Over a few weeks earlier this year, the stock of a struggling gaming electronics company – GameStop – shot up from about $4 dollars a share to almost $500. Quite a ride.
Some thought it would go to $1000 and borrowed money to buy more shares. Plenty of people wished they somehow had gotten in on the action.
A recent newspaper headline was, “GameStop crowd taking a drubbing, shares plummet.” For the many GameStop investors who sold out for various reasons along the way, the story did not have the ending they dreamed of.
The stock has been up and down since. Seems like it’s a bit of a roller coaster. Regulators are taking a look to make sure the original social media-fueled explosion in GameStop’s share price was spontaneous, or if it was something else. Time will tell.
GameStop is an unusually dramatic situation but there are a few takeaways from the GameStop situation for any investor to consider.
First, it’s perfectly natural to hope to come across an investment that rockets up quickly from $4 to $500. That is the stuff that dreams are made of.
People who fully understand and accept the risks sometimes dedicate a limited part of their portfolio to looking for those situations, calling it “Play Money” or “Fun Money” or “Dream Money.” Because lightning does strike from time to time. But it’s rare and managing a huge win can have its own unique challenges and pitfalls.
The Wall Street Journal recently told the story of a civil engineer in Nevada who saw his “$23,000 options gamble on Tesla” grow into “a nearly $2 million windfall.” An extraordinary result.
What’s the civil engineer doing now? According to The Wall Street Journal, he’s borrowing against his position to buy more Tesla options. He sold his home to buy more Tesla options too. He is seriously all-in.
Reading that article, it was easy to imagine people across the country thinking, “Oh, please – take some of that win off the table!”
So the second takeaway is – if a speculative investment pays off – have a strategy in place to lock in some of those amazing profits before something disastrous occurs. Riding a stock up can certainly be fun. Walking away later with a loss is not fun at all. “Catching up” can be very difficult, if not impossible.
The third takeaway is that it’s 100% okay to be very wary of hot stock plays that seem too good or too risky to be true … even if occasionally they do pan out.
According to news reports, one young investor took out a $20,000 loan at 11.19% from a credit union to buy GameStop shares. (At a time when a 30-year mortgage can be had for about 3%!) He lost that money and could be repaying the loan for years. CTV News reported that a college student apparently committed suicide last year (before GameStop) “thinking they’d lost a fortune using the free trading app, Robinhood.” Two very sad stories.
The most sensible strategy is to “know your limitations” – especially when it comes to risk – and let that be your guide. Consider working with a licensed, independent objective financial professional. Because exciting can get dangerous in a bunch of different ways. And while “slow, steady and as safe as possible” sound dull to some, that is actually how most people do successfully grow their investments over time.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. Have a question? Email to info@cantoncoopbank.com.