Whether you agree with it or not, you have to admit that there’s something inspiring about what’s going down with r/WallStreetBets’ gamification of the GameStop stock. This rag tag collection of folks in a subreddit decided to stick it to Wall Street by buying up a stock that was pronounced dead and largely shorted by brokers. The investors’ all-at-one influx of money fully resuscitated GameStop, transforming it into a Fortune 500-level company in roughly the span of a day. The investors, some of whom stated that they borrowed money from family or took out funds from their 401ks, made oodles of cash. Some even became millionaires, or close to it, after just one day of trading.
Wall Street is pissed. Those that see the hypocrisy in that — hedge fund outsiders joining the club without an invite to do what insiders do day in and day — had a good laugh. But while the entire episode will make for a fantastic movie (it has all the narrative elements: a crew of underdogs, a solid nemesis, a crazy plan that just might work, and a number of twists and turns along the way), it certainly shouldn’t serve as inspiration to withdraw your entire 401k and throw it all on Robinhood.
During the pandemic, interested day traders swarmed to brokerage houses. Such places like Schwab, E-Trade, and Robinhood saw as much as a 170-percent spike in the first quarter of 2020. A large share of these new users were younger wealth-seekers. While low interest rates, a brutal economy, and staggering unemployment rates certainly makes bellying up to the stock market and throwing a few bucks on some shares understandable, the truth of the matter is that, while it’s certainly possible to make a killing on Robinhood and other such investment apps, it’s far more likely to not.
The allure of the upside is certainly real. Who wouldn’t want to be one of these folks with the stomach to spend five grand on GameStop, trusting that other message board investors would strategically do the same? That’s one of the myriad the stock market is so enthralling. But to think any stock purchase is a surefire win is often to set oneself up to be very disappointed.
There’s just so much that could go wrong. Consider this: A 2010 study by Brad Barber at the University of California-Davis found that, factoring in transaction costs, only one percent of day traders generated strong gains on a consistent basis. And if you’re thinking about betting big on so-called meme stocks because it worked out this time, there’s no certainty in anything. Even with GameStop, the investors who made the group decision to buy are likely in for a rude awakening, even if regulators decide to not do anything about the fact that there was coordination between traders on the message boards.
“These individuals basically stormed the castle,” marketing guru Scott Galloway told New York Magazine about the GameStop situation. “But if you look at a stock price, and you look at its valuation, which is the link between the stock and the actual fundamentals of the company, that curve is bent and jagged and unpredictable. When there’s a reattachment of their equity to the underlying fundamentals of GameStop, they’re all going to look at each other and realize that they’re about to be slaughtered.”
The truth of the matter is that betting on stocks is just that, betting. For anyone dipping their toes into the day-trading market it’s extremely crucial to not throw in any money you’re not willing to lose (and don’t ever bet with essential money), to think hard about and define what you’ll see as success early on, to think in the long rather than short term (you’ll likely get walloped by short-term capital gains rates) and, importantly, to know when to cut your losses. (You get more tips here)
As financial journalist Daniel Kurt previously wrote on Fatherly, “a lot of investors see stock-picking as akin to playing the lottery — if they get lucky and hit on the next Facebook or Netflix, great. But, really, it’s should be about having fun.”
Fun is a relative term. But if you have some money laying around and want to throw it in Robinhood, do it for the lolz, and be shocked if money is made. You might get lucky. You probably won’t. But, hey, that’s gambling.