By now, just about every news outlet (Bloomberg, Wall Street Journal, NPR, etc.) has reported to you the story of GameStop (GME). I’ve read more than I ever wanted to on subjects that will not matter for 99% of investors, but there are some simple lessons to be learned.
GameStop is/was a heavily ‘shorted’ stock—meaning investors (many being hedge funds) took a view that the stock will decline. Instead of simply not owning it, they actually borrowed shares from a broker (with the addition of a fee) and sold the stock.
They make a profit only if and when the stock goes down in price, and they can go on the open market and buy back shares of GME for less than what they sold.
Next, retail traders (amongst others) banded together to ‘pump’ up the price of the stock and hurt those mighty hedge funds in a classic ‘short squeeze.’ It’s important to note that this is not the first time this has happened. The stock market is old. Since the first market started to operate, there have been people trying to take advantage of certain situations. It is the most competitive industry in the world and news of easy money gets around fast.
Long story short? GME is up about 1500% this year already, and some hedge funds may be out of business as a result of their ‘short’ bet on the stock.
So far, in 2021, the best performing company stocks are the ones with the ‘lowest’ price. No, this is not ‘value’ investing, it’s just speculation in company stock that trades a low price per share, regardless of fundamentals.
The great thing about financial markets is everyone is allowed to express their opinion, commonly done by voting with their dollars: Buying some shares of companies and selling others.
Lessons GameStop Can Teach Investors
As an advisor, you can use this as a valuable teaching opportunity. Here are some lessons you can pass on to your investors:
First, you don’t have to play this game outright. You’ll be surprised to know you haven’t missed out on owning the stock. As a U.S. investor, it is likely you own a fund or combination of funds that own large, mid and small cap stocks. GME was a small cap (making its way to large) and is held in several ‘total market’ funds.
Some call the total market funds the ‘anti-FOMO’ funds; since they invest in every stock, you never miss out!
Second, we don’t utilize the strategies you have seen on the news lately. We do not outright ‘short’ stocks. But we may own some strategies that go long and short in an effort to provide you low beta and diversifying exposure to alternative asset classes.
We do not load up on small positions hoping for large gains. This is best for day traders that end up losing more than winning.
We strive to manage your ‘stay rich’ bucket, not your ‘get rich at any cost’ bucket, and we practice extreme diversification to ensure you will be in the market for the long haul.
Third, it is important to keep your head when everyone else is losing theirs! Yes, some small few are going to make out well and win a lot of money on this day trading game. But this isn’t your game or ours. What you won’t hear about (for a little while at least) is all the day traders who lost on this ‘bet,’ or how much they lost before their big win.
Fourth, the only ‘free lunch’ is diversification. Even the day traders on RobinHood are paying something. Take into account that if you buy GME, you are paying an average spread to the brokers of 0.32. That is not free.
Take into account that recently, the brokers are also limiting your transactions and you may not be able to buy or sell a certain position. This is fishy to me, but so is ‘pumping’ the price of a stock via an online message board. The SEC has prosecuted for less.
Finally, know what game you are playing. To reiterate, you are in the long-term retirement and investing game. But unlike casinos and day traders, the odds are more likely to be in your favor, since broadly diversified markets tend to fluctuate up more than down. And the longer you are in it, the better chance you have!
If you need to scratch your itch of some single stock picking, that’s okay. Do it using a ‘mad money’ account outside of your managed account that has a small sum in it, so you don’t ruin yourself with extreme bets on stocks.
In the end, remember that markets are pretty efficient. They do a good job of sniffing out people trying to make money quickly. This doesn’t mean what is happening is not important—you could even take this time to brush up on some market history! Just take comfort that this has been seen before and markets are functioning normally. Remember to stay balanced and stay diversified!
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