GameStop: What happened and what can investors learn from it?

By now, you are probably aware of the controversy surrounding recent investment in GameStop, a US-based gaming retailer. In case you missed it, essentially retail investors on the Reddit chat platform decided to take on Wall Street hedge funds, by artificially inflating the price of GameStop shares.

What exactly happened – and why?

The hedge funds were short selling the gaming retailer’s shares, which means they were borrowing them from investors and selling them to other investors at the current price with the expectation that the price would fall. When the predicted price fall occurs, the hedge funds would then buy back the stock at the reduced price and return them to the lender, essentially profiting from the price difference.

If the share price rises, however, the ‘short’ backfires, and the fund that shorted the stock can lose large sums of money. So a single retail investor jumped on to chat platform, Reddit, into a group called Wall Street Bets, where they encouraged others to buy the stock, increasing the price so that the hedge funds would lose money.

There is a lot of speculation as to why the first investor started the movement – and why others followed.  A common theory is that there is growing dissent among some retail investors who feel that Wall Street is profiting while they are left behind. Another additional theory is that it was fuelled by continuing anger at Wall Street hedge funds due to the lingering effects of the Global Financial Crisis. It was billed by many in the media as the ultimate modern-day David and Goliath story, but the reality is not as clear cut, and it can be everyday investors who lose out as market volatility increases.

Whatever the reasons behind the move, it really showed the power of social media, where a single user could start a movement of this size, and I don’t think it will be the last time we see a move like this.

How could it impact investors?

Moves like this will create additional volatility in the market, and at a time like this, where many investors are already nervous, it may be an unwelcome development for many. The good news for local investors, is that with ASIC monitoring and stamping out abnormal trades, it’s a scenario that is much less likely to play out on the ASX.

It’s also important to remember that price movements like this are caused by traders, not by economic changes or changes in investment fundamentals.  So as an investor, it’s best to ignore anomalies like this and not get caught up in the hype.

Investing vs. trading an important distinction

An important distinction to make here is the difference between investing and trading. Investing is about making quality investments that build towards achieving long-term goals. On the other hand, trading is about short-term investments or quick wins based on price movements alone.

Both trading and investing are valid forms of investment, but trading takes significant expertise, experience and infrastructure, and it can be incredibly high risk. It’s not usually something the everyday investor should consider, because without the necessary in-depth knowledge, it’s going to be more like gambling than investing.

Stay true to your plan and when in doubt, seek advice

The critical thing to remember is that as an investor, you should be making investment decisions based on the underlying value of a business, its cashflow and its stability, and how it will contribute to your long-term financial plans.

While market moves like this can be interesting to watch, it’s best to simply stay focused on your plan and not get caught up in the emotion of price movements.

Putting emotion into the mix when investing will rarely (if ever!) lead to positive outcomes. If you find yourself looking at higher risk or short-term options, it’s best to talk to your financial adviser to get some clear-headed advice before making any moves. Your adviser should be able to help you understand how different types of investments could impact your long-term plans and how they fit in with your risk profile, so you can stay true to what you want to achieve.

If you need some expert advice and clear thinking on your investments, get in touch with Apt Wealth Partners. Your Apt Adviser is supported by an expert investment team, who have extensive expertise and relationships with research houses across the globe.  Your adviser will apply this knowledge to your portfolio, so you can achieve your long-term financial and life goals.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.