Unless you have been living under a rock for the past two months you have heard, seen, or read about the GameStop stock (GME) saga. For those of you unfamiliar with the situation, I’ll give you a quick rundown. GameStop is a multichannel video game, consumer electronics and collectibles retailer. They sell new and used video games. Retail investors, led by a group of financially savvy reddit users, decided to short squeeze a popular hedge fund that published its intentions to short GME. The reddit group created so much noise across social media that within weeks the stock price went from ~$15 in December 2020 to ~$396 in January 2021. Needless to say, the short squeeze worked as the hedge fund lost billions of dollars and several reddit users walked away millionaires. Today GME closed at $40.59 (February 21, 2020). While this was a fun event to watch, who does not like a good Robin Hood story (see what I did there 😉?), it did not go unnoticed how many young professionals bought into the frenzy without doing basic research about the company they were buying into.
Whether you made money, lost money, or watched from the sidelines there are several lessons that could be learned from this situation.
1. You Can’t Time the Market but Timing Is Important
It is common knowledge that the optimal time to enter the market is when there’s a dip (a short-term drop in prices). However, what is yet to be mastered is when to exit the market. If you bought GME in the fall of 2020 and sold at its highest point in January, you could have made a return of over 2,000%. However, if you bought GME at its highest point then sold later, you could have lost over 80% of your investment. Though it’s impossible to accurately and consistently time the market, it is a good idea to have an exit strategy before purchasing a stock. That could be holding the stock for the long term, until it hits your target sell price, or until the value drops below a certain percentage.
2. Knowledge Is Power (Seriously It Is)
One of Warren Buffet’s top investing advice is ‘invest in what you know’. If you know nothing about the gaming industry and nothing about GameStop and how they make money, then you’re taking a big risk. At this point you are now speculating; you’re just throwing your money in the ring hoping for a return. Those who became millionaires from the GME event knew what they were doing. They knew the company, knew what a short squeeze was, and they knew recent changes/events that occurred that led them to believe the company was undervalued. In fact, it was later revealed that some of the leaders of the reddit group were actually finance professionals. Before you invest your hard-earned money, do some research. You should know what the company does, how it makes its money and its differentiator. Find out what market conditions the company thrives in, what their recent financials are, and if they are meeting the industry benchmark. Even if you’re investing short-term, these are basic knowledge that you should have before you invest.
3. Someone Has to Lose
The reality is where there are winners in the market there will be losers. That is the nature of the market (even for long term investors). That’s what makes investing in stocks risky. As the COVID-19 pandemic taught us, there can be events, through no fault of the company, that can result in loss or even bankruptcy and liquidation. This is why many finance gurus advise only investing money that you are willing to lose. Because chances are, at some point in your journey to financial wellness, you may end up on the losing side.
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