“The market can remain irrational longer than you can remain solvent.” - John Maynard Keynes
The wacky – to avoid using several curse words -- movement in GameStop’s stock price has garnered a lot of attention over the last few days. GME shares are up over 1,200% in just the last two weeks, despite real structural weaknesses at the company. The move has extended to other somewhat similar companies like Bed, Bath and Beyond and AMC Theaters. Even shares of the bankrupt Blockbuster Video were up 774% on January 26.
Mania like this leads to many, many questions, such as: How is this happening? Why? Who’s behind it? What should I do about it?
The seeds of this particular brand of market manipulation were sown in mid-2020. With COVID-related lockdowns across the US, people were spending all of their time at home, whether they were working or not. Also, sports came to a grinding halt, leaving gamblers without a way to scratch their risk-taking itch. These stock gamblers have gathered on a subreddit called “Wall Street Bets” to share ideas and collaborate. This kind of activity, though at a smaller scale, has been happening for the better part of a year now.
The traders on the subreddit banded together to buy shares of Gamestop because they were a highly shorted company. Shorting stocks, which is a way of betting on a share price drop, can potentially lead to unlimited losses. In this case, it looks like the major short sellers, Citron Research and Melvin Capital, lost around $5 billion before closing their positions. While Gamestop has garnered the headlines, there are plenty of other companies seeing huge share price spikes as well.
Clearly, this has nothing to do with Gamestop’s fundamentals or prospects as a company. They are estimated to have nearly $4 billion less in revenue this year than they had in 2018 and to lose more than $2 per share throughout the course of the year. Add the fact that both of the new gaming systems introduced last fall, PlayStation 5 and Xbox Series X, are more geared towards game downloads than discs and Gamestop the business faces some very real risks. This is speculation, pure and simple, not investing.
What, then, should you do about these stock rocket ships? My advice in these kinds of situations is to sit it out. It’s frustrating to watch these share prices rise unabated and I fully understand that. The early purchasers stand to make a lot of money, but there will be many, many people who buy in at the wrong time and ride the price down, decimating their accounts and finances in the process. Much like a rocket ship, the stocks that go straight up tend to come straight down.
If, however, you just can’t help yourself, think of it as gambling or play money; money that, if it disappears entirely, will not disrupt your lifestyle. Trying to catch the right part of this wave with retirement or college savings could prove disastrous. That isn’t a risk I would be willing to take.