It has been a year since an army of traders on the Reddit forum r/WallStreetBets famously helped to drive a meteoric rise in the stock price of video games retailer GameStop.
The saga sparked the beginning of the ‘meme stock’ phenomenon, resulting in a sharp rise in value and unusually high trading volumes despite no obvious change in the company’s fortunes. That said. Bill Ackman, founder and chief executive of Pershing Square Holdings shared an interesting counter view in an interactive investor interview in May last year.
GameStop was the most bought stock on interactive investor, the UK’s second largest DIY investment platform, among customers in the 18-24 and 25-34 age categories – but the popularity of the stock waned with age.
It was the sixth most bought stock last year among the 35-44 age cohort but didn’t make the top 10 cut in the age categories beyond 44. Overall, it ranks 27th on interactive investor’s equity bestsellers list in 2021.
It is a similar story with AMC – ranking fifth, fourth and eighth among the 18-24, 25-34 and 35-44 age categories, respectively – but it does not feature on the top 10 equity bestsellers list among the 45-54, 55-64 and 65+ age cohorts. AMC was the 30th most bought share on interactive investor last year.
Despite this, ii’s latest private investor performance index once again suggests that on the whole, younger investors are tending to have balanced portfolios, with a focus on investment trusts and other collective investments.
The popularity of both stocks peaked in Q1 2021 and generally waned thereafter.
Myron Jobson, Personal Finance Campaigner, interactive investor, explores the five key takeaways of the GameStop saga.
- Investing versus betting
Risk is an inherent part of investing, but there are some investments that raise the stakes to levels akin to slot machines in a casino. The GameStop saga laid bare the difference between investing and betting. Put simply, investing is centred on research while gambling depends on luck. There were no obvious changes in the underlying fundamentals of GameStop that justified its sudden surge in value.
While some people were fortunate to make money in a short amount of time by buying then selling at the right moment during the Reddit fuelled surge, many lost out once the bubble burst. This baptism of fire into the world of investing could put the uninitiated off for life and scupper financial goals. There is also a danger here that investors end up retreating back into cash savings where an investment would be more suitable for long term financial goals.
The key takeaway from the saga is treating investing like a spin at a roulette wheel by betting on highly speculative stocks is not a sustainable strategy to build wealth over the long-term. The reality is that the odds are heavily stacked against those who attempt to time the market.
- Diversification is key
The challenge for new investors is to resist the urge to invest in a particular proposition for fear of missing out (FOMO). It is important to understand what you are investing in. Funds and investment trusts, which use a professional fund manager to spread your risk globally, are a good place to start.
A well-diversified investment portfolio helps to cushion the occasional shocks that come with investing in a single asset class or region. There’s no getting away from the fact that GameStop was the most bought share among our younger customers, but we see high levels of portfolio diversification on average and younger customers are particularly strong on collective investments.
- Beware of investment guidance on social media
The GameStop saga is symptomatic of the advent of ‘finfluencers’ on social media, reflecting the increased interest in investing – especially among younger people. Social media provides a platform to share opinions and there is some good material out there to help people on their investment journey, but it can be a minefield.
Some posters on social media added fuel to the GameStop hype train in hope to profit from getting in early, ride it for a bit before getting off and letting it crash after they’ve taken their profits.
The key is to check where you are getting your information. There are plenty of reputable online resources offered by likes of the Money and Pension Service, Citizens Advice, financial services companies like interactive investor and the mainstream financial press.
The hope is the Online Safety Bill will go some way in removing dubious and outright misleading content on high-risk investments from social media platform.
- Greater financial education is needed
The silver lining of the meme stock phenomenon may be that more young people are engaging with investments. The challenge for the newly initiated is sorting the wheat from the chaff- which is difficult for those who don’t know what good looks like.
The GameStop saga is a ready-made case study that can be taught in schools to highlight the dangers of FOMO investing. It is a disconcerting that some young investors are being steered by what they see and watch on Instagram and TikTok, not parents and teachers.
Let’s talk about investment risk
The past couple of years has seen an uptick in the number of people investor for the very first time. The concern is that novice investors will learn important investment lessons the hard way by losing money on a high-risk proposition.
We need to be having much more nuanced conversations about risk and reward, exploring the impact of even increasing your contributions a little, and/or, reassessing your attitude to risk.
While it is easy to get caught up in the hype around the latest high risk ‘get rich quick’ investment, it is important to take a step back and remind yourself of why you are investing in the first place. Investing is a one man/woman’s race. As such, your investment strategy should align with your attitude to risk and your investment time horizon.
Bonus: Power of the retail investor
The GameStop saga was in essence a demonstration that retail investors actually have some power in the investment market. An army of investment blogs helped drive up the stock price of a seemingly ailing video game retailer despite no discernible change in the companies approach or fortunes.
Movie theatre retailer AMC attempts to stoke interest in the company by offering free popcorn to investors showed that the voice of the retail investor is getting louder, and some corporates are beginning to listen.
However, Richard Hunter, Head of Markets, interactive investor, has a less risky strategy: get your voice heard by voting. Hunter says: “The best way to get your voice heard against the establishment is to vote. And that applies to either side of the Atlantic.
“As with any investment or indeed trade, investors should research the company and understand its business before committing capital, as opposed to surfing a buying wave which may – or may not – have any merit. Equally, social media posts should be cross checked with the latest information available on the company for a balanced view.”