Jumping lessons: what all investors can learn from GameStop loss

Mint head of sales and marketing, David Boyle, explains why the ongoing GameStop experience holds lessons for new-breed investors and the old-school financial industry on handling the highs and lows of markets. Boyle takes it to the bridge...

Tuesday, February 23rd 2021, 6:24AM

by Mint Asset Management

If an online entity called ‘Roaring Kitty’ suggested a bridge-jumping strategy might be just what you need to improve your life, would you follow that advice?

Probably not. However, many thousands of retail share-traders leapt on command in January as Roaring Kitty led them over the virtual guardrail and into the swirling, dangerous waters of the GameStop stock craze.

(At the time of writing its seems that Kitty might not be roaring quite as much from now on - more on that later.)

But back to the bridge: perhaps there is a case to be made for jumping off it.

Before launching over the edge, though, most of us would first make an effort to understand the risks and benefits involved.

For example, you may want to carry out some due diligence on the bridge, covering such important pieces of information such as:

• how high it is above the river;
• how well it is constructed;
• is there a suitable jumping-off platform;
• has anyone else has jumped of it before; and,
• the survival and injury data from previous jumpers.

Your due diligence should also extend beyond the bridge itself, down to the river below, checking out details including:

• depth;
• hazards such as rocks (which don’t mix with heads well); and,
• current strength (to ensure you can swim safely back to shore if you survive the initial fall).

After completing all this analysis and research you would be in a position to weigh up the risks against the potential exhilaration and sense of achievement from jumping off that bridge.

Possibly, your due diligence might support the Roaring Kitty bridge thesis – and you jump. Alternatively, you might not, given your tolerance of risk (and fear of heights).

Sadly, many of those investors (and I use that term loosely) who followed influencers on Reddit with funny names like Roaring Kitty (also known as ‘DeepF-----Value) relied instead on advice from total strangers to buy GameStop without doing any risk-and-return analysis of their own.

I suspect very few of those who jumped on the GameStop trend researched the financials of the company, how well it was doing compared to peers or whether the sector the firm operated in was growing or declining.

In fact, many of those who poured money into stock should have known that (like DVD stores in the early 2000s) online downloads and internet speeds were significantly reducing the need to buy hard copies of games, which was the GameStop business model.

While some emerged from the GameStop pile-on looking like heroes, I suspect the majority of the YOLO – ‘You Only Live Once’ – crowd will have been battered and bruised by the experience.

The extent of GameStop retail investor injuries will, of course, depend on how much each individual threw into the stock relative to their own capital base.

On February 18, 2020, the GameStop share price was US$4.06; by December 14 the stock was sitting at a healthy US$12.72.

However, from January 11 this year though to February 4 we saw some massive swings in value. The stock peaked on January 27 at a massive US$347.51 and after five trading days dropped back to US$3.77 a share.

As at February 17 GameStop was valued at US$45.94 a share. Investors who bought at the top and sold on February 17 would’ve banked losses of some -85 per cent: this could be quite a ‘teachable moment’ for the generation now called Zoomers and the long tail of Millennials, who may learn to treat this type of trading (more akin to gambling) with caution.

The GameStop frenzy of activity was enabled by the likes of RobinHood and the power of social media, which respectively provided an accessible (ostensibly ‘free’) trading service and a platform to distribute unregulated ‘advice’ by Roaring Kitty et al.

As the old saying goes ‘it’s all fine until someone loses an eye’, or in this case quite possibly their shirt.

In the recent US Congress hearings into the GameStop saga, the one known as Roaring Kitty (real name, Keith Gill), shrugged off any responsibility for misleading novice investors in the Reddit chatroom.

“I am not a cat. I am not an institutional investor, nor am I a hedge fund. I do not have clients and I do not provide personalized investment advice for fees or commissions. I am just an individual whose investment in GameStop and posts on social media were based upon my own research and analysis,” Gill told the Congress. “... The idea that I used social media to promote GameStop stock to unwitting investors and influence the market is preposterous.”

Cat or not, Roaring Kitty has been sued, according to US media reports, for fraud that led to losses for many including “those who fell for Gill's act and bought GameStop stock during the market frenzy at greatly inflated prices".

Don’t get me wrong platforms like RobinHood (and NZ variants such as Sharesies and Hatch), which have been unexpected beneficiaries of the COVID-19 lockdowns, are a great introduction to investing.

As an industry, though, we have a role to play in education and highlighting the risks involved in trading shares and mindless trend-following of the GameStop variety. It is pleasing to see the FMA recently releasing a communication on market manipulation to help with the education process.

But the rapid recovery in financial markets from the initial coronavirus shock and the seemingly endless upward march of equity indices may have given the new breed of share traders a sense of immunity to loss as they head ‘to the moon’.

Back down on earth, the financial industry needs to do a better job of explaining why the old adage of spreading your eggs in different baskets continues to ring true. We need to highlight the ongoing value of investing in diversified managed funds, looked after by investment professionals – whose full-time job is to inspect the ‘bridges’ and surrounding market environment for risks and benefits – and supported by expert financial advice to counsel clients before they jump.

In his Congress testimony, Gill argued he was merely pointing out – via his many social media posts and frenetic videos – that the GameStop jump could be fun.

“It is tragic that some people lost money and my heart goes out to them,” he said.

Faux sympathy from fake felines fueling FOMO (‘fear of missing out’) won’t bring much comfort to those investors who jumped into this short-term game.

As the next generation starts building up wealth, I hope they discover that FOMO is a no-go strategy over the long term – and that bridges are really for crossing, not jumping.

Mint Asset Management is an independent investment management business based in Auckland, New Zealand. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement at mintasset.co.nz

Tags: Mint Asset Management