Bill Gates told CNBC that the Reddit-fueled trading mania in GameStop and other stocks is reminiscent of betting in a casino, and not investing.
The billionaire philanthropist and tech entrepreneur's comments were posted on Squawk Box Thursday, hours before the House Financial Services Committee holds a hearing on the GameStop Short Squeeze that was triggered last month. The video game retailer's shares skyrocketed as retailers piled into the stock that hedge funds had bet heavily against.
"People like to play. Unfortunately, it's a zero-sum game," Gates said in a taped interview with CNBC's Andrew Ross Sorkin. “The idea that you are making a valuation that goes way beyond what is reasonable is hard for society to see as a good use of time. And the people who get in early get a godsend. The people who get in late feel like they do Jerk. "
GameStop traded below $ 20 a share in early January before hitting an intraday high of $ 483 on Jan. 28 – an increase of more than 2,300%. The stock closed the session on Wednesday at $ 45.94.
GameStop was one of the most heavily wagered stocks on Wall Street, and some retailers had recognized their technical vulnerability to a brief press. In January, when Reddit users and online investors either bought stocks directly or bought call options, short sellers got into trouble.
Short sellers borrow stocks of a stock and then immediately sell them back on the market with the intent of buying back stocks later at a lower price. Then they return the borrowed shares and benefit from the difference. When the opposite is true, as with GameStop, shorts can try to minimize their losses by buying back the stock at currently higher prices.
Social media, especially forums like Reddit's WallStreetBets, proved to be a powerful force during the GameStop trading frenzy. Steve Huffman, CEO of Reddit, and Keith Gill, a well-known WallStreetBets user, will both testify at Thursday's congressional hearing. Also there are Vlad Tenev, CEO of the brokerage app Robinhood, and GabrielPlotkin, who runs the hedge fund Melvin Capital, which was briefly GameStop.
Microsoft co-founder Gates raised concerns about the role of social media in the GameStop stock saga and its possible impact on the US stock market.
"Reddit forums where people have a reason to go ahead and get out at these high prices, you know, the [Securities and Exchange Commission] has to look at that because we don't look at the stock market as just a performance like a casino Role, "said Gates, the third richest person in the world. "We have restrictions on gambling activities."
Other people acknowledge the highly speculative nature of the GameStop frenzy, but claim that risky trading has long been an integral part of the market.
"Every investor is a speculator, whether you hold a stock for a millisecond or if you own it for 10 years, and the market has to take that into account," Kevin O & # 39; Leary told CNBC on Wednesday. "When you invest, you win and you lose. You make money, you lose money," added O & # 39; Leary, co-founder of O & # 39; Shares ETFs and investor in Shark Tank.
Some have said that the GameStop trading frenzy has populist characteristics, with smaller investors trying to tie it to hedge funds and large Wall Street companies. Gates said that if that's really what individual investors want, it won't end well.
"If the general public investor takes on the hedge funds over time, the hedge funds will come out on top," said Gates. "I am sure there will be many stories from people involved in the frenzy that really served no social purpose."
Disclosure: CNBC owns the exclusive off-network cable rights to Shark Tank, which is co-hosted by Kevin O & # 39; Leary.