Chamath Palihapitiya closes GameStop position, but defends investors' right to sway stocks like pros

Key Points
  • Billionaire tech investor Chamath Palihapitiya told CNBC on Wednesday that he closed out his position in GameStop.
  • The move comes one day after the CEO of Social Capital and former Facebook executive joined the trading frenzy around the video game retailer.
  • Palihapitiya said the phenomenon around GameStop, and a few other stocks like AMC, is individual investors pushing back against the Wall Street establishment.
Investor Chamath Palihapitiya: The GameStop story is pushback against Wall Street establishment

Billionaire tech investor Chamath Palihapitiya told CNBC on Wednesday that he closed out his position in GameStop, one day after joining the trading frenzy around the video game retailer.

Palihapitiya also defended the power of individual investors to compete with Wall Street hedge funds.

The CEO of Social Capital and former Facebook executive tweeted Tuesday that he bought $125,000 worth of February $115 GameStop call options after asking his followers on Twitter what to buy. Calls are derivatives that give the buyer the right to purchase a stock at a set price. The trader makes money when the stock rises above the strike price. GameStop stock opened Wednesday at $354 per share, up more than 1,550% this year alone.

Wednesday on CNBC's "Fast Money: Halftime Report," Palihapitiya said, "I ended up closing out my position this morning, and I wanted to announce that I'm taking all the profits that I made plus my original position — I'm going to take $500,000 and I'm going to donate it."

Palihapitiya dismissed Wall Street criticism about how individual investors are banding together on social media — particularly the wallstreetbets Reddit message board, and short-squeezing GameStop and a handful of other stocks like pros — as hypocritical. He said hedge funds try to push stocks around all the time.

Allowing hedge funds to go short 140% of GameStop shares could be seen as irresponsible, he said. "To a normal person that doesn't make any sense. But to a Wall Street mathematician, that's the game that's been played. And that game came undone."

Gabriela Bhaskar | Bloomberg | Getty Images

Shares of GameStop initially jumped earlier this month after the company said that Chewy co-founder Ryan Cohen was joining its board. As buyers plowed into the stock, shorts were sent running for the hills.

A short squeeze happens when a stock with a large bloc of short sellers starts to increase in price, and shorts scramble to buy shares at the current higher prices to limit their losses. They return the number of borrowed shares and lose the price difference.

Palihapitiya said the craze around GameStop shares, and a few other stocks like AMC Entertainment, is much more than just a trading story, arguing it's a pushback against the establishment.

"Instead of having 'idea dinners' or quiet whispered conversations amongst hedge funds in the Hamptons these kids have the courage to do it transparently in a forum," he said. "What it proves is this retail [investor] phenomenon is here to stay. There are 2.7 million people inside wallstreetbets. I think they are as important as any hedge or collection of hedge funds."

Palihapitiya said the best research on stocks done by retail investors inside wallstreetbets is nearly indistinguishable from the best research on Wall Street. "That edge is gone. Now all of a sudden, retail can be on the same footing and they don't have to be the 'bag holder' to Wall Street."

A veteran venture capitalist, Palihapitiya has had success lately sponsoring SPACs, blank-check special purpose acquisition companies. One of his SPACs completed its merger with Virgin Galactic in October 2019, allowing Richard Branson's space tourism venture to become a publicly traded company. That stock has gained more than 115% in 2021.

Billionaire investor Chamath Palihapitiya on GameStop surge and rise of retail investors