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Lessons Learned from the GameStop Saga

Lynae Tucker-Chellew

Lessons Learned from the GameStop Saga - Ryan DeBerardinis

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On January 28, 2021, one company saw an increase in its stock value that neared 30 times its value at the start of the year. On the first trading day of 2021, the video game retailer GameStop closed at $17.25. On January 29, they closed at $325, a day after hitting an intraday peak of $483. That day, GameStop was the most-traded stock in America on one of its busiest ever trading days.

On January 24, 2022, nearly a year later, those same stocks fell to $100.15, their lowest level since February 24, 2021.

Brief Timeline of GameStop Stock Events

  • December 8, 2020. GameStop reported an operating loss of $63 million in the third quarter of the year, which forced stock value down to $13.66 per share.
  • January 11, 2021. Ryan Cohen, Alan Attal, and Jim Grube—all high-ranking executives at e-commerce giant CHEWY—joined the GameStop board of directors. The announcement sparked some initial chatter on the Reddit page r/wallstreetbets.
  • January 13, 2021. Retail traders noticed, and the stock closed at $31.40 a share—a more than 50 percent increase since the January 11 announcement.
  • January 19, 2021. On this date, Citron Research posted on Twitter the following: “Tomorrow am at 11:30 EST, Citron will livestream the 5 reasons GameStop $GME buyers at these levels are the suckers at this poker game. Stock back to $20 fast. We understand short interest better than you and will explain. Thank you to viewers for . . . feedback on last live tweet.” This tweet seemed to stir the pot for amateur traders, as seen in the following events.
  • January 22, 2021. Support grew for GameStop on Reddit’s thread, r/wallstreetbets. The stock skyrocketed. It opened that day at $42.59 a share and closed at $65.01. After hours, trading took off with retail traders. On January 25, it opened at $96.73.
  • January 26, 2021. Elon Musk tweeted the term used heavily on the Reddit page to refer to GME—“Gamestonk!” which refers to the Internet and meme-fueled rise in the price of GameStop stock. Musk also linked the r/wallstreetbets forum to his 44 million Twitter followers.
  • January 27, 2021. Citron Capital and Melvin Capital, two firms shorting GameStop stock referenced heavily in the r/wallstreetbets forum, said on January 26, 2021, that they were closing their positions at a significant loss.
  • January 28, 2021. Retail trading platforms including Robinhood and TD Ameritrade abruptly restricted most GameStop stock transactions.
  • February 2, 2021. After its rise in the previous few weeks, GameStop stock opened approximately 50 percent down at $140.76 a share.

What Can We Learn from the Aftermath?

For GameStop, Investors took to online forums to encourage each other to keep buying—and not to sell—to keep the share price from tanking.

Rob Smith is head of behavioral finance at Barclays Wealth. He says it is understandable that investors are drawn in by the notion of acting collectively. “We naturally form into tribes, and this one had a powerful underlying David and Goliath narrative, so it was particularly persuasive,” he says. He does warn that that behavior can be risky.

A study by the US Securities and Exchange Commission in 2021 found that 70 percent of traders lose money every quarter on average and 100 percent of their money within 12 months.

Had you bought $100 of GameStop shares at the best time and sold at the best price over the past year, you would now have around $1,420.00.

If you bought and sold $100 of shares at the worst times, you would likely be in the red.

Buzz-based single share investing techniques are risky business. On the other hand, micro-investing is lower risk and offers educational opportunities for retail investors looking to get their feet wet. Taking small steps to learn the investment process and market trends is often a good way to improve financial literacy.

David Versus Goliath

Vanderbilt Professor Josh White told ABC News that this “David versus Goliath” saga, referencing the GameStop saga, “reflects a lot in our society” amid a pandemic that has exacerbated income inequality. He is further quoted as saying, “We expect that eventually GameStop stock price will come down and some people will lose money when that happens for sure,” he said. “And my fear is that they’ll view the stock market as being rigged and not being fair, and that they won’t invest in the stock market.”

Starting small can be done. The advantage of micro-investment apps such as Robinhood and Stash is that they come without the traditional hurdles such as initial investment requirements and fees to brokers and firms. Micro-investors can learn to invest in stocks without fees (which often run around $10 per trade) while investing in some of their favorite companies with high share prices, such as Amazon or Tesla. Many micro-investing apps also provide tutorials and educational materials that are influenced by your trading history to teach you the ins and outs of trading as you go.

Things Can Change Overnight

Simply put,  being an engaged investor can help you be more aware of the changes and patterns in the stock market. The GameStop saga taught us that things can change overnight. Whether it be the stock market or the legal market, projections are only as good as our data, and the best data is the information we go out and find for ourselves.