Lessons Learned from the Gamestop Run
“You can’t invest without trading, but you can trade without investing. … Thinking you’re investing when all you’re doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other.” — Jason Zweig
Are you out of breath trying to keep up with the breaking news about GameStop and other recent red-hot trades? Here’s a synopsis (to date) and what it means to you as an investor.
Seemingly Unstoppable Games: Last week, a perfect storm of traders converged on the market, propelling the prices of a few previously sleepy stocks into the stratosphere. Jason Zweig of The Wall Street Journal reported, “From January 25 through January 29, a ragtag army of individuals sent shares in GameStop Corp. up 500%, and sent many others skyrocketing too.”
Reddit Gone Wild: Interestingly, there was no huge, breaking news or major shift in these companies’ fundamentals to explain the surge. Instead, a tidal wave of trading momentum happened to form on a Reddit forum called WallStreetBets.
Keith Gill (aka, Roaring Kitty): If the GameStop movement had a leader – or at least a cheerleader – it might have been Gill, who had been entertaining his online friends with GameStock status reports since he began trading it in spring 1999. The Wall Street Journal reported, “Mr. Gill said he wasn’t a rabble-rouser.” But, the report continued, “Many online investors say his advocacy helped turn them into a force powerful enough to cause big losses for established hedge funds.”
Big Short-Sellers Get Squeezed: Whatever inspired the movement, it soon became a force of its own, like an online flash mob buying and holding shares at increasingly higher prices. Why would anyone do this? Some may have just gotten caught up in the excitement. Even Elon Musk got in on the action with his “Gamestonk!!” WallStreetBets tweet. Others were hoping to profit on a communal squeeze play against “fat cat” hedge funds and others who had chosen to short sell the same stocks.
When a trader short sells a stock, they’re betting the price is about to drop. If it does, they can profit handsomely. But if the price instead shoots upward, a short-seller can face a margin call, requiring them to cough up the difference between the original share value and the fast-soaring price. With GameStop, short-sellers like Melvin Capital Management lost billions of dollars meeting margin calls, which became chum to the feeding frenzy.
Robinhood Parries: As the frenzy continued, many retail trading platforms – including Robinhood, Schwab, TD Ameritrade, and others – started experiencing trading overloads. Technical glitches, as well as deliberate trading restrictions, ensued. Not surprisingly, traders impacted by the lapses and restrictions have cried foul, perhaps rightfully so.
Enter the Fed: Is the phenomenon just a new but legal variation on a very old market mania theme? Did anyone violate existing regulations, and if so, who? Are new regulations warranted? Securities regulators are considering these questions, not yet resolved.
Now, to the main point. Where does this leave YOU as an investor?
You may have noticed: As we’ve introduced the players in this unfolding drama, we’ve not used the term “investor.” That’s because none of them are actually investing. Not the retail traders flexing their communal muscle. Not the short-sellers who lost their shirts. Not the trading platforms, stuck in the middle.
Everything we’ve been describing so far has involved trading, where there’s nothing new about having big winners and sore losers. Trading is a messy, cut-throat, zero-sum game. For every trader who gets to buy low and sell high, there must be a pair of traders on the other side who were willing to sell low and buy high. The only real questions in the current drama are whether any rules were broken that made the trades illegal or whether any new rules need to be crafted to ensure markets don’t become so unstable, they cease to operate.
As proponents of relatively efficient markets, we remain confident these questions will be resolved. It may not be pretty, but this too shall pass.
In the meantime, you are an investor, and we encourage you to remain one.
Over time, winning and losing traders converge and create market growth. Their volatile trading games translate into long-term market returns. As an investor, you can capture these returns by buying and patiently holding broad market positions, based on your willingness, ability, and need to take on investment risks in exchange for expected market returns.
As an investor, it really is that simple, and we’re here to help you do just that. As a trader? Wow, if anything, these recent adventures should underscore how impossible it is to predict where any given stock, sector, or forecast is headed next. All the more reason to bet on the efficiency of a long-term, globally diversified portfolio and to leave the GameStop gambles to the traders.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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