GameStop’s Stock Surge: 3 Important Lessons for Investors

GameStop stock surged this week, driven by retail investors of a Reddit community. Here are 3 investing lessons it teaches us.

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  • Shares of GameStop are trading at sky-high prices this week, driven by a Reddit community called r/WallStreetBets.
  • It’s a good reminder that the best approach to the stock market is slow and steady investment in index funds and exchange-traded funds (ETFs).
  • If you want to get in on the stock market, consider opening a Roth IRA account.

The hottest stock on the market right now is … GameStop?

So why is a struggling brick-and-mortar video game store suddenly trading at sky-high prices?  

In short, this is a battle between institutional Wall Street investors and a group of individual investors — and a timely reminder of the big risks and volatility that come with short-term stock trading. 

Investing in the stock market has become more accessible in recent years as platforms such as Robinhood, Public, or Webull make it easier for the average person to invest. You can even buy portions of premium stocks like Apple or Microsoft with just $1, which is known as fractional investing.

Today, retail investors account for around 20-30% of market activity. And when big enough communities of retail investors band together to engage in “group trading,” they can cause major movements in the market. Rather than trades based on a realistic assessment of a stock’s share value, this kind of trading is a manipulation of the market by an organized few.

This is what’s happening with GameStop, driven in large part by a Reddit community called r/WallStreetBets. These Redditor investors, in apparent response to GameStop’s declining fortune in business and on the market, have initiated a gamification strategy known as a “short squeeze.” 

Basically, a group of users picks a stock, injects capital to increase traction, and once traction is reached, sells at the “peak,” causing losses for many who aren’t aware of the strategy. In this case, institutional investors like hedge funds, who were making big bets on GameStop’s declining fortunes, are racking up huge losses.

GameStop’s share price rose from $18 in early January to a peak of nearly $350 before starting to come back down Thursday. According to MarketWatch, GameStop has become the one of the most traded stocks in the U.S. — in line with Apple, Microsoft, and Amazon.

Source: Google / NYSE

These gamification strategies have even caught the interest of President Biden’s White House and Treasury Secretary Janet Yellen. Her team has begun to monitor companies likely to see the effects of group trading

When there’s so much noise in the stock market, what should one think of it as a long-term investor? 
My view: Avoid the GameStop gambit — and future versions like it — with a 10-foot-pole. The best, simplest way to invest in the stock market is sticking to the “boring” fundamentals: don’t try and time the market, invest in exchange traded funds (ETFs) and index funds, choose a long-term investing strategy and stick to it.

Here are some other good lessons to be mindful of:

1. There Are No Gains or Losses Until You Sell

Whether the stock market increases by 20% or drops by 40%, these gains and losses don’t matter until it’s time to sell your holdings. That means as a long-term investor, you shouldn’t worry about the daily battles of the stock market. The GameStop situation and other volatile stock patterns will pass by as short-term blips.

2. Invest in Index Funds and Know Them

Investing long term in index funds allows you to buy a spread of the entire market or index you’re after. For example, you can invest in the top 500 U.S. companies, all at once. By buying into a large spread, you buy into a little bit of everything and offset potential risks that occur with these volatile manipulations or any one stock. You’ll be able to look at a headline and think “ah, today’s it’s GameStop, tomorrow, who knows” without a further worry about your portfolio. 

Also, know your index funds. Don’t forget to do some extra credit and analyze the index funds you’re investing in, since many index funds can be top heavy. For example, the S&P 500 Index is becoming known as the S&P 5, as 20% of the index’s market value is accounted for by the top 5 tech companies (Apple, Microsoft, Alphabet, and Facebook). Be mindful of your top- heavy indexes and invest properly. Maybe you’d want to focus on more healthcare ETFs. We recommend investing in what you know.

3. Stay Diversified

Though it’s good to be a long- term investor in the stock market, it’s also important to diversify your passive income in other wealth building streams such as real estate.

How are you handling volatility as the retail investor plays a larger role in the stock market? As always, please feel free to email me your thoughts at hello@firstmilli.com.