Should You Buy GameStop? A Guide for the Uninitiated Investor

You know hype can be dangerous. You know stock picking is risky, and you’re unlikely to beat the market consistently.

So you maxed out your 401(k) contributions, you bought some low-cost index funds. And you’re socking away cash for a rainy day.

And yet. 

Your friends have been texting you about just one thing this week: GameStop Corp.Its share price has surged. Back in April, the brick-and-mortar video-game retailer was trading at $2.80. On Wednesday, it hit $380. Reddit is obsessed with it. Elon Musk tweeted about it.People are making some serious money off this single stock. 

And it looks like this behavior could be repeated: Reddit posters are already searching for the next company to pounce on. Shares of AMC Entertainment, BlackBerry, Bed Bath & Beyond and Expresshave soared, too. 

It might be just enough to make you wonder: Am I missing something? 

We polled financial advisers on both sides of the Atlantic and asked them that question. This is what they want you to know now right now: 

Yes, You’re Smart. Don’t Let That Hurt You

With more time and cash than usual, many home-bound workers have started paying closer attention to markets. Many have been finding something surprising: they understand some pretty complex trading strategies.

Advisers caution that this doesn’t mean you should hop in.

“Just because you read an Investopedia article and you now know what a short squeeze is, there are enough other people out there who have also read that same article,” said Mike Caligiuri, founder and chief executive of Caligiuri Financial in New Albany, Ohio, describing one phenomenon behind GameStop’s performance this week.

Also read: What’s the $23 Billion GameStop Really Worth? Maybe $2 Billion

This collective knowledge has probably already increased shares to a peak, he said. “Eventually once they squeeze enough of these short sellers out, the opportunity for people to pile in and keep pushing up the share price is going to evaporate.”

You’re Not a Hedge Fund

One of the striking developments about this week’s Reddit wave was that GameStop boosters on social media effectively forced Melvin Capital, a $12.5 billion hedge fund, toback down from its short position on the stock — or its bet that shares of the video-game retailer will drop.

This might make you feel empowered to join in on the action. But advisers caution that one win for Reddit users is unlikely to translate into continuous, long-term gains for you. 

“On the institutional side they’re all unified in their position and their rationale behind what they’re doing,” said Dana Menard, the founder and CEO of Twin Cities Wealth Strategies Inc. Yet on a decentralized, digital community like Reddit, users will undoubtedly have myriad motives for boosting a stock, and your financial wellbeing is likely not one of them. 

Large financial firms also have access to information individual investors just can’t get. Because of this, Menard says investors should be wary of stock boosters promoting their own research. 

“While they’ve read about a couple indicators here or there, they certainly are not privy to the information that institutional investors have,” said Menard. “Unless these people are actually going into GameStop to interview the CEO and getting access to their books like institutional investors do, then it’s completely hearsay.”

You’re Probably Not Running for Governor of California

Yes, wealthy investors have recently revealed their stakes in GameStop, pumping the share price even more. Ryan Cohen, co-founder of Chewy Inc., is one of them. Chamath Palihapitiya, a venture capitalist and former Facebook Inc. executive, is another. 

But they’re both billionaires. On Monday, Palihapitiya bothannounced he was running for governor of California and invested in twoSPAC deals. Someone making those kinds of bets can likely afford to lose money on an investment. 

Chances are your balance sheet looks a bit different. Menard encourages retail investors to think twice about any money they put in speculative shares, and only allocate what they can afford to lose completely. 

That said, he recognizes that some investors may want to get in on the frenzy. And that’s fine, as long as it’s just a small portion of a portfolio. 

“I call it their play money. What it does is it gives them the ability to be irrational, to have fun, to play around, to follow the trends, just to do it responsibly,” he said.

Patience Will Be Rewarded

Finally, the focus for any individual investors should be about their long-term investment goals and not headlines, said James McManus, chief investment officer of Nutmeg, an online investment-management firm based in London.

“Focusing on having patience rather than chasing the story of today, that holds true in down market as well as an up market,” he said, noting that historically investors have been rewarded for diversification, patience, and discipline.

Source: Read Full Article