Unless your New Year’s resolution led you to give up all news, social media and information from the outside world, then you’ve seen GameStop as the major headline in the news this week. It is a tremendous understatement to say the company’s stock has gone on a wild ride fueled by an online Reddit forum called WallStreetBets.
GameStop is a retailer for video games and merchandise and consumer electronics.. Good ol’ brick and mortar. The fundamentals of the company, like EBITDA, earnings per share, and other metrics, haven’t looked good for a while. That’s part of the reason there was such a bearish outlook from big investors and hedge funds who shorted the stock.
The purpose of this article isn’t to detail specifically what has happened with GameStop this week or why. There is plenty of great content that explains that like here, here and here. I encourage you to check it out.
Rather, it’s to highlight a few things that investors should know.
1. What happened this week is not investing – it’s gambling. Nothing more, nothing less. You invest your capital in a company stock in order to purchase the future cash flows of that company. Nothing changed with GameStop to make those future cash flows more attractive. There’s no reason it went from a $1Billion market cap to $15 Billion market cap in a matter of days. People are placing bets using options trading, based on speculation, and/or what the crowd is doing. You’d be just as well taking that initial investment in $GME and plopping it on the counter at your favorite gas station and buying some scratch-offs. Seriously.
2. Many people are losing. Sure, there’s the guy that claims to have turned $55,000 into $11 million. But there are many losers here, and not just the hedge fund managers that got caught in a squeeze. Even the retail investors and others who thought, “Hey, this seems like fun, let me jump on this rocket ship!” At one point, the stock was up more than 2,200% in about 10 days. (start planning for that tax bill!) Conversely, there are some folks who bought at the top and are down 30%, 40%, 50% in the same trading day potentially. Or the Robinhood users who got cut off from transacting freely.
3. You should never risk more than you can afford to lose. There are some options contracts that have unlimited downside – let that sink in. Everyone wants the great return, but not everyone respects what you have to risk to get it. Whether you’re truly investing for the long-term or gambling with options on GameStop, you must understand this principle.
We’ll see what happens next with GameStop, AMC, Nokia, Blackberry and others. When the music stops, someone is going to be left holding the bag. You really don’t want that someone to be you, because let’s face it: what has happened this week is not how investing works. It’s a dangerous game many people are playing.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas,” said Nobel Laureate and famed economist Paul Samuelson.
Investing is not a game, just stop.