Don’t go looking for the next GameStop

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If you’ve followed the GME stock story at all, it has been quite the exciting and wild ride over the past few weeks. As far as I understand it, hedge funds got a little too risky making extreme short bets on GameStop stock.

At it’s core, they are able to make money by betting a stock will go down. This can create a lot of risk. If you buy a share normally, you can only lose as much as that stock is worth. For example, you buy a stock at $10, you can only lose $10, since the furthest it can fall is $0. In a “short”, an investor would borrow a stock at it’s current price, sell it immediately, and then returns it to the original owner at the new (and hopefully for them, reduced) price. It’s a tricky way for investors to profit on a stock going down in price. I have never and likely will never attempt this strategy as an individual investor, so that’s about as much as I care to know about it.

What can happen, and what happened with GameStop, is that the price can go up, but theoretically it could go up forever, and so your losses can be infinite. You bought shares at $10, but they rise to $300, all of a sudden, you’re down 30x your original investment. Ouch.

A few smart individuals on Reddit’s Wallstreetbets noticed that the hedge funds had overextended themselves with GameStop. They managed to create a movement of retail investors buying up GameStop, driving the price higher and forcing hedge funds to cover their short bets at massive losses.

A lot of folks made a lot of money over the past few weeks. And a lot of folks (big hedge funds included) lost a lot of money. I have watched this saga with interest and have felt my fair share of FOMO, as I (rightly, in my opinion) do not own any stock in GameStop (unless it’s included in an index somewhere). As a rule, when I am feeling FOMO about something, I know that’s generally something to avoid.

Of course hindsight is always 20/20, but a few weeks ago, this looked ridiculous, and a lot of people will be regretting their actions over the past few weeks. As of this writing, the stock sits at $107, down from it’s all-time-high of ~$480 just a few short days ago.

The diamond hand memes coming out of Reddit’s Wallstreetbets are definitely funny. I love the idea of sticking it to the Wall Street fat cats when you get the chance, but if you bought in early, get out while you can. If you missed the boat, stay away from it. And in your own best interest, do NOT go looking for another opportunity like this. Ignore all of the people pointing out AMC or whatever the next short-term gain could be. That is not investing, it’s gambling.

What is the classic advice to people going into the casino? Quick aside, if you’re going to the casino regularly, you’re most likely not on the path to financial independence. Anyway, the advice goes, quit while you’re ahead. If you get lucky enough to beat the house, relish your winnings and get out. Same goes for the absurdity of GME over the past few weeks. Cash in your profits and get out. Just be thankful you won this time.

You are not smarter than they are (they’re not smarter than you either to be fair). You do not have the resources or the army of analysts to find and uncover opportunities like this. And frankly, these aren’t just sitting out there waiting to be uncovered. If you won with this gamble, know what it was, pure luck. GameStop was likely a once in a decade chance to capitalize on somebody else’s mistake.

Just know this, the big guys will not make the same mistake twice.

So what to do instead?

Increase your savings rate, buy the indexes, and just wait.

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett.

Check out my post I titled “Investing 101” if you’d like to learn the simple investing strategy I used to become financially independent and still use today (spoiler: I never buy individual stocks).

Thanks for reading, let me know your thoughts in the comments below!

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