You Don't Have to GameStonk
A Reddit-fueled trading drama captured the world’s attention last week as thousands of individual traders banded together to drive up the stock of a company many had never heard of before -- GameStop (NYSE: GME).
This strange episode makes for great socially-distanced dinner party chit-chat, but it's not a template for good investing. GameStop is a video game retailer that has spent years on the wrong end of an economy that continues to pivot away from physical stores and physical video games.
For months, hedge funds had been betting that shares would fall in value as fewer and fewer customers showed up at GameStop stores. If an investor thinks shares will fall in value, she can take a “short” position by borrowing the shares, selling them at today’s price, and promising to give the shares back to the owner at some future date. If the price goes down, the short seller buys the shares back at the lower price and keeps the difference between the higher sales price and the lower purchase price. That’s how short sellers make money.
But if the stock goes up, then the short seller has to buy back the shares at a HIGHER price, and she can lose a lot of money very quickly.
Enter a handful of Reddit users who decided that they should intentionally push up the price of GameStop stock and cause a lot of pain to those investors who were taking large short positions in the stock. Whether to punish hedge funds for their amorality, make a quick buck, stick it to the man, or give the middle finger to the global financial system, we witnessed the strange and intense power of orchestrated market manipulation. On January 20th, GME closed at $39.12.By January 25th, GME had reached an intraday high of over $159.Elon Musk sent the Twittersphere into overdrive on January 26th by tweeting one word – GameStonk!! – and investors took it as a rallying cry to keep pushing the price up. On January 27th GME closed at $347.51. Over 600,000 people opened trading accounts at Robinhood in just one day to get in on the action. On January 28th, Robinhood and other brokers were forced to stop trading in GME because of the crush of volume. (We still don’t know exactly what happened or why.) The stock traded between $112 and $483 during the trading day. Today the price of GME is around $59.This new type of trading is now referred to as “meme investing.” It’s a fascinating corner of the market, but should you participate? My strong belief is that every investor needs to chart her own path and implement her own strategy.
So if you can answer “YES” to the following questions, then meme investing might be for you:
Do you have a Reddit handle?
Can you explain what a “short squeeze” is?
Do you get a secret thrill from watching someone light a pile of money on fire?
Is your retirement account the ideal avenue for bringing high-risk excitement into your life?
If you felt your adrenaline start to race just reading these questions, you might be a natural meme investor. If not, it probably makes sense to sidestep this phenomenon. It’s okay to steer clear of speculative and/or "battleground" securities. It’s okay to focus on mutual funds or ETFs that hold a large number of securities, minimizing the risk of any one holding. Asking the question, “Should we get in on this [insert meme] trade,” is similar to the basic market timing question, “Is this stock going to go up or down from here?”
It’s already the most difficult question in investing. The big difference with meme investing is that the investor's prediction about which way the stock will go is not based on the value or efficiency of the company, its products or its services. The investor's prediction is based almost entirely on what other investors will do, and exactly when they will do it. I have no problem encouraging my clients to consider certain investments based on my own research about a company's long-term value. But I would never encourage a client to make an investment based purely on the future actions of other investors. In the short-term -- and with meme investing, I'm talking about days, hours or even minutes -- it’s just too difficult to predict.
The stock being manipulated could keep charging up or it could crash, literally at any minute. After all this, GameStop is still a company that sells video games and consoles from physical stores in malls. If that sounds like a business you want to own, then go ahead. But if you’re trying to make a quick buck, be careful. Who do you think was buying GME at $400 and now owns it at $59? My fear is that it was a lot of people who could not afford the loss.