“Did you buy GameStop?”
“Should I buy GameStop?”
“What is Wallstreetbets?”
“What happened to the stock market these few days?”
I believed these are the most heard and asked questions these few days, and even someone that never touches stocks before began to gain interest in the stock market. Many started to approach me and ask me if it is good to enter these stocks now, and of course, the politically correct answer would be ‘at your own risk’.
GameStop shares google searches have been exploding this week, and even the stock name has trended on Twitter. Its share price had gone up around 2000% in this year itself and has become one of the most common topics in this week’s conversation.
Let me give you a summary of what this is about, and before you continue, do join my tele channel HERE !
Hedge funds* (Melvin Capital) and others saw an opportunity to make a profit from short-selling* GameStop shares (GME). As they determined GME to be overvalued, they shorted the stock.
However, this action was overturned by a large group of investors (over 2on a Reddit forum known as ‘WallStreetBets’ (WSB) which many labelled them as ‘amateurs’. These WSB investors came together and decide to buy into GME shares (both options & shares), not solely because they think that the stock price is undervalued but also with the intention to push the share price up to inflict losses on the short-sellers.
This ‘war’ between WSB investors and Short-sellers had cause share price to soar tremendously, and this effect is known as ‘Short Squeeze’*.
This rapid rise in share prices of GME was further fueled by a billionaire investor Chamath Palihapitiya after the tweeted that he had bought call options on the stock, and also Tesla CEO Elon Musk tweeted “Gamestonk”, adding a link to the WSB forum. With these 2 influential figures in the stock market, it added on to the hype of WSB investors, resulting in further push up in the share price.
Report has shown that short-sellers of Gamestop have collectively lost around $19 billion just in the first month of 2021. Some view it as a transfer of wealth from the rich to the less rich, and some view as a way to punish the wealthy people and decided to join in the hype, while many also see it as an opportunity to ride the wave and earn quick money.
*Hedge funds – commonly known as an investment pool, or a large pool of funds contributed from both investors and professional fund manager, which funds are managed aggressively to generate higher returns. Usually, hedge funds are valued at millions or billions, which essentially means that these investors are of high net worth.
*Short-selling – An Investor borrows a stock and sells it, hoping to buy it back at a lower price. Investors use this strategy when they expect share prices to drop. For example, an investor thinks that Apple shares will drop, there he short sells an Apple share (AAPL) at USD 100. If the share price drops to USD 80, he earns USD 20 (because he essentially buys at 80USD and sells at USD 100.
*Short squeeze – A sharp increase in the price of a stock, forcing Short-sellers (who had bet on its price to fall) to buy it in order to cut its losses. In this context, assuming that melvin capital shorted 10 million shares of GME, to close its position, it has to buy back 10 million shares of GME, which would cause a sudden sharp increase in its share price.
Should I buy GameStop now?
To beat the market in the long run, investing requires one to evaluate the company’s fundamental value, and adopt a strategy to capitalize on the stock’s rise in price due to its worth. With the right strategy and knowledge, one will be able to minimize his/her losses and maximize their returns over in the stock market.
If you buy a stock not because of its fundamental value but because WSB Reddit Forum says so, are you investing? Are you buying it because you bet that stock price will go up in this period? Or do you buy it because you want to ride the wave of squeezing the short-sellers? By doing so, it is no different from playing a game of Black Jack, betting that you will win the game based on luck.
This type of gambling or rather speculation will usually result in you taking a huge loss. If you google ‘top reasons why people lose in the stock market’, the most common reasons will be
- Temptation to Make Quick Money
- Letting Emotions Guide Decision-Making
- Taking advice from ignorant friends/ medias
If you think about it, these reasons will give you an answer to whether you should buy GME now. Yes, of course, the insane 2000% will seem very b and you would argue and say no many stocks offer this chance to profit greatly in only a few days. Many told me that even if the GME share price drop, they will hold no matter what. So does this mean that after this frenzy even if the share price fall to around USD 20 per share you will still hold in view that it will peak up again? Well, think about it again. I’m happy for those that managed to profit from GME, and for those who are still trying to enter GME to ride on the wave, good luck to you, just make sure you don’t catch a falling knife!
Personally, I will not touch these stocks because I do not want to be betting my assets on a share that I don’t believe in fundamentally. In the long run, I strongly believe that fundamental investors will be rewarded. Ignorance and greediness will usually turn out to be disastrous.
Because of this GME mania, large indices ‘Dow Jones, S&P 500 and Nasdaq’ fell over 4% in the last week, posing the worst week since October 2020. It is possible that many investors chose greed over fundamentals and sold off fundamentally good stocks such as Apple, Microsoft, Facebook, just to risk their money to ride on the wave of GameStop, contributing to the fall in the broader market. If this mania continues, it may possibly shake up the market further, causing more volatility in the market.
Think about it, once this GME mania is over, investors will flock back to the broader market, pushing back up the share prices. This means that shares of Apple, Facebook, Microsoft etc are now at discount and it would be a good chance to enter if you have yet to. However, this is just my personal opinion and it might not necessarily be right.
Over the past week, I’ve bought in Apple myself during the drop, because I believe in its long-term growth and also along its most recent earnings report, with Apple delivering its largest revenue by quarter over US$100 billion, with its sales up 21% over the year. I would say that if you are a long-term investor, it might be great to take advantage of this mania to buy the dip in fundamentally good stocks.
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To end off, I’d like to throw in a quote,
“If you play with fire, be prepared to get burnt”
If you decide to join the army on WSB and hop on the trend, do be prepared to be burnt by the fire, and do know when to take your profits. Gambling is not investing, and do not ever take the stock market as a casino. For all the long-term investors, good job, stay strong and do not be waivered by the temptations. Once again, good luck for those trying to enter the mania.
Join my tele channel here if you haven’t !
Before you exit this page, I’d like to thank you for reading this and your continuous support. Please do contact me if there is anything I can assist you with once again. Sorry that it took me longer this time to post new content as new semester in school had just started but rest assured I will continue to post more frequent and keep you readers updated ! If my content is helpful, please do spread it with your friends and get them to join my tele channel now ! Thank you !
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.
Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.