Game over? The rise and fall of GameStop


At ATB Wealth, we’ve been watching the GameStop saga with a fair degree of fascination. There’s no doubt it has made some investors worried they missed a once-in-a-lifetime opportunity. It has also left others feeling twitchy about what it means for investment markets overall. But there is no need for concern, because there are ways to protect yourself from market volatility.

By Michael Mekhitarian

How it all began


If you haven’t been following the GameStop / Reddit saga over the past couple of weeks, here’s the basic back story

It all began with the Wall Street hedge funds shorting GameStop stock.

GameStop, for the uninitiated, is a large US retail gaming store. It is the parent company of Australia’s EB Games. It’s nothing special. In fact, given that the company has a lot invested in bricks and mortar and the entire gaming space is moving online, many investors have long considered it pretty unfavourable.

‘Shorting,’ or ‘short selling’ is a fairly simple concept. An investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.

When they do this, the short sellers are betting that the stock they sell will drop in price, so they can then buy it back at a lower price and return it to the lender. The difference then, between the sell price and the buy-back price is the seller’s profit.

When successful, short selling can net the investor a nice profit in a very short timeframe, because typically, stocks tend to lose value faster than they appreciate. BUT … it’s a practice that’s ripe with risk.  Even so, the hedge funds engage in this practice all the time, and it is totally above board.

The power of social media


Over a period of weeks, hedge funds were shorting GameStop. This became obvious to a bunch of individual traders using Reddit, trading apps and other social media. Essentially, these individual investors teamed up to buy large quantities of GamesStop stock in an effort to drive the price up – a deliberate strategy that meant instead of making a profit on the shares, the hedge funds would lose out and have to pay the difference between the ‘borrowed’ prices and the pay back price instead.  And it worked.

With the hedge funds losing billions (such is the power of social media) the stock trading platforms froze all trading on Gamestop, meaning that users couldn’t buy more stock, but they could sell it.

This definitely isn’t supposed to be how the stock market is run and the incident has raised more questions than there are currently answers… But it’s also important to keep in mind that there’s nothing illegal in any of this.

What happens next?


For the moment the GameStop frenzy appears to have subsided.

What has emerged in the aftermath though, is that through the rise of trading apps and social media, the ‘power of the people’ can drive the market in ways we haven’t ever seen before.

What happens next is not clear.

The FOMO factor


Federal market regulators in the US, are currently assessing the entire scenario. An over-regulated market is not ideal, and it will be some time yet before we have a thorough understanding of what rules and laws might be implemented.

Undoubtedly, some issues will probably be resolved in the courts if disgruntled investors seek to take legal action – there have, after all, been some monumental losses. GameStop shares peaked at $US400. They’re now trading at around $US50.

As the share price peaked a few weeks ago, there was a genuine ‘fear of missing out’ (FOMO) amongst some investors. And right now, many are enviously looking on at the wild success stories.

But there are equally as many Mum and Dad investors worried that they could be unwitting victims of similar activity resulting in severe price collapses.

Golden rule: If an investment looks ‘too good to be true’, it probably is


Here’s the bottom line: If something seems too good to be true, then it probably is.

By all accounts those who successfully traded GameStop stocks and made big bucks were people who had time to sit online, communicate with each other, and strike at the perfect moment.

In very many ways, they got lucky.

Hoping to get lucky is not an ideal investment strategy. Nor is getting caught up in market hype (think Bitcoin). Nor is approaching the market with ambitions to become ‘an overnight millionaire’ by investing in a ‘magic stock’.

Each of these present a high degree of risk, especially if you are not a seasoned investor and prepared to lose as much money (or more) than you might gain.

Most people don’t succeed in ‘go it alone’ investing because :

  • They don’t have enough information, or they have too much information, or they don’t have access to timely and credible information.
  • They procrastinate – leaving it too late or doing nothing at all.
  • They get caught up in working out what could / is going wrong (analysis paralysis).
  • They don’t think they can be successful and consider the market‘too unpredictable.’
  • They don’t make their investments a priority: tending to ‘set and forget’ rather than actively managing the portfolio.
  • They make emotional decisions.
  • They don’t get professional help.

The secret to successful investing


So, if all of these mean you’re not likely to do well in the market, then what does guarantee success?

Well, firstly, successful investors make measured decisions and take advice from trusted experts.

Secondly, they take a medium to long-term view, rather than a ’get rich quick’ approach.

Thirdly, and perhaps most importantly, the most successful investors build diversification into their portfolios. Diversification means investing across different asset classes, such as shares, exchange traded funds (EFT) property, fixed interest, and so on …. often including home-grown investments as well as some offshore, and building a balanced portfolio.

Time and again, diversification is successful because typically when one stock doesn’t perform well, the chances are others in the portfolio will be doing very well, and overall, average returns will be stable and steady. In fact, investors with diversified portfolios came out of the GFC much better off than most others, and we expect to see the same result when market turbulence around Covid-19 settles.

Diversify your portfolio


Diversification helps to avoid market volatility.

And it delivers peace of mind.

We all work hard for our money. We want to know that it is in safe hands. And of course, every investment is a risk, but you can implement strategies that reduce your exposure, and that’s where professional advice can make all the difference.

Markets react to all kinds of circumstances. And right now, there’s a lot going on globally – the US has a new president, Trump is facing impeachment, around the world many countries are still grappling with Covid-19, a vaccine is imminent in Australia, although we’re still in post-pandemic recession. International tourism and migration are not coming back anytime soon.

City real estate, commercial in particular, is currently taking a hit, but regional residential seems to be blossoming.

When you work with a trusted investment advisor, you have someone on your team who can translate what these trends are likely to mean for your investments and help you to make sensible decisions, as well as find opportunities that will keep your finances safe, and growing, over the long term.

Join us for a Capital Markets Update


To find out more about what’s likely to be ahead as we transition out of Covid-19 and into the ‘new normal’ join Michael Mekhitarian and Jim Vass for a Capital Market Update with Emmanuel Calligaris on Wednesday 24 February via Zoom 4-5pm.

The discussion will touch on the GameStop saga, as well as what we can expect from the markets over the next few months, and what this will mean for investors.

You can register your interest here.