Three Lessons we ( hopefully) learned from GameStop
Chances are if you follow the news you heard all about GameStop a few weeks ago. It turned into the hot “Main Street vs. Wall Street” or “David vs Goliath” story. There will be commissions and committees for months to come that will try to break it all down. But for people who are new to investing – and even for old pro’s – here are a few key thoughts that I have not heard much about but are important to consider when it comes to the market and the economy:
- The Stock Market, like any other market, is driven by Supply & Demand
If you turn on CNBC you will hear all about whether shares of a company should be bought or sold based on P & L, earnings, debt load, management, etc. At the end of the day, none of that actually matters.
Here is an example we can all relate to: Toilet Paper. Think about what you were paying for a roll of toilet paper February 1, 2020. Think about what you were willing to pay for a roll of toilet paper March 30,2020. The toilet paper itself was exactly the same product, made exactly the same way. The only thing that changed was the supply – there was none to be found! That simple fact was the ONLY thing that made toilet paper more “valuable”.
So when it came to GameStop: A bunch of investors figured out that there was going to be a built in demand for shares based on hedge funds shorting large quantities of the stock – (basically hedge funds borrowed shares to sell, hoping the price would go down, so that when they had to buy the stock back to cover what they borrowed they could make a profit -sell high, buy low). So those investors got together and bought up all of the supply of GameStop shares. Now those shares were harder to come by, but the hedge funds were required to buy them, so they kept becoming more “valuable”. Then the news started covering the story, sparking more demand because more people wanted in on the action, driving the price up even more.
So the bottom line is that those ups & downs had absolutely nothing with the company’s earnings, P & L or any other financial indicators. It was all about the good old capitalist fundamental of supply & demand. Any product or service in our economy is ONLY worth what someone is willing to pay for it. And what drive’s someone’s willingness to pay more for something?
2. Faith
Yes – I said faith. Belief. Out entire economy is based on faith. If you ever find an old printed dollar bill (pre-1960) it will have a statement on it to the effect that you could redeem it for “real money” – as in silver or gold. Now our money is backed by the “full faith and credit” of the US Government. What does that mean? It means that our money is only as valuable as people believe it to be.
Our economy is nothing but a self-fulfilling prophecy. When people think the economy is doing well, they are willing to spend more. Maybe they finally replace the old washer, or book a resort vacation (remember those?). When people spend more money, the economy does better. Sales go up, revenue goes up. Now when people are worried about the economy, they are more inclined to save their money. If you are worried about losing your job, it’s probably not the right time to buy that new car. When people don’t want to spend money, business don’t make sales, revenues go down, and the economy tightens.
And what is the driving force behind all of this – Faith. You spend or not based on your belief in the current situation. And that spending, or lack thereof, creates the current situation.
So much like what happened with the GameStop stock – enough people got together and believed that their collective actions could have a big impact on stock price. And they were right! But it was a big gamble, and if you were late to the party, it may not have worked out so well for you. Which brings us to:
3. Investing vs Playing the Market
There is a HUGE difference between Investing and Playing the Market. Simply speaking:
Investing is good. Investing is about being in for the long term (time) and diversity (mutual funds/ETF’s) The rule of thumb is to have savings (bank deposits) to cover 6 months of expenses. After that foundation would come investing. Mutual funds and ETF’s pool investors money and provide diversification which minimizes risk. And although the market experiences volatility in the short term, in the long term it just goes up.
Playing the Market is…risky. Particularly if you go into it looking for the next “big thing”. There are so many factors that determine what makes a particular stock appealing to investors on any given day. If there is a particular company that you believe in for whatever reason, it should still be considered as a long term strategy, and requires careful monitoring so that you don’t get caught on the wrong side of the supply & demand equation. A good rule of thumb is something my Mom told me a long time ago – don’t go to Vegas with more than you are willing to lose. If it’s a game you want to get into, it should only be after you have the strong foundation of savings and investments.