Meme Stock, Good Stock, Bad Stock, GameStop
By George Grombacher
President of Financial Consulting Professionals, the Founder and Chief Community Officer of Money Alignment Academy, and the host of the popular LifeBlood podcast
If you participated in the Wall St. Bets/Reddit/Meme Stock phenomenon this year, I hope you got rich. I hope you “stuck it to the man.” Whatever you wanted out of it, I hope you got it. I hope you also learned some valuable information that will serve you for the rest of your life.
The circumstances leading up to the GameStop event, how it played out, and its impact moving forward will be talked about and studied for years to come. We saw new technology (apps like Robinhood) attract new investors and use gamification techniques to encourage trading. We saw the impact of social media on investing via Reddit message boards. We also saw FOMO at work: we know we’re supposed to buy low and sell high, but because we hate missing out on something good, people bought when things were at their most expensive. We saw classic behavioral finance bias like loss aversion at play: people bought shares at the top and held onto those shares as they lost most of their value on the way down. We hate to lose, so this bias causes us to hold onto losing investments even though we should be selling them.
There will always be changes and shifts in the financial marketplace. One of the biggest changes over the past 30 years is a shift from active towards passive trading. Instead of trying to beat the market, investors try to replicate the market to get the same returns as the market. Does that mean the market can’t be beaten? No. It can and it’s done everyday.
Think about beating the market this way: Can I be a professional football player and play in the NFL? No. Why? I’m too old ( though I’m younger than Tom Brady), and lack the physical ability, skill, and desire. Does that mean that no one can be a professional football player and play in the NFL? No. There are who have, do, and will play in the NFL.
So, can I beat the market? Sure. If I commit to becoming a trader, gain the required knowledge, and dedicate the required time. Will you beat the market if you forego these steps and simply download a trading app? Maybe a few times, but not consistently or sustainably. There is a difference between investing and speculating, as well as a time and a place for both.
Investing is done with a long term view on buying an asset based on solid information, an acceptable amount of risk and expectations of returns, and a plan for how long you’ll own the asset. Speculation is buying shares of GameStop, AMC Theaters, or other meme stocks. Speculative stock trading is not a sustainable business model because it holds a high degree of risk. Speculative investing should happen only after you’ve done the work to prepare for your short, mid and long term financial foundation. This includes an emergency fund with six months of expenses, and progress towards your mid and long term goals. Only then should you get in on the action.
Investment professionals use the term “tuition” for the speculative investment in individual stocks. It’s another way to say that everyone has to pay their dues and lose money. The personal experience of losing money is so strong that it’s likely you won’t have to pay tuition more than a handful of times before you get an education and learn your lesson.
As a reminder, 80% of a portfolio should be in low cost passive investments (The S&P 500 Index or a target date fund for example) across all of your investments: brokerage accounts, 401(k)s, IRAs, and other accounts. From there, start investing (or speculating) as you see fit.
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