Broker Check

Thoughts on GameStop

January 28, 2021

Some thoughts on Game Stop and this week

If you somehow missed this story (which would have been very hard to do) let me give you the quick backstory.  The stock of Gamestop ($GME) became the popular target of a Reddit thread known as r/wallstreetbets.  Essentially a large number of retail investors through apps like Robin Hood came out in droves buying shares and pushing the stock higher.  The back theory was that since Gamestop was so heavily shorted by the hedge funds, pumping the stock price would force a short squeeze, force the hedge funds to buy additional shares to cover their short bet, thereby increasing the price even higher.  Well it worked, until it didn’t.  Multiple times on Thursday Robin Hood and Interactive Brokers halted sales of the stocks thereby allowing the free fall to happen.  At 10am GME was trading at approximately $468 per share, at 11:18 it was at approximately $126.  Here are some of my thoughts:

1. I love it!  You won’t see me losing sleep over billionaires losing millions.  It shows the power of a connected world and shows that traditional thoughts on investing need to continue to grow through the advent of apps like Robin Hood, which puts the market at the finger tips of many that didn’t have access before.  When you see Dave Portnoy from Barstool, AOC and Ted Cruz all agreeing with same thing you know the situation was a little crazy.
2. I hate it!  Make no mistake, in situations like this you aren’t really trading, you’re gambling.  I’m sure plenty of you will respond to me that Wall Street and investing is always a gamble.  Sure, you can be wrong about a certain stock or time period but a real financial plan with goals, risk alignment and consistency is a little different than throwing $100 on Black at the roulette table when you walk in the door of the Hard Rock.
3. Be educated!  Do you know what a put option is?  What about incurring a call on your margin account?  If you thought I was referring to Tropicana orange juice when I wrote “short squeeze” above, then maybe now is not the time to start jumping into day trading.  Understand what a sell-stop order is and maybe you can get ahead of the brakes put on by these brokerages.

I want to be very clear, if you think you can make some money on these apps, that’s not my job to stop you.  I love to see new people getting into investing and having a better understanding of how markets work.  But remember just because something has 28,000 upvotes on Reddit doesn’t mean it’s going to be fool proof.  Sometimes, the roulette table lands on red.