Lessons from the GameStop Frenzy

If you hadn’t already heard of GameStop, surely you’ve heard that name come up over the past couple of weeks. Likely you heard “GameStop” used in the same sentence as “WallStreetBets,” “Reddit,” and “market frenzy.” Many folks, even if they weren’t exactly sure what was going on, wondered if this so-called GameStop frenzy they kept hearing about was something new. Was this frenzy…wait for it…“unprecedented”? Another question that comes up is whether or not all this noise means anything to the majority of investors.

The answer to the first question (“is all of this GameStop mania something new?”) is no. Definitely not. Honestly, any time you hear about something on Wall Street being unprecedented, run fast. This situation is actually reminiscent of the 1990s, except that a new instrument is being used for speculators to gather online—the Reddit online forum, WallStreetBets. In the 1990s, internet chat rooms offered one-of-a-kind stock tips, and now the masses can turn to online Reddit forums. Those with steadfast confidence often drive these market manias, rather than those who have actually been correct.

During the 1990s, the thinking was that small investors could beat Wall Street with this new paradigm because (according to some individuals) “professional investors underperform the market.” One piece of significant information missing from these stories is that the underperformance has nothing to do with lack of skill. No one can consistently beat the market over a long period of time!

Most recently, the “let’s beat Wall Street” talk was coming from the WallStreetBets online forum, where members caught wind of hedge fund companies short selling GameStop (borrowing shares of the stock to sell at a higher price than the price to purchase). These WSB folks saw an opportunity to create a short squeeze by buying up the stock to drive the price higher. The hedge funds with short positions were forced to buy back at extremely inflated prices. Many retail investors (the little guys) got caught up in this frenzy, hoping to achieve overnight fortune, but as quickly as the fortunes showed up, they disappeared.

Winners and losers are made all the time on Wall Street, but it is extremely difficult to be one of the winners and to actually realize such winnings before they’re gone. Many investors were still holding GameStop shares as the stock started to plummet.

Individual stock investors follow the crowds at their own peril. Investing in this manner, especially based on hype, is always going to be risky. However, investing in a well-diversified portfolio allows for long-term gains that aren’t influenced by individual stock abnormalities.

Unfortunately, this GameStop noise also creates fear and will turn some individuals away from investing. It’s true that one group of people with an agenda can influence the price of a stock, but they cannot influence the market as a whole. Investors should continue to invest in an allocation appropriate to their time horizon and risk tolerance, and they should focus on well-diversified funds (exchange-traded funds and mutual funds) rather than exposing themselves to the whims of a small group of investors betting on an individual stock.

Having a sound investment plan is key! When noise happens, keep these quotes in mind:

“The four most dangerous words in investing are ‘it’s different this time’.” — Sir John Templeton

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson

“The individual investor should act consistently as an investor and not as a speculator.” — Ben Graham

The stock market is filled with individuals who know the price of everything but the value of nothing.” — Phillip Fisher

“Don’t look for the needle in the haystack. Just buy the haystack!” — John Bogle

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffett

“Wealth isn’t primarily determined by investment performance, but by investor behavior.”— Nick Murray

“Another lesson I learned early is that there is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”— Jesse Livermore

 As always, your Bluerock Wealth Management team is here to answer any questions!