the end of the third year, roughly doubling their money.

Let’s say Saab didn’t have this program and instead the employee invested the $10,000 in a stock market index fund. Assuming the market appreciated by 6% (not including dividends), and at the end of 3 years the employee sold their position for cash, they’d have the same $11,910 of proceeds for an after-tax value of $11,509.

A good question is – how much can Saab underperform the market and have the participant still not be harmed by the Share Matching Plan?

We can solve to find that Saab stock (plus the currency movement) can underperform the market by 19.6% and the plan is roughly a wash, as seen by the table below.

In this example, Saab stock is losing 13.6% per year for 3 years, and the end result is an after-tax balance of $11,509, the same as what you would have gotten from the stock market if the market returned a positive 6%. In total that’s roughly a 20% annualized difference.

There is no reason to expect Saab’s stock and the Swedish Krona to underperform by an annualized 20% making this plan attractive.

Recommendation: We recommend Saab employees take full advantage of the Share Matching Plan, putting in the 5% maximum each month. Once the shares are matched, they should be immediately sold. For a Saab employee with a $200,000 salary, and assuming market returns, you’d be reducing your monthly paycheck by about $830, but after three years in the plan, you are getting a $1,625 rolling after-tax cash out. In order to take advantage of this you’re exposing yourself to an additional $60,000 of market risk in Saab stock and the Swedish Krona.

Whether you’re an employee of Saab AB looking with further questions on the Share Matching Plan, or you’re a client with questions related to your employee stock purchase plan, please reach out to your advisor, e-mail us, or schedule a call.

Investors nerves were tried throughout 2020, yet those investors who avoided behavioral mistakes and didn’t let their emotions get the best of them were rewarded handsomely.  The year was full of lessons, but some highlights were:


  • Market results are unpredictable- Missing the best market day in March would have cost you 10%.  That “lost” 10% will compound over time and never be recovered.  Investors that resisted the urge to bet against the market came out ahead, investors that didn’t made a mistake they will regret.


  • Stocks prices reflect thoughts about the future- Markets are forward looking, and reacting about “news” that is common knowledge is already baked into stock prices. In other words, making investment decisions about what you see, read, or hear will often have poor results.


  • The impact of Washington- Stocks have appreciated almost 15% since election day. The party in power does not drive stock prices.  Stocks will find a path to profitability regardless of Washington.  This year, many investors realized their predictions on what should happen in financial markets as a result of an election were trumped (no pun intended) by an always unpredictable market.


  • Don’t confuse luck and skill- In 2019, nobody would have guessed 2020 would look anything like it did. The few investors that made great timing decisions (got out of the market and back in) or bought any of the large technology stocks early on should know that sometimes bad decisions have good outcomes (i.e. they got lucky).  Don’t confuse luck and skill.  Buying a winning lottery ticket was a bad decision that had a good outcome and there is no skill in picking winning lottery numbers.

Congress recently passed a highly anticipated economic stimulus bill just in time for the holidays. The entire bill contains over 5,000 pages of new legislation appropriating over $900 billion in government spending. The following is an outline of the provisions most pertinent to our clients here at Rockbridge.

The headline provision in the bill is the additional direct payment stimulus checks to individuals who qualify based on their income. The base credit amount is $600 per individual and includes additional payments to taxpayers who claim child tax credits for children under the age of 17. Similar to the CARES Act, taxpayers whose adjusted gross income (AGI) is above a certain amount will see their payment reduced or eliminated altogether.

Example: David is a single taxpayer with 2 children under the age of 17, and AGI of $65,000 in 2019. Therefore, David will receive $1,800 – $600 for David and $600 for each child under 17.

Similar to the CARES Act, these payments begin phasing out for single filers with AGI above $75,000 and married fliers with AGI above $150,000. The phaseout provision reduces the taxpayer’s payment by $5 for every $100 of AGI above the limit.

Example: David and Jenna file a joint return and claim Child Tax Credits for 3 children under the age of 17. Before taking into account their AGI, the couple would expect to receive direct payments of $3,000 – $600 for David, $600 for Jenna, and $1,800 total for the children. However, David and Jenna have an AGI of $175,000. Therefore, the couple will see their payment reduced by $1,250, leaving them with a direct payment of $1,750.

