Lars Phillips | February 2, 2021
In the past week I’ve got a number of questions about GameStop and wanted to address them all in one spot.
How do you feel about what we are seeing in the market?
First off – THIS. IS. AMAZING. As an outside observer I’m watching what’s going on with GameStop with a bowl full of popcorn – it’s unreal – like we’re living through history. I can’t wait to watch the documentaries and read the books about it and I’m honestly excited to see how things play out.
Is this going to be a similar situation to what we saw in 2008? Could you see it bleed over to other parts of the market?
I’d say that this and 2008 are not just worlds apart, but galaxies apart. In 2008 you had massive swaths of the country over levered and unable to pay their mortgages, which then flowed into the mortgage back security market, which then flowed into pensions and the rest of the entire financial system as banks had deemed these assets “safe” when in fact there was a lot more risk than people thought.
GameStop on the other hand is a company that on January 1, 2021 was worth $1.2B, and today is worth (based on the current after-hours stock price) ~$13.2B. Don’t get me wrong, $13.2B is a big number but given that the US Stock market is worth ~$50T, we’re talking about ~0.026% of the US Market. In 2008 we were talking about a number substantially larger that affected the entire financial system.
I’d argue (or at least hope) that everyone involved in trading GameStop right now is well aware that the company is not worth anywhere NEAR the value being paid for it, but we’ve entered a game of chicken – brinksmanship if you will – between the short sellers and retail investors. Essentially a very well-coordinated group of retail investors recognized that there was SO much short interest from hedge funds that if pulled off correctly, the retail investors could cause the hedge funds to get decimated – which we’ve seen.
What’s next for GameStop? Will other companies meet similar fates from retail investors?
We could absolutely continue to see the price soar for GameStop – we could also see it drop like a rock. (The volatility we’ve seen these past few days has been crazy but unsurprising.) In terms of liquidity, my guess is at some point we see retail traders start to capitulate and take their massive gains, but when that happens, I don’t know.
As a result of this I think we probably see fewer hedge funds shorting companies that already have a ton of short interest. I think we see option prices that are substantially higher for certain companies. I think we continue to see “pocket bubbles” in individual stocks that may scream up only to quickly deflate. I also think we see more credence given to the retail investor and their ability to move prices for individual companies.
In fact, today, the market buzzword appears to be silver. Who knows what will happen if online traders begin to set their sights to the silver market?
Is this an opportunity I might be missing out on?
We’re staying as far away from this one as possible. All of the meme stocks that we’re seeing are nothing more than short term gambles at this point. I’m almost positive GameStop will be trading WAYYYY below where it is right now at this time next year, but the costs and risks associated with buying puts or going short aren’t even close to being worth the risk.
Should I worry about my 401(k)? What about my portfolio, will it be impacted by day traders?
For our clients, we know these day-to-day individual company moves will have little to no impact on their overall portfolio or long-term financial plan. We make sure our clients have well-diversified portfolios that own ~13,000 companies from around the globe. This eliminates the volatility and risk associated with an individual stock – that is just not a game that we would like to play (pun fully intended.)
Although I find this saga wildly interesting and entertaining, I do feel terrible for the folks who are getting in now only to inevitably lose their shorts when the GameStop drops to back to its “proper” fundamentally driven price. Online trading platforms make it very easy for people to think they can time the market. Sadly, many of these individuals do not have a true understanding about the amount of risk they are exposing themselves to.
I was introduced to investing at a young age and my first experience in the market was a positive one. I share this experience in a recent article, How I Invest My Money. With the advent of easy to use apps like Robinhood, I’m excited to see so many people showing an interest in markets for the first time; I simply hope that these first-time investors soon realize that internet communities, like Reddit, are not the key to successful long-term investing and seek out information that involve more well thought out planning and diversification.