It’s Not a Game (Gamestop)
In my career I have heard people say, “jackpot, all in, hold, players, optimal strategy, whale, wild card, option, bet, accumulator, and double down”. At first, you may wonder If I work at a casino or with the stock market. Are we dealing cards or dealing with stocks? Words matter. It is no surprise that many investors are confusing the stock market with a casino. Let’s take a closer look at the erratic behavior of GameStop and other Reddit-fueled positions.
Before you invest let’s go back to the basics. The stock market is a marketplace for selling shares of companies – where anyone can exchange their money for an ownership position in a company.
Think of it this way, if you were going to put down $1 trillion dollars to buy 100% of Apple shares, it would be important that you know who the CEO is, what they sell, how well are they are performing, and what the future holds for Apple.
What is a short? A short is when an investor borrows shares and sells them, hoping they will be able to buy them back at a lower price in the future, then return them to the lender so that the investor can pocket the difference. Is it wrong for the hedge funds to short a stock? Shorting is a healthy thing to see in the market because it keeps stock prices at natural levels. Now that we have covered the basics of the stock market we can tackle a few of the most important questions surrounding the Reddit phenomenon.
Why did this happen?
Stimuluses are injections of cash into the economy which take place in any many forms. An example of a stimulus can be PPP loans for businesses, lowering the Federal Funds rate for banking institutions and, of course, stimulus checks to individuals. Due to the increase in these stimuluses, individuals have more money to spend. Some of these people who have spare cash in their pockets are making speculative bets on downtrodden stocks in the market. These individuals usually have no knowledge of the fundamentals of companies they are investing in, like GameStop. If I were to poll a hundred of these investors and ask them, “who is the CEO of GameStop?”, they would have to Google it!
Stimuluses create these kinds of surprise run ups; however, with every injection into the economy we must keep in mind it creates unnatural bubbles somewhere else. The Federal Government’s responsibility is to watch for and prevent market bubbles such as these. The Federal Government has a tough job because they are playing a hard game of “whack-a-mole”. When the Federal Government whacks down one bubble, it mutates and pops up somewhere else. Adam Smith, an economist, taught that the economy has an invisible hand that should have minimal government intervention; the economy should have room to run its natural course instead of artificial doctoring. Sadly, the same investors who are shaking their fist to the brokerage firms restricting trades and government oversight are the same people that want the government to pay off their student loan debt. We must make up our minds: do we want government assistance or not? We have forgotten that markets run a natural course and every time we interrupt this organic movement there will be consequences.
What can we learn from this?
There is a growing disconnect between Main Street and Wall Street, but it is not our fault. Overnight, individuals are having to plan for their own financial future. The good ole days of working for one company for 30 years and receiving a pension has become something of the past. Now, individuals who never received any formal training are forced to become investors and plan their own investments. There is a growing divide between main street consumers and the wall street investors. We must not point the finger at GameStop investors because like novices on a video game, they have not been taught how to play the game. They are just pressing all the buttons randomly and getting lucky. Regardless of how the Reddit phenomenon ends, we must have a revival of financial education in schools. Investors need to remember that you buy stocks because you understand why it might go up in the future or for the dividend that the company produces.
Will it continue?
The rich get richer. Jim Rohn once said, “If you took all the money in the world and divided it equally among everybody, it would soon be back in the same pockets it was before.” What we are seeing is a microcosm of stimuli that is being flooded into the economy. For those investors that make wise long-term investments into quality companies will reap the benefits in the long run. On the other hand, investors that make foolish bets will ultimately lose their money and it will float to the top. Do not let this happen to you or your loved ones. Encourage them to get financial advice from a professional not a Reddit discussion forum.
What we are seeing is nothing new. Benjamin Graham was an economist, professor at Columbia University and ultimately Warren Buffet’s mentor. He said in his famous book The Intelligent Investor, “The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise, the stock exchanges may someday be blamed for heavy speculative losses, which those who suffered them had not been properly warned against.”
Investment services offered through SWAN Capital, LLC. SWAN Capital does not provide tax or legal advice; consult your tax or legal professional regarding your particular situation.Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information contained in this commentary has been obtained from sources that are reliable. This presentation is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Thought this info was useful?
Please share it on your social media platforms!
Ready to Take the Next Step?
For more information about any of our products and services, schedule a meeting today or register to attend a seminar.