OCBC OneWealth App– Stop the games: Lessons from GameStop

Equities

USA

Outlook

Market mania

Kelvin Goh

Head, Wealth Advisory, Wealth Management Singapore, OCBC Bank

Stop the games: Lessons from GameStop

18 February 2021

So, who won?

As of last Friday's close, GameStop shares had cratered around the US$50 mark, a significantly higher price for the video game retailer as compared to the start of the year. At the same time, that price is nowhere close to the dizzying heights of above US$450 that GameStop hit in late January.

Questions abound. Is this saga a battle of retail investors against big hedge funds and ultimately, could it happen again? Will it all lead to a turnaround that will see GameStop morphing into a Tesla or Amazon that will lead to huge profits for believers?

I think there has been more than enough speculation on the above. Instead, I would rather focus on the valuable lessons we can gain from the GameStop frenzy. To me, it has served as a reminder that one must take into account trusted principles that will continue to prove useful in what is admittedly a new landscape for investors.

1. Trust, but verify

In this age of ‘information’ where the GameStop saga is playing out, posts on social media were the artillery that allowed individual investors to band together and effect a massive move on the struggling company’s share price.

For those not in the know, brick-and-mortar GameStop’s sales had been in trouble for years. But its shares were finally edging up in early Jan, thanks to a management change. This also made it a target for big-moneyed institutional investors, who bet against it.

Incensed, a small community of retail investors launched a crusade on Reddit, calling for a rally against the ‘profiteering’ financial elite. The ethics of this are debatable, but it clearly shows how coordinated action against a perceived weakness can cause a massive reaction. With the global reach of the Internet, it also means actions can be amplified, and can gain momentum quickly.

This is what investors have to note: It is now critical to question the agenda behind information one is receiving. A post urging you to buy a counter could already have a long position established at lower levels. Would it not be in its favour for prices to continue to move higher? Importantly, who is behind the post and what gains do they seek?

Today, you will come across many social media ads purporting strong returns with little potential for losses. All I can say is that in this age of marketing ‘wokeness’, it is vital to question the motive and agenda behind every call to action.

2. Set emotion aside

I was struck by the emotional tone of the many posts on the Reddit discussion group that set GameStop’s shares ablaze. Cries to "Hold the Line" and "Fight to the End" were accompanied by calls for a takedown of the hedge funds.

While entertaining, having such a charged environment as the basis for speculation rarely makes for good results. I believe in taking a dispassionate view towards investing, as this will clear the path for level-headed decisions.

Personally, what has worked for me has been putting technology to good use – I have ‘automated’ how I buy the bulk of my investments. I have set aside a stipulated amount for buying into funds and ETFs via a Blue Chip Investment Plan. This amount is debited from my account each month, taking the guesswork out of timing a purchase. It also makes for a much less stressful experience and allows you to evaluate situations without being distracted.

3. “Don't lose money”

Apparently, Warren Buffet swears by this rule. But the meaning behind this is actually to not be frivolous and gamble money away. This is essentially what you are doing if you "invest" in an unfamiliar name that you learnt of in an online forum.

For every few people who got lucky and caught the wave early (and I do not mean just with GameStop), there are also stories of just as many people losing money originally set aside for essentials such as rental payments. As the GameStop story continues to unfold, prices will likely evolve over the coming weeks and for some, there could be worse to come.

But what happens if you cannot ignore a really hot stock tip that the whole Internet is blowing up about? I say, recognise it for what it truly is - a speculative gamble. Make sure that you have the basics in place: Enough cash for your living expenses over the next year, and all liabilities covered and insured against. Basically, your financial foundation must be solidly in place.

Then, think very carefully about how losing that will affect you. Don't look at the potential upsides; focus on the impact of losing your capital on that one bet. Hopefully, that should dissuade you – or at least, curb your enthusiasm so that the impact of your gamble will be minor if you decide to go ahead.

The world is changed

In this new norm, I admit that I do not have all the answers. And as a professional, I am fascinated by how behaviours and trends can affect the market. I predict that past matrixes and protocol governing investment behaviours may have to be re-evaluated as the world evolves.

But I believe that even as things change, there are certain things that will always stay the same. Base your decisions in cold logic and questioning, and you will minimise the chances for missteps.

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