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February 4, 2021

GameStop or Game Begin? Investors Beware


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‘To Short or not to short, that is the question’ – Weary GameStop Hedge fund managers

Investing, when carried out haphazardly, often leads to luck or loss, but rarely stability. As a new year begins another ripe example from a long list of ‘sure things’ presents itself on the world stage.

This month’s hopeful is GameStop, an American video game and electronics retailer, who had up until August 2020 been only a forethought in the world of gaming having not adapted to the prior five-year explosion in popularity of free gaming apps played the world over on mobile phone devices.

Then the unexpected happened. A well-established Venture capitalist, in the three months that followed, went on a shopping spree amassing a 13% share in the company and along with it, during the interim, announced his intent to morph the flagging retailor into a credible rival to none other than Amazon of course!  The share price went north, going from $9.47 on September 18th to $18.84 on December 31st .

And then there were two, and three..

A legion of small investors, using the Robinhood trading app (and armed with the ‘movements’ Bear and Diamond hand emoji’s in their virtual back pocket as those portrayed in the insight image for this article), readily took the Amazon bait and scrambled to purchase the stock. This understandably caught the attention of Wall Street who saw an opportunity to ‘Short’ the stock, and short it they did, believing such a rise was momentary and destined to fail (A ‘short’ seller is someone who borrows shares on a stock and then sells these borrowed shares to buyers willing to pay the market price. As the stock price falls, the seller would then buy it back for less money and pocket the difference). Like all good dramas there is a caveat however, if the share price kept rising it forces the seller to buy back shares to cover the potential loses.

The stage was set. Who would be right? Who would be wrong? Where was the stability? The Long-term minded investor, the one who understands that time and not timing is what makes for prudent investment decisions, had long left the scene. This was a ‘blackjack moment’ that only ‘winners’ understood, see.  In this tit-for-tat battle it transpired that the little man, Mr Small ‘investor’, took a scalp by ratcheting up the share price and thereby squeezing out Wall Street who wrote off some of their loses. On January 27th, 2021 when nothing could derail the small investors momentum GameStop was trading at $347 per share. At the time of writing this insight on 3rd February, the predictable has become a reality with shares trading at $92, a 72% collapse in share price from seven days prior.

What can we learn from all of this?

The best way to manage investment risk is not to focus on investments but rather to draw up a personal financial plan. This way you identify what income is needed to meet future intended expenditure such as capital items or normal family payments. In our own client solutions, we advise clients to look beyond the moment and plan for the worst-case scenario. No job, illiquid investments, no rentals from investment properties, increased interest rates and increased expenses. All of which can occur at the same time. Just remember the collapse of the Celtic Tiger.

So, what game are you playing?

If your conviction is based on sound investment fundamentals, ones that centre around individual financial goals for you, your family, and your retirement, you will be unmoved by the latest ‘pop’ and ‘fizz’ in the marketplace and will instead be broadly diversified to ensure your ‘blackjack moment’ is not instantaneous but brought about through careful planning and the revisiting of your blueprint, year in and year out.

It’s time someone let the GameStop, and we let the real ‘game’ begin.

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