The Little Guys Take on Big Hedge Funds With the Help of Reddit
The returns from what’s happened with GameStop over the last few weeks has to have investors wondering, where’s the next opportunity? Another quick stock tip from the Reddit forum r/WallStreetBets would be easier than winning the MegaMillions jackpot, right? Before going on, I’m not going to address what’s currently unfolding with short selling and Robinhood. That is an entirely different issue that I will address in the near future.
So, was buying GameStop a good strategy?
Well, this depends on you.
There is a significant difference between investing and planning for your retirement.
Your retirement portfolio would not have included GameStop. Retirement portfolios should be based on several factors, in this case specifically, reasonable returns within reasonable time frames (1,641.9% in 12 days doesn’t fit either).
Investment accounts can be built for just that, investing — separate from your retirement plan. If they work out, you are ahead. If they don’t, your retirement plan doesn’t suffer. In the case of GameStop, this was not investing; it was speculation.
This is at the heart of what we believe as a firm; we help people insure against what could go wrong, for the luxury to invest for what could go right. When your retirement is secure, you can invest and, yes, even speculate.
For many who don’t know, GameStop is a brick & mortar store that, like many during COVID, has found itself in financial troubles. The ability to download video games directly to a console takes away the need to purchase the physical copy of a game from a store like GameStop.
So how did this GameStop surge happen? Known on r/WallStreetBets as u/DeepF******Value (and on his YouTube financial channel as Roaring Kitty), Keith Gill is the man who started the $GME craze, per Reuters. The 34-year old Gill lives in Boston and formerly worked at the insurance firm MassMutual as a financial advisor.
Keith began with an initial bet of $53 in September 2019. Now the position is worth an estimated $48m as of February 1st. Where did Reddit and, more specifically, the thread r/WallStreetBets come into play? Well, many believe that they found a way to get rich quick all while putting the squeeze on the large hedge funds that had shorted GameStop stock. Within the first week, they were wildly successful.
This underlying risk on a play like this becomes, how long do you wait before you sell? When is enough — enough? This is essentially speculation; the Reddit crowd has built a modern day pump and dump, combined with a game of musical chairs and a slight Ponzi scheme.
Las Vegas wasn't built by people becoming ultra-wealthy by sitting at the blackjack table. It was made because they stayed at the table too long.
While the Reddit crowd seems to believe in a mission over profit, plenty of people are wagering their mortgage, education funds, emergency savings, and even their retirement on this wild bet.
This event will change how hedge funds operate moving forward; however, not all hedge funds take short positions. Hedge funds are only available to accredited investors for a reason, risk. Most people shouldn’t take the risk that a hedge fund has to take to achieve the returns investors desire.
If you have more questions about investing vs retirement planning, schedule a call, and we would be happy to have a conversation.