Anatomy of the GameStop Saga

Last week my wife and I watched a Netflix docuseries called Eat the Rich: The GameStop Saga. It detailed the meteoric rise of GameStop (NYSE: GME) in 2021, profiling a number of hedge funds and individual investors who were placing bets on the company.

Learning from the GameStop Frenzy

The story exposes the David-vs-Goliath story of online traders banding together on Reddit and TikTok to bid up the price of GameStop, threatening the strategies of short-selling hedge funds. Though indulging some eccentric characters, the story delivers humor while underscoring the disruptive potential of democratized trading.

The series taps into resentment toward the rigged financial system but also reveals vulnerabilities, as media quickly moved on without addressing how even the smart money can get whacked. While entertaining, the saga doesn’t reassure those with stock investments that the system is stable when even the so-called experts can get pummeled between the eyes.

During the show, my wife asked me, “Why didn’t we make a million dollars on GameStop?” I replied, “Because we aren’t reckless investors.”

Although some investors did manage to get out of GameStop with a win, many more lost money. The story highlighted many important financial lessons, and a number of inexperienced investors learned those lessons the hard way. But even sophisticated investors lost a lot of money, which can happen when herd mentality pushes a stock in a direction contrary to the underlying fundamentals.

There were people who had lost jobs, and were desperate for money, pushing in all their savings on GameStop. That is about as reliable a way of making money as betting everything on 35 black at the roulette wheel in Las Vegas. Yes, some lucky few will win that bet, but far more people are going to lose everything.

Some of those who invested early in the GameStop saga had a sound investment thesis. They invested in the company, while laying out their reasons for thinking the share price could rise. Most of those that followed jumped into the trade because GameStop stock was rising.

As shares continued to rise, the price became more disconnected from the underlying value. When that happens, determining when to sell becomes impossible. It’s just a guess, and most people end up riding the stock price all the way up, and all the way back down. At every step, they expect the price to reverse itself, and for it to hit those highs once again.

My Investment Philosophy

During the show, my wife became more interested in investing than I have ever seen her. I got to explain my philosophy in some detail. Basically, it is to normally make low-risk, calculated bets. I would never invest in something because the price is rising.

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Invest based on fundamental metrics, and then wait for the price to rise. I was careful to temper her expectations by highlighting some of my losing trades. As I told her, nothing is guaranteed. The most careful due diligence can still end up in a losing trade.

But the key to success is making more winning trades than losing trades over time. In the story of the hare and the tortoise, be the tortoise. Or if you prefer gambling analogies, be the casino. Don’t be reckless. Do your homework in making your bets. Slow and steady wins the race, even if sometimes you see recklessness pay off for some people.

My GameStop Trade

One irony in the GameStop story is that I did make a bet along the way. It was a low-risk, high reward trade based on GameStop’s historic volatility. I told the story of that trade at the time, which I summarized in Closing Out A Profitable Trade.

Next week I will talk a bit more about these kinds of trades. I do them on a regular basis, and they consistently hand me low-risk, double-digit gains year after year.

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