There has been quite a bit of buzz surrounding GameStop’s stock as well as others including AMC Entertainment. Countless articles have been written on this topic and a quick internet search will give you a plethora of information that we’re not going to dive into here.
The short (pun) story here is there were hedge funds “shorting” (taking a position that the stock will lose value) GameStop’s stock while a group of internet users predominately on the message board Reddit gathering together to purchase GameStop’s stock to raise the price and “call” the hedge funds’ shorts.
Many articles discuss whether this is right or wrong (on either or both parties), or address Treasury Secretary Janet Yellen, the SEC and FINRA’s actions against the small investors, Robinhood (a trading platform used by many of the people trading), and the hedge fund. Other articles still discuss unlikely political partnerships attempting to be formed between Senator Ted Cruz and Congresswoman Alexandria Ocasio-Cortez condemning the actions of Robinhood to halt purchases of GameStop.
Here we’re looking at this entire situation from a thirty-thousand-foot view and rather than cast judgement or question the reactions of the government and regulators we want to discuss what this means for investors.
There are a few major inflection points in the stock market that even the average person likely understands. These include the Great Crash (1929), Black Monday (10/19/1987), the Dot Com Crash (3/10/00), the Great Recession (2008) and perhaps in a few years the GameStop Game of 2021. As a student of history, I doubt this one will make it into our permanent memory just as there were some noteworthy “Fat-finger errors” even in recent years regarding in major market movements but at least for the short term there’s certainly some takeaways from this.
The “Reddit Investors” as we’ll call them were doing this for sport, for fun, and to prove a point in a David and Goliath battle that they “won”. They won this because the hedge funds’ positions were called, and they moved out of their positions at losses. The Reddit Investors however each have their individual positions and stories and while some may have made significant returns on the stock and sold their positions others bought at different times and may have taken significant losses as the stock’s volatility continued through these weeks. This strategy while perhaps “fun” for some participants and interesting to many spectators has more in common with placing a bet at a casino knowing the numbers are moving so unpredictably. We all have fun in different ways, some more reckless than others, but that’s another article on life insurance risk assessment.
Some of the thought pieces mentioned above cast judgement on capitalism and Wall Street and the “market”. We are not going to dive deep into that either except to say investing in diverse, risk and time horizon appropriate companies has the potential to create wealth for those companies, their employees, their investors and their communities which we feel is a good thing. Many of us can think of several companies in their community that make a big impact and when you look at the “market” as bunch of those in a bunch of different communities you can begin to see why participating in the market is not only good for you and perhaps your retirement savings but also for the places where your invested capital is deployed. This is not only true of stocks but of bonds and municipal bonds. Your investment in a “muni” could be funding a new community ice rink and a hospital which I think many people would agree could make a great impact.
The lesson we want our clients to take away from the 2021 GameStop Game is that it was just that, a game. That regardless of how you cast judgement on any players in it they were merely playing. Those purchasing GameStop’s stock were likely not looking at a long-term picture let alone their complete wealth picture. We want our clients to always have those concepts in the back of their mind when reading splashy headlines about the next hot stock tip or IPO. Our process looks at the client’s individual goals, along with their risk tolerance and time horizon and employs a strategy fit to their needs while diversifying their portfolio to manage their risk. We don’t have a crystal ball but as we often tell our clients if we had that we’d probably be on a beach somewhere in the winter and not in snowy Buffalo!