Many of you have no doubt heard about the hype surrounding the video games retailer GameStop (GME) over in the USA. In case you missed it here is a quick recap. Its shares, trading at around $US10 at the start of January, leapt to around $US380 in a matter of days as a coordinated group of retail investors using the reddit chat board “WallStreetBets” noticed that a disproportionately high number of GME shares were being “short sold”. Now I will spare you the long-winded investing lesson on what that exactly is, basically speaking though it is when large hedge funds and broking firms profit from the DECLINE in a company’s stock price. The folks over at WallStreetBets saw an opportunity if they could buy up the stock en masse and drive up its price they could “squeeze” the short sellers into having to buy the stock back at greatly inflated prices (hence the term “short squeeze”). So great were the losses that hedge funds Citron Capital and Melvin Capital depended on bail outs from other hedge funds to avoid going under entirely.

Why is this important I hear some of you ask? Good question, you see GameStop is a struggling retailer that is suffering as a result of a large-scale consumer shift to online digital games. GameStop makes the majority of its revenue from selling physical copies of games in their stores. They have been in decline for years and the hedge funds knew it. They saw an opportunity to make a pile of money “shorting” GME shares. What they did not count on, was the ability of a sophisticated group of day traders using an online chat forum to concentrate their buying power to such an extent that they could force the price of GME stock up 40x its market price in a matter of three days. The motivation was to “beat the hedge funds at their own game” and “stick it to the man” so to speak. What it was though, when you strip away all the righteous indignation, was a glorified “pump and dump” scheme (see the movie “The Wolf of Wall St” for examples). What that means is that, despite losing their “short” bets the hedge funds who bet against GME were right, GME stock was heading downwards FAST. Chat forums on the internet were hyping the price of GME stock to a price point far exceeding its true value and this is where things get dicey.

The stock market is not a casino. However, there are numerous historical examples of feverish speculation ending in tears for those who got caught up in it. Examples include the Poseidon bubble of 1970 (https://en.wikipedia.org/wiki/Poseidon_bubble), the Dot com bubble of 1999, the GFC and now GameStop. Despite the fact that every 10 years or so (on average) there is some form of speculative mania in the investing world, there is possibly no other industry that seems to believe that history re-starts about once a decade and that all prior history isn’t worth considering. Seriously, if this were any other industry, and the participants failed, so spectacularly, to include the lessons of history in their work, they would be out of a job before you reach the end of this article. Can you imagine a doctor, in 2021, grabbing leeches and a garden saw on the way into the operating theatre? Can you imagine a scientist starting with ‘Well, we know the Sun rotates around the Earth…” Do not get me wrong these “bubbles” made a small number of people very rich, however it made the vast majority of participants lose a significant portion of their capital, sometimes in matter of days. As the old saying goes, “What goes up must come down”, if we take that and apply it to an investing context it would go something like this “what goes up 500% higher than its current position on the back of nothing more than hype and false promises, must come down and come down hard”.

History is littered with examples of people, even so called “professionals,” treating the stock market like a casino. Like a casino the house always wins, as the old saying goes, except in this case the “house” is the market. Famous economist John Maynard Keynes said it best “The markets can remain irrational longer than you can remain solvent.” Simply put hype, speculation and downright craziness will last longer than most people that fall for it can. The moral of the story is don’t be one of those people. I feel sorry for those that may have been scarred for life by this whole GameStop saga. For many it will have been their first foray into “investing,” ironically, they were not investing they were gambling, and I feel sorry for them as many of them will never return after being burnt. Fortune does not favour the brave, it favours the patient. The stock market is the greatest wealth creation vehicle that exists and those that patiently invest for the long term and ignore all the hype and hysteria are the real winners.

This article does not constitute financial advice, or a recommendation of any particular investment. Please consult a financial adviser for specific advice.