What is Going on With GameStop?
If you’ve been wondering about the GameStop story this week, you aren’t alone. We’ve gotten a number of questions about what is going on and what it all means. Here’s a quick overview.
This is an old story with an acutely modern twist. A wide swath of individuals, mainly via the online community Reddit, have essentially banded together to push up the stocks of various favorite companies. Gamestop, a gameseller, is the most famous right now—these traders pushed the stock’s price up about 1,700% through January 27. However, other companies, like Blackberry and AMC, have also benefited.
This is essentially a deliberate attempt to pump the stock price higher and, in the words of at least one Reddit commentator, to “stick it” to the professional traders who had bet on Gamestop’s decline. On January 27 alone the price jumped over 130%.
With all the volatility, a variety of trading restrictions were imposed on the stock this morning, January 28, and as of this writing it was down over 20%.
What does this mean?
Way back when, these types of schemes were carried out by a few individuals in a room—today, they can be coordinated across the world. In both cases, this is not a reflection of what a company is actually worth. In this case, we think it’s fair to say that there is a definite note of anger among the people participating.
Unfortunately, we don’t see this ending well for those individuals.
While the hedge funds that had short positions on the stock are certainly under a bit of pressure in the short run, the people who lose the most in these situations are the individuals who buy into the frenzy, usually at the peak. Now that the kinds of restrictions that prevent extreme volatility are in place, the mad upswing is likely going to slow down—it already has.
What’s more, this is still the same company it was a month or two ago. The attempt at propping it up and “sticking it” to professional investors won’t change that. In other words, this might alter the milestones of the Gamestop story but in our view its unlikely to change the trajectory.
Thoughtfulness and discipline
For those of us with kids who are cheering on the traders of Reddit and Robinhood, we think this story will eventually offer a good lesson in the value of thoughtfulness and discipline. While it might seem like an adventure right now, we can only hope that people haven’t put too much of their savings into this scheme. The hedge funds will be fine; those who piled on at the peak might not be.
In any situation, we believe that investment strategies—whether its ETFs or individual stocks—should be selected for good reasons and with an overall awareness for risk management. Thoughtfulness and discipline might not be as alluring as excitement and rebellion, but they’re a much better path when it comes to achieving financial goals.
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Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.
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