By now you’ve probably read about the GameStop/Reddit saga. In fact, you’ve probably read more than you care to. Even though I know it was gambling, I had some serious FOMO. Nonetheless, I feel like I need to address it. It’s not often an “investing” (gambling?) topic becomes the most talked about topic on the internet.
It took my wife until last Thursday to ask if we had any GameStop stock because she just caught the news. (Bless her for being able to focus on work. I wish I had that kind of attention span. Squirrel!)
If you are still catching up or just want one place to catch up, the best information I’ve found is this Vox article.
It’s impossible to have unique thoughts on something so many people have written about, but here’s what I think deserves more attention than it seems to be getting:
There are great stories of Gamestop/Reddit helping people.
This 10-year-old cashed in on his gifted GameStop stock from a couple of years ago. He’s got an interest in the stock market now and is investing 1/3rd of it. What about the other two thirds? It’s going in a savings account.
In the WallStreetBets forum, I read stories about the money paying off college loans and helping with medical treatments. There’s a genuine story of the money from billionaire hedge funds losing money to change the lives of retail investors.
GameStop/Reddit Will End Badly
I have been watching the WallStreetBets Reddit and it seems like no one is stating the obvious. It’s probably because “the obvious” is against the mission. Any mention of it is likely to get voted down.
There is one obvious conclusion to the GameStop saga. What goes up, must come down, unless there’s a business to support the price. GameStop business can’t support the price of a $25 billion-dollar company. It doesn’t have the profits. Maybe it can raise money and retool its business to make those profits, but it would take years. Most people don’t like their money tied up doing nothing for that long, so they’ll sell.
That’s the best-case scenario of how this ends. The typical is that people get bored in a week everyone tries to sell as it goes down. It’s a bad game of musical chairs. There are going to be stories of people who bought in at $300 a share only to have it be worth $20 a share. Unfortunately, there will probably be some extreme stories about some people who invested their entire retirement savings only to have it be worth several thousand dollars now.
3. The Fed’s Helped Create this Mess
I have to give credit for this idea to Peter Boockvar. He notes that the Federal Reserve has been keeping interest at (or near) zero for a long time. This discourages people from using safer investment vehicles like CDs or simply a savings account. No one wants to earn 0.1% interest in a bank account. I can see many people thinking, “why not get the Robinhood app and try to make more?”
I think a better plan would be these income investing ideas.
The GameStop/Reddit frenzy isn’t new
I remember the pump and dump schemes on Yahoo Finance message boards back in the 1990s. As one Reddit user described WallStreetBets (somewhat paraphrased): “We’re a bunch of monkeys throwing [poop] around. The only difference is that this time we’re throwing our [poop] in the same direction due to a unique circumstance. Don’t expect that to continue.”
It’s true. There are many people looking for the next GameStop to get on-board the train, but it’s difficult. AMC has done well if you got in early enough. Other meme stocks like Blackberry seem to have gone nowhere after an initial jump of attention.
New Opportunities Will Emerge
Whenever something ends badly for one group, there’s usually an opportunity for another group. I’m not sure what that may be yet. Maybe people are burnt so bad that they run to value stocks that pay good dividends.
I have read that the stock market being down overall the last few days was due to the market getting nervous about this GameStop/Reddit frenzy. The market is only about 5% off its highs, but that means millions of people are dollar-cost averaging with their 401ks at lower prices.