Well, I wouldn’t normally post two posts in a week, much less two in two days! But by popular demand, I have a few words on this GameStop fiasco. What do you guys think I am, some kind of journalist?!
I hate when news stories like this come out. These sorts of headlines give rise to the kind of stock market talk that promotes the age-old myth: the entire system is run by wealthy Wall Street Fat Cats, the small people can’t get a piece of the pie (or only lose money), and boy wouldn’t it be great if we could tear it all down!
This is flawed thinking. Here’s why:
A Little Background
For those of you not following the latest, here’s my quick interpretation:
GameStop is (Probably) a Dying Company
GameStop, a slowly dwindling brick-and-mortar gaming store from the mall era has seen its stock also slowly dwindle. First important note: GameStop’s stock is tumbling because the business is not keeping up with the times. That’s the natural selection of the business world. Poor management leads to poor business, which turns investors away. The stock price goes down. We can love a company, but that doesn’t make it a good investment.
Hedge Funds Bet on Failure
Anyway, hedge fund managers, doing what hedge fund managers do, placed shorts on the stock, essentially betting that the stock would continue to fall. If their assumption is correct, they make money. A short is a bet on failure, and it’s done all the time. It’s a bet. And it’s betting on failure. That’s a slimy way to invest (but they’re not wrong to assume that the stock would probably fall).
Basically, the short position on GameStop was incredible. Firms placed massive short bets believing that GameStop stock would continue to fall.
Armchair Investors Quarterbacking: Reddit WallStreetBets and GameStop
Meanwhile, a group of Reddit investor enthusiasts—not of the kind we endorse, for reasons that will soon be discussed—decided for several reasons that they would suddenly, en masse, invest in GameStop. Some of these investors actually believe GameStop is an undervalued stock, and as such has room to grow and provide the investor a return. A handful of these folks smartly realized the massive hedge position and banded together to put upward pressure on the stock.
Others, more intent on sending the Wall Street short gang a message, jumped in and gobbled up shares of GameStop to inflate the value of the shares. This sudden surge in investor activity created a micro-bubble, grossly inflating the value of the stock and indeed putting the tail between the leg of the Wall Street Short Club.
But probably the majority of investors, as we’ve seen with this “hot stock”, psyched like tiger sharks in a chum water frenzy, hopped in on the hype for quick riches. And with every good bubble, comes crazy volatility.
Most of these people are not seasoned investors. Allegedly, much of this group is made up of teens and 20-something bros. They have access to apps like Robinhood, which allow them to frivolously trade their allowance or lawn mowing money on whatever stocks are being digitally fist-pounded by their homies.
It Sort of Feels Good to See
At first glance, this rob-the-rich-and-feel-vindicated approach feels like a power-to-the-people kind of moment. Elon Musk, Stephen Colbert, and even Jon Stewart have tweeted in support of the Reddit investors. It feels good to give a middle finger to Wall Street, right?! They’re to blame for the 2008 Financial Crisis, right?!
And certainly, I haven’t yet gotten out my tiny violin.
Unfortunately, as with most things, these situations can’t be distilled down to a protest sign or a Tweet. Although this is a great one:
Lovely to have all these new followers .. can we just check that you know that you’re following The World Wide Robin Hood Society in Nottingham and not the Robin Hood App .. if so .. a big welcome from Sherwood 🙌
— Robin Hood (@robinhood) January 28, 2021
There’s nuance here.
Also, didn’t a bunch of other folks read some stuff on the internet and get all hot about it? Didn’t they feel vindicated and a sense of power-to-the-people on January 6?
This feels oddly like a “drain the swamp” kind of moment. If we’re not careful, we risk draining one swamp and flooding the prosperous and fertile valley below (and maybe your retirement plan).
Responsible Investing Focuses on the Long-Term
I’ve been writing here for over two years, banging the same table:
Investing is sustainable when the investor takes a long-term approach.
People who make lasting money in the stock market
Buying hot stocks is not successful investing. Trying to guess the next big winner is very rarely successful investing.
The Reddit investors are, in essence, gambling. These folks sit around their computers and trade misguided stock tips. Add in the prevalence of highly functional and easy investing apps like RobinHood—which allow for purchases of fractions of shares for small sums of money—and you have a recipe for a mess. Internet-informed masses who can easily promote misinformation and can take quick action.
Damn, this still feels oddly similar to another mass group of people with different, but passionate beliefs.
So, what’s the problem with folks trading stock tips? The problem is that many of these investors clearly are looking for get-rich-quick, “hot stocks.” I don’t want to be too dismissive: I’m sure there are some well-intentioned folks on this forum who are just psyched on a more active form of investing. Some of them might be using suitable fundaments of revenue, expenses, and other metrics to assess the value of a company. My guess is that many, however, are not.
But Some People Cashed Out Big with GameStock!
Maybe some were lucky and did crush it on this one. So? People crush it on Blackjack and Spin-the-Bottle occasionally too, but most of us aren’t quitting our jobs over those successes. This is gambling, and winning here is luck.
These investors have probably failed on many other speculative ventures before this hoopla came around, and they will probably go back to lackluster performance when this is all over (assuming they haven’t already lost a bunch of money).
Plus, they probably haven’t considered, as Mrs. CC puts it, that “they’re going to get taxed out the asshole” for those winnings. While I wouldn’t use quite that much technical jargon, Mrs. CC has a point. The tax rate on short-term capital gains is not exactly forgiving.
The Game Isn’t Rigged and Wall Street Isn’t Going Anywhere
When we work with the system, it works. We can build wealth and we can buy our freedom. The system is not rigged.
Despite all my ranty-ness here, you might be surprised to learn that I take an optimistic, love-based approach and mentality to both money and investing.
I primarily invest in a single index fund that tracks the stock market as a whole. Why? I want the economy to succeed. I recognize that not all companies will succeed, but many will. And as some of those successes fade, new hungry innovators, collaborators, and entrepreneurs will step up and fill those gaps. And the cycle continues. I doggedly, month after month, year after year, whole-heartedly believe that.
I believe in human innovation, prosperity, and I participate in that. Yes indeed, I put my money into the economy, and not just through the stuff I buy. I invest in companies, people, and ideas. I don’t simply do this to make money and never work again.
Maybe I’m a hopeless romantic, but that’s how I really feel.
When we financially support companies, we are rewarded when these companies create value. Those who choose not to participate—and worse yet, those who feel the stock market is evil—are in essence saying that they don’t have confidence in the long-term stability of their economy.
If you only view investing as a way to get rich, you are part of the problem.
If you feel investing is wrong or evil, I’m all ears on how you plan to save for your retirement. At least Musk, Colbert, and Stewart, unless they burned through it all, have enough cash to not even bother with investing. The rest of us schlubs, however, need the power of compound growth.
The system is not rigged.
Summary on the GameStop Saga:
This is not a rob-from-the-rich-give-to-the-poor or heroic David-and-Goliath story. While I enjoyed seeing Wall Street short betters squirming as much as the next guy, I’m far more alarmed by the growing trends of internet-informed masses with easy tools to take ill-informed action.
The Reddit investors will, at best, be the recipient of a fat tax bomb next spring. At worst, some of these people, especially those who bought in at grossly inflated prices, will probably lose most of the $18 or whatever babysitting money they’ve invested. Wall Street probably won’t change.
What’s the lesson? Maybe we all need a little bit of digital minimalism in our lives. Let’s take back our brains.
For two other great summaries of this, umm, situation, I’d recommend these:
New York Times’ The Daily: The GameStop Rebellion
Early Retirement Now: My Thoughts on the GameStop Volatility
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Thanks guys, see you next week.