What does the GameStop squeeze mean for the future of investing? (2)
This article was published in February 2021
What does it all mean for regular investors?
Is this the start of something big?
Whether coordinated market manipulations by retail investors will prove to be a short-term phenomenon or a new regular feature of the market is unknown. Much analysis of the situation so far has focussed on the exceptional times we are living in:
The pandemic has meant many people have more cash due to stimulus measures. Those who are still employed also have more money to burn as they are not going out or on holiday. The allure of returns from investing may have also attracted people in more desperate situations to try to replace their lost incomes. Many people also have far more time as well as money, with some turning to investing out of boredom. The BBC reported that over 4.5 million people opened trading accounts just in the first 3 months of 2020, with the majority being in March, where many saw the market crash as an opportunity.
Although these factors aren’t going away any time soon, they will not persist in the long term. Many newbie investors will likely learn the hard way that investing based upon market hype is not a sensible strategy and may give up altogether.
Regulators are also watching closely and the controversial decision for many commission-free trading platforms to limit or block trading in GameStop and other stocks took the wind out of the movement’s sails.
However, it is very possible that regulators will come down the side of the retail investors. Trading platforms may also be better prepared in case of a next time, their decision to restrict trading resulted in much negative publicity. The narrative that retail investors can club together to ‘stick it to the man’ will not be forgotten in a hurry, and further attempts to achieve this are likely.
If we do assume that groups of retail investors will continue to manipulate markets, what does this mean for investors?
Could this pose a new investing opportunity?
Those with a good knowledge of investing know to steer well clear of events like these. Buying into bubbles like this is not investing, it is gambling. When there are enormous numbers being thrown around in the financial news, it is easy to be seduced by the prospect of huge returns. However, when asset prices are hugely inflated, they can come crashing down at any moment.
Most of those who bought shares or options in GameStop on the 27th of January, the day of the biggest surge, were met with a 43% drop in value the very next day. On the day of writing GameStop shares were trading at under $100, less than a third of their peak. Many overenthusiastic investors will have lost thousands. In summary, if you are reading the news about tremendous growth in the price of an asset, there is a good chance you are already too late.
Will this affect sensible investors?
Sensible investors focus on long-term returns rather than get rich quick bets. They use products like broad-based funds to benefit from the aggregate growth of markets and iron out the risks that come with investing in single companies or sectors. They invest in assets which grow in value due to their underlying fundamentals and are not influenced by short term speculation and volatility. Finally, they don’t get involved with complicated and risky market instruments like shorting. They bet on markets going up in the long term, which they always have, not the success or failure of one small part of it.
Markets have always been noisy, and now there are new voices to that noise. If a significant amount of new investors do stay in the market, this may pump the market up higher, but is likely to lead to the overvaluation of popular stocks (such tech companies) and may lead to greater market volatility as a greater amounts of investors buy and sell according to financial news or what they read on social media.
However, when you invest in the whole market, this will make very little difference to your overall returns. Market volatility means very little for long-term returns if the general trend is up.
Despite the meteoric rise of GameStop shares, the volatility will be ironed out by time and by the fact it makes up a tiny part of a market worth trillions. Even at its very peak, GameStop was worth around 1% of Apple4, the current largest company, and Apple itself is just one company in thousands that make up a well-diversified portfolio.
Over the last ten years (to November 2020), global equity markets have grown at an average of 11.7% over the last ten years5, At this rate, you would double your investments every seven years. This is despite the market dropping by 10% or more in six of those years and ending the year lower than it started in 2011 and 2018. Sure, this new generation of retail investors may contribute to this volatility, but this tells us nothing about long term returns.
While past results tell us little about the future, they do tell us that it is possible to make good returns by simply leaving your money and letting the market work for you, rather than spending endless hours on speculation and risking extreme losses.
To find out more about our investment beliefs at BpH Wealth click here
4 Yahoo Finance. 2021. How the tale of Reddit, GameStop, Robinhood is really about 5 big trends
5 Albion Strategic Consulting. 2020. [paper available on request]
Featured image credit: Tiffany Hagler-Geard | Bloomberg | Getty Images
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