All Fun and GameStopSubmitted by Moneywatch Advisors on February 8th, 2021
If you’ve read any commentary over the last couple of weeks about the company GameStop, and how could you miss it, then you’ve probably seen this portrayed as the classic David vs. Goliath story. These tiny investors trading from their phones got the better of the huge, bad hedge funds and this new technology allowed the common man to stick it to the suits! But, does one win just by making someone else lose?
First, just a little background on what happened. In short, a group of people used a couple of social media platforms to generate interest in buying stock in a money-losing company called GameStop. They ignored the financials of the company and were motivated to buy because some professional traders “shorted” the stock – placed bets the stock price would decline – and publicized what they’d done. What began as a sentimental play on a company these folks liked turned into a, supposedly, organic groundswell effort to bring down the big guys. And, they succeeded in making at least one hedge fund raise a huge amount of capital to cover their short trades. But, was this actually good for the little guy?
As more stories about this emerge, it appears this could just be a classic “pump and dump” play – someone hyping a stock to raise the price and then selling, leaving a bunch of people holding the bag as the price plummets. The only difference is this time people used social media to convince others to buy a bad stock in the name of solidarity against Wall Street. Now we’re learning some of the social media leaders sold at or near the price peak of $483 per share, pocketing millions, while others are losing their shirts now that the price has plummeted to $67, as of Monday morning’s open price. That’s a collective loss of $30 Billion.
Is there a place for day trading?
Sure. Just know the difference between investing and speculating.
- Investing is buying something for the value it will provide you to help you reach a goal. This goals-based investing isn’t as exciting as speculating, but the value of regular compounding over years is amazing – and will help you sleep better.
- Day trading is speculating, which is akin to an afternoon at Keeneland. When I go, I take say, $100 to spend on bets, bourbon and burgoo. Any amount left after the last race is more than I expected to have.
- Day trading should be viewed the same way: Do it for fun; don’t buy using margin (borrowed money); and don’t expect to do well over the long haul.
Most of these day traders started trading during the Covid shutdown - when they were bored and when the market was at its nadir. As the market increased over 60% since then, making money buying and selling stocks looked easy. Be warned, fellas, the market won’t always move straight up and it won’t always be this easy. So, always remember to keep a little back to pay for your burgoo.
Steve Byars, CFP®