Well, that was crazy. Are you sure we're not back in 2020?
I'm talking about this month's trading in a handful of stocks including Gamestop, the retailer of video games. Hordes of individual investors, or traders, or millennials, or some combination of all three, went on a buying spree, pushing the price of Gamestop from $19 per share on Dec. 31st, to close at $325 on Jan. 29th, with massive swings up and down along the way.
*Update as of 2/2/21 - Gamestop closed at about $90 / share, down over 70% from 1/29/21*
The buying wave began with YouTube's "Roaring Kitty", a home basement trader, posting videos about his buying of Gamestop shares as the company was under attack by hedge funds. The hedge funds had "sold short" the stock, meaning they were looking to profit from its decline. The videos and message went viral, spreading through on-line sites such as Reddit.com. The "little guys" were encouraged to take on the hedge funds, drove up the price, and at least for now have won, causing billions of dollars of losses for Wall Street's elite!
Much of the trading was done through the Robinhood app, which at one point shut down the ability to sell shares. The populist crowd cried foul, enraged that they couldn't trade while the hedge funds and big institutions could. Politicians on both the left and right saw an opening and sided with the amateurs. All that's left is the made-for-TV movie.
So, will this new market populism become a force to be reckoned with? I think it depends on what type of investor you are. Let's look at three categories:
The Short-Selling Hedge Fund
Yep, it's a game changer. You now have a new challenger - the Robinhood trader - who doesn't particularly care about valuations or your investment thesis. Remember, when you short a stock, your potential for loss is unlimited.
The Robinhood Trader
Please, please, please, be careful my friend. Understand the difference between trading — buying a stock based only on the hope that someone else will quickly want to buy it from you at a much higher price — vs. investing — that's buying equity in companies to build wealth in the long run. Don't trade more than you can afford to lose.
The Disciplined Long-Term Investor
You'll be just fine. This speculation is taking place in a small corner of the U.S. stock market, heavily shorted small cap stocks. According to the Wall Street Journal, by January 27th the most-shorted stocks accounted for only 0.17% of the S&P 500.1 The total U.S. stock market, which has a total value of approximately $50 trillion2, remains largely unaffected. If you are a diversified investor and own funds that track the broad markets, don't worry. In the short-run market volatility may increase, and you certainly will hear a lot of chatter about this phenomena on the news. But in the long-run, stocks will go up or down based on earnings and growth potential. And the long-term track record of the buy and hold investor remains strong.
As always, stay disciplined and think long-term.
David Rappaport, CFP®
David is the Co-Founder of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.