The stock market is not Vegas
A look at the recent GameStop stock story
These days you would have to live in a cave not to have heard something about the trading platform, Robinhood, and the company GameStop.
For those who somehow missed it, GameStop’s stock has soared from a low of $2.57 a share in the spring of 2020 to a high of $483 in January 2021.
This massive surge in the stock price was fueled by small investors, who began promoting the video game retailer’s shares in online message boards after growing angry with hedge funds who had shorted the stock.
Others jumped on board thinking the stock presented a good opportunity to make a quick profit. As the stock took off, the trade took on a life of its own. Small investors were emboldened–viewing themselves as David and hedge funds as Goliath. Finally, the little guy had a chance to take on and beat Wall Street.
Two other factors enabling this kind of activity include an increase in commission-free trading and the rise in platforms like Robinhood, which allow retail investors to buy and sell securities simply by downloading an app. The barriers to entry are so low a kindergartener can do it. Maybe not as simple as putting a quarter in a slot machine, but darn close.
First, investing is not meant to be a mode of gambling Las Vegas style. Second, investing is a way to build wealth over a long period of time. Third, it is time in the market, not timing the market that makes you a successful investor.
Granted, you may get lucky occasionally day trading, just like placing a bet on red or black sometimes pays off, but the odds are stacked against you, as they are in Vegas. The dealer wins almost every time, which is why most people leave Vegas having not won a dime.
A smarter way to invest in the stock market is either to buy a stock because it pays you some income in the form of a dividend every quarter or because it has tremendous growth prospects. Blindly buying shares in a company because someone on Reddit says you should squeeze the shorts in the stock is a fool’s errand. Hedge funds have billions in capital to survive a short squeeze; you the individual investor, do not.
Fundamentals should matter, corporate earnings should matter. GameStop recently missed their earnings and the stock closed 33% lower. The company also announced that it was going to increase the supply of shares on the market by $100 million. Both are valid and real reasons why the stock should go down and someone touting it on Reddit is not a good enough reason to buy it.
The real purpose of the stock market is to help companies raise enough capital to build and expand their operations. Owning shares of stock in a company means you become an owner of the company, and if that company pays a dividend four times a year, you will get paid something every quarter as a reward for owning their stock.
However, the real attraction of owning stocks is for long-term appreciation. If a company does well and makes a ton of money with their products or services investors will take notice and bid up the price of the stock. Over time, as the company continues to prosper, so will you as an investor.
Trading GameStop every 20 minutes might be a lot of fun, but it is certainly incredibly risky and not what investing was meant to be about.
Instead, pick a company you know something about with a product that you use. Make sure this company is the best at what they do and incredibly profitable. Once you do this, leave the stock alone and watch the company and stock grow. Over time, this approach has been more successful than rolling the dice.
Fred Taylor co-founded Northstar Investment Advisors, LLC in 1995. The firm specializes in managing personalized investment portfolios for individuals, families, and retirees with a focus on income generation. He is a member of the Colorado Forum and also served as an economic advisor to Colorado Governor Bill Ritter from 2008 to 2010.