What Can We Learn From The GameStop Debacle?
A hare was making fun of a tortoise one day for being so slow. “Do you ever get anywhere?” he asked with a mocking laugh. “Yes,” replied the tortoise, “and I get there sooner than you think. I’ll run you a race and prove it.” -Aesop's Fable, The Tortoise and the Hare
I barely pay attention to the "news" but I couldn't get away from hearing about the GameStop debacle last week. Hedge funds going broke, lives being ruined, a few getting wealthy and many chasing a return that already passed them by. Suddenly everyone is talking about shorting and short squeezing a stock and everyone is an expert on those subjects.
Remember this fact. "The majority, if not all, of financial input you get from the "news" is journalistic. And journalism by nature, stays in business by selling you the news which is timely, as opposed to the truth, which is timeless." Nick Murray
Write that down or take a picture of it with your phone and read it again when the next "crisis du jour" happens.
This isn't a nuts and bolts article about hedge funds and short sales. This is a blog about how as a long term goal-focused investor, hedge funds and short sales don't apply to you.
What Is A Short Sale?
Since short selling stock is all the rage, here's a simple explanation of short selling: An investor borrows a stock, sells the stock and then buys the stock back to return it to the lender. The investor is betting that the stock they sell will drop in price. If the stock does drop after selling, the investor buys the stock back at a lower price and returns the stock to the lender.
The difference between the sell price and the buy price is the profit. This happens on Wall Street everyday, all day long, but the media typically doesn't put these stories in the 24 hour news cycle because they aren't sensational enough.
What Happens When You Borrow?
When you borrow anything you are in debt to the lender. Debts have to be paid back. When you borrow shares of stock they have to be paid back, too. In the case with GameStop, the hedge fund borrowed the shares on credit and sold the stock betting that the price would drop and they could buy it back at a cheaper price, then sell it back to the lender and make a profit.
However, a group of investors got together and decided to buy GameStop stock in bulk to drive the price up. Once it started going up, the everyday investor wanted in on the action, too, and it snowballed out of control. The stock price was driven up and the hedge fund was on the hook for billions of dollars to their lender. The hedge fund company made a bad bet and they lost. This not only affected them, it affected day traders and wannabe day traders as well. Some won the lottery and some just bought lottery tickets. You know who this didn't affect? Long term goal-focused investors.
Robinhood kept some from even buying lottery tickets. If you would like to know more about Robinhood and the "free" commission trading platform, click here. I think you might be surprised to find out it's not free.
What Can We Learn From The GameStop Debacle?
We can learn that with a proper investment plan none of this "news" even applies to you. When you have a plan you’re focused on your goals and your investments are aligned with achieving your goals. Everything else is just noise that we can tune out.
At 80/20 Financial we believe in creating wealth for certain, not creating wealth quickly. Just like in Aesop's Fable, the race is not always to the swift, but slow and steady wins the race. We believe that real wealth, an income one doesn’t outlive, can only be achieved through a program of lifetime investing in quality companies. If that interests you, contact us. We can help you create a plan to achieve real wealth.
You Need A Plan
A goal of retiring - without a plan to get there - is simply a plan to never retire. Retirement isn't some magical age. It's a dollar amount. If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and possibly leave a legacy to your family. The consultation is free and without obligation. Contact us to set up a consultation.
For more articles about retirement planning and investing, click here.
Thanks for reading!
Brian Coleman/Retirement Income & Investment Planner
80/20 Financial Services is an independent Registered Investment Advisory Firm. We help clients age 50 and over plan their retirement income and investment strategies. Contact us today for help with your retirement needs.
Photo by Clay Banks on Unsplash