The stimulus bill also addressed the Paycheck Protection Program (PPP), another major program enacted under the CARES Act. Arguably the most significant item addressed for small businesses who already have an outstanding PPP loan, is the deductibility of business expenses paid for with funds from the PPP loan. This is significant because while the CARES Act specifically stated that PPP loans would not be included as income, the IRS subsequently took the position that expenses paid for with PPP loan funds were therefore not deductible – effectively making the loans taxable. Fortunately, small business owners now have clarity that they can seek loan forgiveness without increasing their tax bill.

Other important PPP related items contained in the bill include: both reopening the window for small businesses to apply for an initial loan; and providing those business who received a PPP loan, but continue to need financial support, an opportunity for a second loan, albeit with more strict qualification requirements. The bill also expands the types of business expenses that qualify for loan forgiveness.

People may be wondering if the new stimulus bill extends certain popular provisions enacted by the CARES Act, including waiving required minimum distributions (RMDs) and Federal student loan relief. Unfortunately, the answer is no. At this point individuals should plan on taking their RMD for 2021, and those with Federal student loans should plan to resume making those payments beginning in February.

Those who do not need distributions from their retirement accounts to meet their living expenses may want to wait until later in the year (if they do not already), in the event that additional legislation is passed further waiving RMDs. Contact your Rockbridge advisor if you would like to discuss a plan for your 2021 RMDs.

Stock Markets

Results over the past quarter are consistent with positive expectations due to the introduction of vaccines in November. Small company stocks and Real Estate markets have snapped back but not enough to bring the past year’s Real Estate returns into positive territory. Over longer periods, domestic stock markets have outpaced international and emerging markets.

Bond Markets

The Yield Curve shows the pattern of observed returns from holding Bonds to term across several maturities. Today these yields go from essentially zero to about 1.5% across a twenty-year spectrum. Yields have dropped since a year ago, which explains positive returns over the past year, especially those for longer maturity Bonds. On the other hand, yields have increased at the long end of the curve over the most recent quarter, impacting returns for longer dated Bonds negatively.

The slope of today’s yield curve has steepened over the past quarter which is consistent with expectations for increased interest rates.

A Perspective on 2020

2020 gave us one extraordinary event after another: a hundred-year pandemic that has taken over 350,000 American lives; lockdowns and quarantines producing massive unemployment and a deep recession; a government in disarray capped off by a contested Presidential election; Black Lives Matter protests; one hurricane after another; and unrelenting wildfires across the West. Now, we have scientific break throughs producing Coronavirus vaccines in record time. This development plus an essentially resolved Presidential election means we can begin to see a “light at the end of the tunnel.” Signals from capital markets seem to be telling us so.

Throughout the year capital markets responded to these events. Not only were stocks volatile but Bond yields dropped significantly as monetary policy and markets reacted to the onset of the pandemic and remained close to zero. Yields on inflation-adjusted Bonds like TIPS dropped below zero and stayed there.

During 2020 the stock market returns were not only volatile but were inconsistent among the various markets. Over the first nine months the largest U.S. Tech companies fared reasonably well – other markets fell short. Those who told us the “market” came back after the initial fall off in March were only talking about the S&P 500, which is driven by these largest Tech companies. The numbers tell this story: Over the period ending September 30th, the S&P was up nearly 6% while a globally diversified portfolio was off almost 8% – a 14% difference. With the announcement of an effective Coronavirus vaccine in November we get a different story. While all markets were up in the fourth quarter the S&P 500 did not keep pace – the worldwide portfolio earned 20% versus 12% for the narrowly focused S&P 500. All in all, however, stocks earning better than 10% over this truly extraordinary year is not bad!

With the onset of the pandemic, Bond yields dropped significantly and have remained low. While yields at the short end, which are most affected by the Fed, remain close to zero, yields at the longer end have increased in recent months, which is consistent with expectations for an improving economic environment. Bonds were strong in 2020– earning from 3% to 10% over the year depending on maturity. Most of these results came in the first quarter after the sharp fall-off in yields.

Markets look ahead and recent activity is consistent with positive expectations for a recovery from the effects of the Coronavirus vaccines. As the economy improves, perhaps the Fed will feel less inclined to drive interest rates to zero. There is no doubt that the cost of money is at rock bottom and readily accessible. With this availability and a pent-up demand in both the private and public sectors, it is reasonable to expect an improved economic environment. While many uncertain ties remain, a pickup in the economy could produce more reasonable stock and Bond markets. Yet, 2020 was a stark reminder that markets are driven by surprises. Today’s environment feels a little more comfortable, and perhaps we can hope for positive surprises out-weighing negative surprises going forward.