As if the year 2020 wasn't interesting enough for markets, the GameStop and Reddit frenzy made for a unique start to 2021.
For those of you who may not know what I'm referring to, here's a (very) brief summary: an internet chatroom on the site "Reddit" helped influence a surge in the stock price of GameStop, an American video game and electronics retailer. How did this happen? Wall Street hedge fund managers "shorted" the stock, meaning they borrowed vast amounts of GameStop stock with the prediction the stock price would drop. We're talking billions of dollars in GameStop stock. Meanwhile, the "Reddit" chatroom full of retail investors saw this and decided to encourage investors to buy up the stock so that the stock price would rise, therefore forcing the highly leveraged Wall Street hedge fund managers to cover their shorts, resulting in billions of dollars lost for the hedge funds.
What happened after that is the most interesting part of this story, and also what makes this story a learning lesson for many investors. Once word got out about GameStop's surging stock price, many individuals, some with little investment knowledge, ran to their online accounts to purchase GameStop. But why? GameStop has been a struggling company for a number of years. Gamers overwhelmingly choose to buy their equipment and video games at larger big-box or online retailers, like Amazon or Wal-Mart, making it hard for GameStop to compete in the marketplace. If we're looking at the company’s balance sheets and historical data, GameStop is not a suitable company to invest in for a majority of investors. For example, it would not meet Iowa Wealth Management's Prudent Man selection process. Unless, of course, you’re speculating, which brings me to my point.
Unfortunately, many of those purchasing GameStop after the surge were only focused on the potential for massive profit (which is a natural and human response), and many of them lost their lunch on this bet (also a natural and human outcome). The difference between speculating and investing is simple – one is focused on the process of investing that favors a predictable outcome. The other is focused strictly on the potential outcome and is not necessarily rooted in history or facts.
At Iowa Wealth Management, we totally understand the excitement of speculation. It’s a natural, human response to see an opportunity and want to participate. However, we base our investing decisions on historical data and proven process. We employ Prudent Man Theory that helps guide you, the investor, towards making sound decisions and less emotion-based decisions regarding your hard-earned dollars. If you ever have questions about specific investments or want to know more about a company, we’re happy to do some research for you so that you have the information you need to make a suitable and informed decision for your portfolio.
Past performance is no assurance of future results. Iowa Wealth Management is a registered investment adviser with its principal place of business in the State of Iowa. Opinions expressed are those of Iowa Wealth Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security.