Surely someone has already started work on a movie script about the rise of GameStop shares – what a story!
GameStop Corp. (GME-T) is a down-on-its-luck video game retailer targeted by hedge fund managers who bet that the company’s shares would fall. Using an online forum on Reddit, a posse of individual investors strategized a way to fight those hedge funds.
We’ll score this one investors 1, hedge funds 0. GameStop shares have soared like a rocket, while hedge funds lost billions of dollars.
Other stocks have been driven higher by these individual investors, including the struggling movie theatre chain AMC Entertainment. Are you getting the picture here? There is a big disconnect between the value of these companies as investments and their recent share price gains.
What’s happening with GameStop is a form of social protest against the elite of the financial world, as represented by hedge funds. It’s the story of how retail investors have been empowered by new technology in the form of smartphone apps that let anyone trade stocks at no cost. It’s a great David versus Goliath narrative – and yet another example of how the pandemic has added an unpredictable edge to almost everything that happens these days.
High-flying stocks crash to earth as trading platforms hit the brakes
Social media-driven trading frenzy has tax implications
Silver, precious metal mining shares the latest hit by Reddit-fuelled volatility
How did the Reddit stock market rally happen and why did it start to fizzle on Thursday?
But if you’re wondering what the GameStop story means to your future investing, the answer is nothing. Enjoy the show – but don’t take notes.
The foundation of success in stock market investing is buying, either directly or through funds, into companies that produce value for shareholders in the form of rising stock prices and/or dividends.
GameStop’s a nice operation – my boys used to buy video games at one of its stores in a nearby mall, and the staff were always great.
But as a business, GameStop has been likened to Blockbuster Video and record store chains. That’s why its shares were priced below US$5 in the summer. On Thursday, they traded above US$450 before falling back some.
Individual investors have basically crowdsourced a higher GameStop share price, a brilliant strategic win against hedge fund managers who are used to being the clever ones. But there’s no way to convert the GameStop experience into a sustainable way forward as an investor.
Let’s recognize that significant money has been made by regular people who have never had a score like this. Yahoo Finance has reported on a user of the WallStreetBets forum on Reddit who posted a comment about paying off a student loan.
But things could get ugly when other GameStop investors want to sell – and they most certainly will want to do so. Remember, this is a company that investors valued at less than US$5 a share just a few months ago. Keeping GameStop aloft is like blowing into a giant balloon: Eventually, you run out of breath.
We got a glimpse of that Thursday, when the shares plunged almost US$350 a share in 90 minutes before rebounding again. Selling a free-falling stock at a favourable price is really hard.
Another layer of complication arises from the way in which frenetic trading of GameStop and other stocks has clogged online brokerage websites and trading apps. As I wrote this column, my e-mail inbox filled up with notes from readers who were angry about not having access to their brokers. It’s ironic that making stock trading more accessible through technology has at times made it more difficult due to heavy traffic.
The investing world has always included a mix of traders who buy and sell frequently and investors who hold on for the longer term. Every so often, we get a hot stretch for stocks that empowers traders and makes investors feel like they’re losing out.
That’s where we are now. The GameStop drama suggests that social media and technology have created a way for small investors to trade their way to big money. You almost feel like a sucker holding your exchange-traded funds, mutual funds and blue-chip stocks.
But those kinds of investments are the foundation on which long-term investing success is based. You buy them, you hold onto them for 10 years or more, and they make you wealthier. GameStop is an investing story for the ages, but it’s no way to invest.
Stay informed about your money. We have a newsletter from personal finance columnist Rob Carrick. Sign up today.
Rob Carrick