If you’ve ever attended one of my presentations, you’ve likely heard me talk about how your money story and mine, despite the myriad of reasons for why they are different, have much in common. You’ve heard me use the analogy of your favorite book, movie or television show. In that all stories are centered around characters, take place in a setting, and have a plot.
For the last two weeks, the story of the rise of GameStop’s stock has captured the attention of many.
The characters: While the story is about GameStop, the way I see it, they aren’t the protagonist.That role gets assigned to the members of the Reddit thread that kicked everything in motion.
The setting: Wall Street.
The plot: An unexpected rise in their stock price – GME, which was led by amateur investors on a relatively new (2014) investing app: Robinhood.
On February 1, 2016, the stock price was $26.81; on the same date in 2017, it was $24.30; it was $16.66 in 2018; $11.24 in 2019; and $3.95 on February 3, 2020. Starting in the Fall of 2020, it kept rising and rising and closed at $325.00 on January 29, 2021. Unbelievable may be an understatement!
As a short seller, you borrow a stock, sell it, and buy it back to return it to the lender. It’s akin to when your bank uses the deposits in your accounts.
If you are a short seller, you make money by betting against the company, or when the stock price goes down. So you really, really don’t want the price of the stock to go above the price at which you borrowed it.
That’s why those hedge fund managers were freaking out (I know not an eloquent word choice, but very accurate). The rise of GME was not good for them, because it meant they had to quickly come up with money to cover their shorts.
Think: If you had a loan and your lender “called” it earlier than you were prepared for. You, too, would likely need to scramble to be able to pay back the loan.
This is the position the hedge fund managers, or institutional investors as we refer to them in the industry, found themselves. And not only were they caught off guard by the stock’s unexpected rise, they were also flummoxed because of who was driving the price of GameStop up.
The “who” were members of a Reddit forum. In other words, they were the “amateur” investors, or as we refer to them in the industry, the “retail” investors.
Oh, The Many Layers
There are so many layers to this story.
Personally, I am intrigued by the “David vs. Goliath” angle. The “little” guy brought down the giant; they proved they have just as much power to move the stock market, especially if they move in tandem.
Having worked in the industry since 1986 and witnessing up close its evolution, I am also intrigued by how much access “retail” investors have to the market today than they did back then.
And it turns out, the combination of access to the stock market fueled by social media and crowdsourcing form an incredibly powerful trifecta.
The story regarding this concatenation will continue to unfold. Especially in light of the investigations this event has triggered.
Perhaps you didn’t get caught up in the drama of this story. Perhaps you’ve already moved on from it. But, trust me, more layers will unfold in the coming days, weeks, and months ahead. As those layers unfold, here’s one thing I wish to point out:
Yes, they both work best with a plan that guides when you’ll buy and when you’ll sell. Yes, both have the aim of earning a profit.
The difference is with their approach.
While there may be a strategy behind it, trading involves buying and selling stock for short-term profit. Sometimes, traders change their position within minutes or days.
Investors, on the other hand, buy and sell stocks with a longer-term outlook and strategy in mind. Holding onto a stock for years – maybe even decades.
As an individual investor, you don’t have to be either/or. But you do need to know which “hat” you’re wearing when you are buying and selling stocks.
I think it is great that there are more platforms that make accessing the capital markets easier. The barrier to entry is lower not just because you can bypass a broker (or other financial professional) and buy/sell directly yourself. But it is also low from a financial one, too. Today, you can buy fractional shares, something which was not possible in 1986. Likewise, you have a range of platforms – some that charge low commissions to those that don’t charge any. (Though I’d be wary of the latter — free is never really free. #justsayin.)
This is one way of democratizing investing. And that’s great!
Do they differentiate, in advance, the stocks they’ll trade vs. those they’ll hold?
Do they have a strategy – for trading, investing, or taking a hybrid approach?
What about you? If you’re in the U.S., are you amongst the 55% of Americans who own stocks or mutual funds? If so, what type of investor are you: trader, investor, or both?
Sure, neither GameStop or Reddit is the protagonist in your story, but I hope you see how their story is connected to yours. If nothing else, I hope it makes you have more than a passing thought about how you approach investing – philosophically and in terms of your activity.
Because remember, trading vs. investing not only represent different approaches to investing in the stock market and (hopefully) making a profit. These approaches affect your expectations and experience of the market, too.
As the story of GME continues to unfold, this is the part I don’t want to get lost.