For the longest time, I thought GameStop was an intervention group for parents whose children obsessively play video games.
Bryce Sanders, the prolific writer of articles for our industry and presenter of advisor training, and my good friend, sent me the following email on the morning of Friday, January 29, 2021:
Good morning! Sal, I assume you are writing the Dunham Blog, "Why GameStop Proves You Need a Financial Advisor" at this moment. Reading your mind, people will learn:
- Clicking "I understand the terms and conditions" means you assume lots of liability.
- There is no investment objective titled "beating the hedge funds."
[he chose a different word for beating.]
- Investing involves assuming a degree of risk. People may have committed money they can't afford to lose.
- Investors might have not realized how much they can lose if it goes the wrong way.
- Hopefully, someone hasn't told these folks "It's a one-way bet."
- People leveraged on margin might find themselves owing money.
- "Paper profits" require a buyer to take the shares off your hands when you want to sell.
- "Pump and dump" might reenter the vocabulary.
- Investors actually drove up an Australian mining stock with the same symbol (up 50%) thinking they were buying GME.
- Where were the Robin Hood compliance folks?
Once again, Bryce nailed it. He was correct in assuming I would be mid-writing as the news of GameStop continued to grow. Fortunately, his message provided just the insight I needed, in a clear and concise format.
Lessons Learned from GameStop
Sanders’ points accurately summarize the lessons that can be learned from GameStop. He emphasizes the weight behind fine printed terms and conditions and notes that investing always assumes a degree of risk. Furthermore, borrowing money to partake in investments can increase the amount owed in the long run.
Paper Profit & Pump and Dump
He also brings up the important topic of paper profit. Making a profit on paper does not always reflect the final outcome. The shares must still be sold, and to make gains, they have to be sold for more than their purchase price.
Investopedia defines a pump and dump as “a scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements. The perpetrators of this scheme already have an established position in the company's stock and sell their positions after the hype has led to a higher share price.” As Sanders hypothesized, some have called the surge in GameStop’s stock a pump and dump scheme.
The GME mix-up that Sanders refers to is reminiscent of the “Zoom” confusion of March 2020, when investors repeatedly confused Zoom Technologies with the widely-used video meeting platform, Zoom Video.
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