As we come to a close to the first month of 2021, January has already been a wild ride and just as unpredictable as 2020 was. You might have seen some interesting headlines recently involving a video game retailer, a movie theater chain, and a popular stock trading platform. At face value that isn’t all the unusual, companies get talked about all the time when it comes to the stock market. However, this time is far from usual as it seems everyone, and I mean everyone, is losing their collective marbles.
Alright, so what is really going on? In short, it’s a David vs. Goliath battle in which David came out swinging like Mike Tyson against Marvis Frazier. Although it’s fair to say that the Marvis Frazier in this example didn’t even know he was in a fight to begin with. The David(s) in this scenario are average, every day folks caught up in the hype and a community that originated from Reddit, a popular social media site. On the flip side Goliath(s) are Hedge Funds (namely Melvin Capital) and professionals in the investment world. Everyone loves a good underdog story, right? Just look at the Might Ducks! Except this isn’t a story Disney could even comprehend to write, it’s pure madness. More importantly however, it most likely won’t end well for each and every David involved.
Before we get into the astounding numbers, here are some that are related to this event that would normally blow your mind on a “normal” day.
Here is the crazy part that you’ve came here to read, and it all revolves around one company, Gamestop, a video game retailer. Gamestop is arguably a company on the brink of bankruptcy and looks to be going the way of Blockbuster. The comparables between the two are similar as both companies operated a brick and motor retail approach that is getting left in the dust as things become more digital.
Does a “failing” company typically stock typically rise +16,660% in the span of one year? How about +2,900% in the span of three weeks? Not to mention the trading volume going from 7 Million on average to 178 Million on Tuesday the 26th. Do safe investments usually have more stock being shorted than physically exists?
r/wallstreetbets (the Reddit Community) sparked a price surge that was only driven up more by the likes of speculation from Elon Musk, Chamath Palihapitiya, and Barstool Sports founder David Portnoy. This forced Melvin Capital and other Hedge Funds to purchase a continually rising stock to cover their initial short, which only drove the price up further. Keep in mind there was literally a lack of stock to buy, which again made the price higher. Good ol’ supply and demand.
The volatility that is currently going on is unbelievable and it has taken the world by storm. So much so that popular trading platform Robinhood, which caters to younger investors, and others decided to halt trading on certain stocks such as GME and AMC, only allowing it’s users to close out their positions. Trading has since resumed but that isn’t the full existent of some other shady practices going on behind the scenes, which we will not get into.
This has caught the attention of individuals such as Sen. Elizabeth Warren, Rep. Alexandria Ocasio-Cortez, Sen. Ted Cruz, and Donald Trump Jr who all have slammed namely Robinhood for limiting trading. In case you haven’t been paying attention, I don’t think there has been a single issue that those four, and others, have ever agreed upon.
Will Gamestop stock go down? Will AMC stock go up? Nothing is certain, and we’re not in the business of making bold predictions. Stocks like GME could continue to rise, or they could crash spectacularly in a blink of the eye which may already be going on (At the time of publishing GME is at $90). One thing that is most likely certain is that individuals, people who caught up in the hype or who have decided to gamble will get hurt. Keep in mind GameStop lost $470 million in 2019 and announced hundreds of store closures in 2020. That doesn’t sound like a stable investment now does it?
If you’re not prepared to walk into a casino tomorrow and throw down your life savings on Red, only to have it land on Black, then you should not be putting that amount of money into stocks even in the most stable of times, let alone right now. Investing isn’t guaranteed, no one has a magic ball or a sure fire formula and if they tell you that they do then they are lying. Can you get rich like others by placing your bets on GME, AMC, or another stock? Yes, you can, but the overwhelming statistics tell you that no you will not. Investing, whether it be the stock markets, bonds, ETF’s, mutual funds, commodities, or forex all carry risk and it’s up to you to decide how much is too much. Are you wanting to roll the dice on your future?
Although this week has been chaotic, fun for some, and a disastrous for others it will be a flash in the pan one way or the other. It’s possible regulations could be implemented to curb this scenario from happening again in the future but it is next to impossible that it will stop all forms of market manipulation.
Although Forex isn’t fool proof when it comes this comparison it does provide more security as the market is vastly larger (6.6 trillion daily volume roughly). On top of that Forex by nature operates different than the stock market, as you need to buy and sell currencies at the same time. Unlike holding a stock and waiting for it to go up.
Here at Canadian Wealth Strategies we understand risk, volatility, and what it takes to aim for a consistent high expectation although we never guarantee our clients anything. If a get rich quick, “YOLO”, type of approach isn’t for you then we recommend speaking with us today. We target year over year consistent growth that complements your existing portfolios or Financial Advisors plan. You won’t be buying a yacht with us anytime soon, but you can rest a little easier at night knowing that your money is working hard and also earning a return that you deserve.
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This blog is a matter of opinion by the author and does in no way promise, guarantee, or hold CWS to any future predictions that may or may not have been presented. This is not meant to be take as financial advice.