It is a regular event for the financial press and even consumer press to spend hours fixated on the fabulous runup in prices of a hot investment. The media can spend so much time on one topic that it becomes hard for even the savviest investor to not get pulled into drumbeat of a hot stock, technology or trend.
The most recent hot topic has been last week’s news that the stock of GameStop has skyrocketed over the past 14 days, fueled by small individual investors on social media platform Reddit. The surge was made more intense via investors trading for free on the Robinhood app, which has been the target of a number of regulatory fines and scrutiny.
In the month of January, 2021 GameStop went from $17 per share to $325 per share despite the lack of any apparent underlying reason that the business is improving. In fact, as a brick-and-mortar business, it has suffered greatly due to the pandemic. The main reason why this stock was so newsworthy was several hedge funds have been shorting the stock (selling the stock they don’t own by borrowing it, an old strategy when an investor believes it will do poorly), but a large group of small investors pushed the price up so high, it forced the hedge funds to eventually buy back the stock. In short, the little investor made great deals of money at the expense of a few very large investors. This narrative helped fuel novice investors to blindly buy the stock.
Encouraging these little investors, according to a Reuters report, is a former financial advisor who reportedly was showing screen shots of the profits he had been making on his investment in the stock. It is worthy to note that no legitimate financial advisor would ever share his personal brokerage accounts to retail investors, much less novice investors like the ones that typically spend time on Reddit.
What provides a very valuable lesson to learn or re-learn, is it is just fine to miss out on short-term price runups. However, many new investors will likely learn this lesson the hard way if the comments on investing groups in Facebook and others are any indication. “Should I buy some GameStop”? was a popular question posted on social media after the stock hit $300 per share.
Panic buying is never a good idea, and investors at all levels can take heed in the fact that famed multi-billionaire Warren Buffett often shares that he has missed out on many investment opportunities both short term and long term. The key is to have a sound strategy and stick to it over the course of time, adjusting only when the fundamentals dictate a change-and not trade on the whims of the mob or opinion of one person.
Trend-setting topics like Bitcoin, Tesla, and GameStop, whether they be legitimate long-term opportunities or mere short-term gambles come and go with complete regularity. What investors should also do with equal regularity is take a deep breath, do not take fast action and confer with a professional financial advisor on what action to take.
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