Since writing my article last week, GameStop has been at the center of today’s 24/7 media frenzy and not just financial news outlets. Pitting Wall Street hedge fund “Suits” against the individual investor and “RobinHood trader” is a juicy story in today’s world. I’ve had at least a dozen people ask me what the heck happened, which my last note details, however what is clear to me is that this was an incredible breach of trust by RobinHood and other brokerage firms that restricted the buying of certain stocks. If there is any regulation that comes out of this, I hope it’s in favor of free markets. Another big reason this may have blown up is due to the allure of investing in a stock that multiplies your investment by 20 times in a few weeks. Who doesn’t want to hit the big lotto?
GameStop (GME) has now roundtripped from $20/share in early January up to $483 last week and back to $53/share on Thursday, so a lot of money has been made and lost by investors, savvy or not. No, short sellers were not the only investors who have lost money. For every transaction, there’s a buyer and seller that are paired together. So that means some poor individual bought GameStop stock at $483/share and if they haven’t sold, are sitting on an 89% loss. Who in their right mind would buy the stock so high?! Probably someone who’s extremely inexperienced, doesn’t understand the risks and believes they can ride the wave and make a quick buck too.
Koss, a headphone maker & AMC, the movie theater chain were two other stocks that were swept up in this “short squeeze” frenzy. Silver Lake, a massive asset manager, capitalized on the stock rise and reportedly sold their AMC stake for over $700million! It was reported that the Koss family sold $31million worth of their own company stock during the massive rally. Ironically, this happened to be worth more than the entire company before Reddit traders got involved. When all the dust settles, did Reddit traders really steal from the rich and give to the poor? Or were there a few smart investors that made a lot of money by gathering foolish followers to tag along with the hopes of getting rick quick?
It often boggles my mind that there’s no Finance 101 courses in High School. It’s mandatory that we learn a foreign language, but most high school graduates are financially illiterate in terms of balancing a budget, filing taxes, investing, compounding interest and real estate. Let’s do some quick math…
Stimulus Checks + More Free Time + Gamified Free-To-Trade Apps = A Recipe for Disaster.
Maybe we should require trading commissions as a barrier to entry…
The simplest advice I can give is that there is no easy way to get rich quick without being extremely lucky. A book I’ve read several times and recommend is called “The Richest Man in Babylon” by George S. Clason, written in 1926. Parables are told by a fictional Babylonian character named Arkad, a poor scribe who became the “Richest Man in Babylon”. His lessons are split into two main sections, how to generate money and wealth, and then how to protect and invest that money.
Without ruining the book, below are the keys to building wealth.
- Save at least 10% of your income
- Control your spending
- Invest & Compound the investment return of your savings
- Avoid the risk of total loss and invest wisely
- Buy vs Rent your home when possible
- Create an income stream for when you stop working
- Develop your own skills to increase your earning power
Did you see anything in there about buying GameStop? Me neither.