What The Gamestop Fiasco Can Teach Us About Investing
To the moon. Diamond hands. . You may have heard or seen these terms recently.
If you haven’t and are wondering, “simi lai eh?”, these terms originated from the r/wallstreetbets community on Reddit, referring to a stock that’s about to increase in value massively. The stock that’s usually in question? GameStop.
What about GameStop?
For those who don’t know what happened to GameStop or need a simplified recap:
- GameStop stock was heavily shorted by financial institutions (Betting on the stock price dropping)
- Certain members of r/wallstreetbets found that the stock was undervalued and noticed the heavy shorting on the stock.
- They realised that if enough people bought and held the stock to raise the stock price, the financial institutions would lose billions and be forced to buy the stock to cover their losses - increasing the stock price even more.
- This created what’s known as a “squeeze” - a massive increase in the stock price due to a constant need to cover losses.
- Investors caught wind and bought into the stock, with public interest and buying activity increasing with the stock price.
- The price of Gamestop shot up from $17.69 on 8 Jan 2021 to $483 on 28 Jan 2021.
Investors were suffering from success (shoutout to DJ Khaled). There was too much huat to go around. There were expectations of the stock price going to the thousands, and investors were ready to strap on to their figurative rocket ships to see the stock price go “to the moon”.
On 28 Jan, however, everything came to an abrupt halt.
Trading on the stock was suddenly restricted. Institutions began to massively sell the stock to drop the price and save their losses, hoping to scare people into selling. And it worked, as the share price kept falling.
Many panicked and sold their shares at a big loss, especially those that were too late and chased its rise to the top. They would have likely missed out on its rebound to $264 as of 12 Mar due to fear of buying in again.
As an investor that observed the euphoria and chaos from afar - plenty of lessons can be learned to help you better manage your money and emotions when it comes to the stock market, hopefully preventing you from suffering such losses in the future.
Invest what you’re prepared to lose
The euphoria surrounding the GameStop stock reached a point where people were putting in their life savings, grandma’s pension, and college loans. Siao, right?
Although a few did get lucky and make bank, the vast majority ended up taking massive losses on funds they couldn’t have afforded to lose.
Rule number 1 of investing - Invest what you're prepared to lose. Anything more than that, you're pretty much gambling with important money. There is inherent risk involved in every investment and one must be prepared to move forward even if the investment drops to zero. This one not game hor.
The market is unpredictable
Nothing is a certainty in the stock market. People were comfortable with buying at $400 as they believed that the stock would confirm go to the moon - it’s safe to say they got burned badly.
Expectations and targets are always good to feel optimistic, but one should not have a mindset that their expectations will chop chop confirm hit one.
Just like buying Toto and 4D, there is always an element of luck. There will always be a possibility that something happens out of nowhere that causes these expectations to be dashed. You’ll be setting yourself up for disappointment, and this can cause you to act emotionally when the stock price falls - such as selling for a loss.
Keep your emotions in check
It’s easy to get emotional when you’re losing money. Let’s be honest, no one likes having their money disappear from their account in an instant.
A strong emotional reaction can cause you to fold and sell stock at a loss - possibly the biggest no-no when it comes to investing. Mai kan cheong, okay?
That’s why it’s also important to invest what you can afford to lose as mentioned above - so that you can easily take the loss on the chin and move on.
However, it can also work inversely where being too happy with what you’ve earned from a stock can cause you to get greedy and hold on for too long as you ride through its rise and fall. Sometimes, it’s important to take profits, especially when you know the stock’s success may not last.
It's why I didn't invest in GameStop even though I knew about it early - I foresaw that my greed would take over and cause me to miss my opportunity to take profits, burning me badly.
Doing plenty of research on a stock and having plenty of conviction in it can also help to temper emotions - on days when the stock is down, you can always fall back on your research to remind yourself why you bought it in the first place.
Investing isn’t a get-rich-quick scheme
Events like the GameStop debacle are one-in-a-million. It required a combined effort of millions of retail investors just to trigger a squeeze that sent the stock price flying in just a few days.
In reality, share prices do appreciate over time - but you need to be able to weather the ups and downs in the process.
It isn’t a get-rich-quick scheme and should never be treated as one - investing should never be seen as a game or free money. You should never have feelings of FOMO and blindly buy in thinking it will result in instant gains. If you wanted that, you should just go and play Huat Pals.
Understand the risks involved in investing and own your decisions. Do it well, and eventually that BTO or resale flat will be much easier to finance. Or maybe you can finally buy that Tesla. Or how about Sentosa Cove? Okay lah, getting carried away already…