The week of January 25 – 29 was an interesting week for markets that is for sure. But you wouldn’t have known how interesting it was just by looking at broad stock index performance. Sure, most US stock indices were negative for the week (as show in the chart below: -3.73% for SPY = S&P 500 / -3.69% for IJR = S&P Small Cap Index) but that happens from time to time. What was notable from last week was the surprising performance of of two small, somewhat obscure stocks: GameStop (+323%) and AMC Theaters (+200%).
GameStop (yes, the store that sells video games) and AMC Theaters are not what you would typically call compelling investment “story” stocks in today’s world. Each company has struggled mightily in recent years and both certainly have their challenges.
However, with that said, each company’s stock price has been on a tear recently. Much of the recent run up in the stock price for both appears to be the result of a historic short squeeze (details: short squeeze) driven by retail day-traders following a 2.5 million+ member trading forum on an app called Reddit. These Reddit followers have used their social media acumen to shake down some major wall street hedge funds and make some major news headlines.
Because of these headlines, we felt it was a good topic to cover in this post. Below are three takeaways that we think longer term investors need to keep in mind when considering last week’s GameStop/AMC short squeeze news:
The history of the stock market is full of stories showing a manic run up in prices of individual stock names over short periods of time. Some of these euphoric increases were the result of short sellers getting squeezed while others were the result of good old-fashion greed. In addition to GameStop last week, history shows us that cannabis stock Tilray and well-known global car maker Volkswagen AG were both subject to a massive short squeeze in 2018 and 2008 respectively. Additionally, one doesn’t have to look to hard to find a number of examples of manic buying of individual “.com” stocks in 1999. The moral of the story is manic buying happens for a number of different reasons. GameStop is certainly not the first, nor will it be the last. However, even though manic buying is part of market history, it doesn’t mean that you should participate. The degree of difficulty in attempting to anticipate short-term market movements has historically been a high bar to clear. Usually, the best bet is to not even try.
Trading stocks has gotten much easier and much, much cheaper over the years as a result of mobile trading and commission-free brokerage apps like Robinhood. Couple these with the fact that many people are spending more time at home with more time on their hands due to the pandemic and now you have the recipe for a perfect storm retail trading storm. Obviously, some have taken to day trading to fill their time. While some fortunes have been made by day trading, many more have been destroyed. Day-trading is certainly an intriguing thought. Why not try to make a quick buck and sell before the music stops? Unfortunately, trees do not grow to the sky and neither do stock prices. In this party, the D.J. doesn’t announce when it is the last song. You don’t want to be the one dancing alone.
Last week’s flurry of return spikes for GameStop, AMC and a handful of US stocks captivated investors and noninvestors alike. In response, the national media and social media are chalked full of conspiracy theories and “things you should do” stories. The major media outlets are portraying last week as a David versus Goliath story, instead of what it is, an interesting investment story. On social media, popular taglines: like #HoldTheLine have attempted to re-enforce the idea that somehow the buyers of GameStop, AMC and other small company names are in it together and should not sell the stock on principal to stick it to the “man”. Both media outlets are attempting to pull at our emotions. When the media (mainstream news or social) is pushing emotion, it is usually best to tune out.
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