Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to LasVegas. – Paul Samuelson
In case you missed the biggest market story of the new year, here’s the short version: a group of rogue retail investors got together on Reddit (a popular online forum) and decided to stick it to the man by aggressively purchasing shares of GameStop and other out-of-favor stock names. “The man,” in this case, was a combination of hedge funds and short sellers who had bet on these stocks declining in value by borrowing shares at the then-current price with the intent to purchase them at a lower price and make a profit when they covered their position. Thus, when the Reddit rocketeers started buying, the result was a “short squeeze,” which forced the short sellers to purchase shares at a higher price to cover their bets, which in turn drove the price even higher and resulted in A) devastating losses for the short sellers, and B) stratospheric gains for the buyers.Then, much to nobody’s surprise, the stock price proceeded to plummet back down to earth, resulting in gut-wrenching losses for buyers who were tardy to the party. Here’s the story in one chart (GME's YTD price action):
If you’re curious to find out more, there have been approximately five bajillion articles published in recent days, so I’ll let you decide whether you’d like to travel down that rabbit hole or not. Rather than spend too much time debating who’s right, who’s wrong, and what it all means, I’d like to share three points that stood out to me as I was reflecting on recent events:
- Getting involved in this kind of trading activity is a lot like base jumping...at least, what I imagine base jumping to be like. You take a leap and get a huge, temporary rush of adrenaline. If your parachute deploys and you manage to pull off the landing, you have a great story to tell your friends. On the other hand, there’s a very good chance you end up getting obliterated, especially if you’ve never done it before. Furthermore, if you do survive, you’ll likely end up trying to find that same rush again. Every time you do, there’s still a good chance you end up getting obliterated.
- Sensational stories like this are intoxicating, which is why every media outlet under the sun was covering it. The Twittersphere was twitterpated, and even such august publications as the Wall Street Journal were writing feature stories about day traders like Roaring Kitty. To be fair, it was fascinating to watch: the narrative was stranger than fiction, the characters were compelling, and lots and lots of money was at stake. However, let this serve as a reminder that the ingredients for a good news story (e.g. entertainment value) are seldom the ingredients for a good investment.
- In some ways, investing has never been easier. Thanks to the Internet, investors have access to dozens of low-cost platforms, an infinite array of data and insights, and numerous forums to share best practices. In other ways, investing has never been more challenging. Thanks to the Internet, investors have access to more information than anyone could ever hope to decipher, more people to compare themselves to (like Roaring Kitty), and numerous forums to share worst practices. If the last couple of weeks (not to mention the last ten months...) have taught us anything, it’s not always easy to keep a level head if you’ve got it bent over your phone all day.
Today, the world gazes in wonder and confusion at GameStop. Tomorrow, there may come a different Musk-endorsed meme stonk. My advice? Stay focused on your own investment strategy, and how you use the technologies that made this crazy story possible.You have to decide how much risk to take, and to what end. Don't get distracted by shiny objects; instead, entrust your capital to the companies and teams best positioned to lead and support our society long into the future.
And Now For Something Completely Different...
"Those bulls don’t care if you’re white or black. You could be green, for all it matters. They just don’t want you on their backs.”