Shooting The Moon On Meme Stonks
You’d have to be living under a rock if you aren’t aware by now of the current news surrounding Gamestop by now. If you aren’t, allow me to get you back up to speed.
To recap:
- Gamestop has been on the decline ever since the move to digital sales for video games. Many on Wall Street (especially hedge funds) began “shorting” Gamestop’s stock. Eventually, more stocks were shorted than currently existed.
- A stream of positive news (increased sales, support from other CEOs, etc) came in and Gamestop’s stock price began to rise.
- The subreddit r/WallStreetBets, noticing the short positions and spurred on by a combo of 1) good news regarding Gamestop, 2) a belief in Gamestop’s viability, and (most importantly) 3) a desire to stick it to hedge funds began buying stocks of Gamestop (and other company’s whos stocks were shorted… the collective stocks I refer to as “meme stonks”).
- The massive buying of stocks drove Gamestop’s stock price higher, which brought about more buying. Many bought and held, which had the effect of putting a “squeeze” on those who held short positions. Hedge funds would lose billions and one in particular would need a cash injection from another hedge fund.
- Robinhood, the investing app, halted buying of all affected stock, causing their prices to fall. This angered many retail investors and brought about accusations of market manipulation. Those caught in the middle have suffered massive losses (assuming they sold).
- Gamestop’s stock (along with other meme stonks) has been continuing its decline ever since.
Lessons Learned
This has been one of the most wild events to have occurred on Wall Street and has signaled the power that retail investors have AND the power of Reddit. At the same time, the events we witnessed mirror countless stock crazes that have occurred since the first opening of the New York Stock Exchange (and even before).
Additionally, it again teaches some (very) old lessons about investing:
- Short-term investing is gambling.
- Avoid jumping in on stock crazes.
I am also gonna argue that it reinforces other lessons that are popular within the personal finance community:
- Only invest what you’re willing to lose.
- Keep a (very) small portion of your money tied-up in single stocks or avoid them altogether.
The In Popularity of Investing
With the rise of the investing apps (such as Robinhood, Stash, Acorns, M1 Finance, etc)and a growing interest in investing, people are beginning to dip their toes and their wallets into the Stock Market, whether it’s through their retirement funds, day trading, or just buying stocks in their brokerage accounts.
However, I think many people are taking unnecessary risks with how they invest, especially in our increasingly gamified world, and for various reasons. The reasons might be faith in the company, greed, a lack of understanding, FOMO (fear of missing out), etc. The overall goal is to increase the money we have at the end of the day (or our careers).
To many, the Stock Market is a vehicle to make large sums of money… and quickly. Many want to emulate (or eventually become) successful investors on Wall Street. And maybe it’s an American thing, but many tend to seek quick and lasting results with little effort upfront (this happens with diets as well). This mindset often drives many investors into money-losing trades. It’s well-known that most day-traders lose money… but that’s not gonna stop new players from entering (similar to would-be MLMers).
With hot stocks, especially as they are reported about in the media (and notoriously on CNBC) there tends to be a belief (in the moment) that a stock can only go up (hence the hashtag #tothemoon with Gamestop). It’s not anything new either. It happened with tech stocks in the 90’s and it happened with various stocks during the 1920’s. In all instances, some good news (along with some manipulation) drove the price of a company’s stock. As it was more widely reported in the news, more investors jumped onboard, pushing the stock’s price even higher ultimately until some piece of bad news brought the price down, causing investors to retreat, further driving down the price of the stock. Those who are the last to get out lose money in a BIG way.
The Ultimate Takeaway
I posted on Facebook about the Gamestop craze at what appears (in hindsight) to have been the peak of Gamestop’s stock price. The post went a little something like this:
My hope was to caution those seeing the recent news about Gamestop against seeing it as a quick and easy money-making opportunity. It’s super duper tempting to see something on the rise and want to get in on it too. “Who knows, maybe I could make a lot of money out of this”, you think to yourself. Your hopes might have been bolstered by the handful of reports of people who’ve made large sums of money and paid off their debt. My hope with that post was to bring people back down to Earth for this simple reason: by the time a stock has become this popular it is often too late to enter the game and it’s only a matter of time before the stock begins to decline and for Gamestop… boy did it fall. At the height of Gamestop’s rally, its stock price vaulted up to almost $350/share. As of this post, it hovers around $40/share. Ouch. The same has happened with other meme stonks.
Ultimately, investing is a game that should be played for the long haul. It’s boring, but it’s safe, with more guaranteed returns.
