Keeping Your Cool in the Meme Driven Stock Market

Keeping Your Cool in the Meme Driven Stock Market

The recent market saga associated with shares of GameStop is likely to become a cautionary tale for investors, according to a recent article in The New York Times.

“Game Stop has become a stock market phenomenon—an eruption of irrational exuberance,” the article notes, “that had nothing to do with its merits. The company is losing money, as you might expect when you look at its business model” of selling video games in a world when they can easily be downloaded. While the story has a “David versus Goliath element” —that is, a group of individual traders gathered on a message board and collectively opted to make enough bets to thwart the stock’s short-sellers—this “let’s beat the big guy” attempt artificially inflated share prices to a level that exceeded intrinsic value.

And while it can be tempting to join in when people seem to be making money, the article advises against it, noting “at moments like these most long-term investors are usually better off if they stay sober and avoid the urge to make quick profits. A better option would be salting away money in dull, well-diversified stock and bond portfolios, these days preferably in low-cost index funds.”

“Trading in stocks like GameStop is the last thing people should be doing,” asserts former Merrill Lynch chief investment strategist Richard Bernstein. The article notes that most academics who study the subject characterize the activity as more akin to gambling than to serious investing, and although potentially profitable is also dangerous. “For many people,” echoed Columbia Business School professor Ciamac Moallemi, “this can only end badly.”

The article concludes: “The great temptation in a rising market like the recent one may be to buy soaring stocks, for fear of missing out on easy profits. The temptation during severe downturns, like the one a little more than a year ago, is to sell your holdings to avoid big losses. Setting a steady course and sticking with it for many years is a better approach.”