Unless you’ve been traveling off-planet the past few weeks, you’ve heard the names GameStop, Reddit, Wallstreetbets, etc.. Enough has been written about what happened, so I won’t give you another recap.
But what I would like to talk about is a few things we learned from the whole episode, a lot of which just served to confirm what already appeared to be developing in the world of investments. And here is the first thing: A lot more people are buying stocks than ever have before.
Market commentators seem to be mixed as to whether this is a good thing or a bad thing, but I’ll go on record saying I think it’s a very good thing! Starting to invest as early as possible, or starting to invest whenever you can, is a wonderful idea! I’ve said many times before on this blog, even starting out with just one stock is not at all a bad idea. Many people, mostly young people but not all, have done exactly that.
What caused this sudden surge in interest in investing? For American investors it might have been the realization that Social Security dosen’t look like it will last forever, and people decided they didn’t want to be broke through their retirement. Or maybe people decided they wanted to start building more money to improve their lives much sooner. It’s probably a little of each, and maybe a few other motivations. These are some of the key factors in why I started this blog.
First, the good
I see a number of good things coming out of the recent investing popularity boom. One is a sort of chicken-and-egg scenario: which came first, easier ways to buy stock (such as Robinhood and Acorns) or people buying more stock? I guess it doesn’t really matter, because now there are much easier ways to buy stock! Which means more people are buying stock. Great!
The second recent development I’m attributing to more people investing than ever before is commission-free stock trading. I’ll have to admit, I never saw this one coming. I bought my first stock in 1984, and I paid a commission of $40! And that was through a discount broker! Lower fees are always a good thing, and fees can’t get much lower than zero. Which means more people can afford to invest, and investment returns are higher. Nice!
Not sure yet if it’s good or bad
A lot of analysts think the record highs the stock market has been setting on a near-daily basis, and in fact the sharp rise in stocks after the Covid-induced plunge of March 2020, are due to so many new retail investors jumping into stocks. I’d won’t argue with that, and I’ll say that is probably a very large part of it. This had led more than one analyst to declare the stock market to be in a bubble, a topic I will explore in my next blog post, so I leave that discussion for later this week.
Now, the not-so-good
Analysts, regulators, and even Congress are still trying to unravel and sort out exactly what happened during the GameStop madness of several weeks ago. A growing consensus is that ordinary retail investors, new and experienced, were not entirely behind the insane run-up in the price of the stocks of the troubled companies targeted. I completely agree.
It certainly looks to me like market manipulation was going on, and in a pretty severe way. I think Investopedia (a great source of investing knowledge, by the way) describes market manipulation best: Market manipulation is the act of artificially inflating or deflating the price of a security or otherwise influencing the behavior of the market for personal gain. The SEC (Securities and Exchange Commission, not the South East Conference) isn’t a real big fan of market manipulation, for good reason.
I’d say that what Investopedia described above was definitely taking place the last week in January, when the nearly worthless stock of a rapidly-becoming-worthless company topped $500 per share. One article I read recently, that I can’t find or I’d link to it, said that what took place wasn’t the David-vs-Goliath scenario people thought it was at first, but rather Goliath-vs-Goliath. I couldn’t have said it better myself. The same Wall Street “fat cats” people though they were rebelling against may very well be egging them on, for their own benefit.
The same attempt at whipping up artificial buying frenzy was made toward silver, but it failed pretty miserably after a day or two of a small spike in its price. Does this mean the Reddit/Wallstreetbets GameStop tactic is over? I’m sure attempts will be made again, but I think it’s a very bad development for the market, and I know a lot of people who got burned in GameStop. The SEC needs to figure out what exactly happened and take the appropriate action. I’m sure they will.
The other thing that concerns me is that a lot of first-time investors got involved in the GameStop mania, and might be looking at the stock market like it’s some sort of game (no pun intended, really!). Going Yolo once or twice with some play money is ok, I guess, but a lot of people lost a lot of real money getting caught up in something that wasn’t what it seemed.
What I’m trying to say, and what I say a lot in this space, is: 1) know what you’re getting into, and 2) be careful with crazy price swings, especially when they aren’t driven by anything other than emotion. And 3) invest with your investment money, and speculate with money you can afford to lose all of.
I think there is plenty to be optimistic about when it comes to the financial markets. And I’m very happy more people are getting into investing. Let’s all make money the smart way!
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