GameStop’s trip to the moon was a short-lived and dangerous path — especially for the average college student who’s just starting to invest.
If you’ve been on the Reddit front page in the past few weeks (or as long as you haven’t been living under a rock), you’ve probably heard about the Wall Street Bets subreddit (r/wallstreetbets) and the unpredictable price drama of GameStop stock. At first, the interest in GameStop was loosely motivated by fundamentals. Ryan Cohen, the founder of the successful online pet food company Chewy, joined the board in early January and investors thought that he could perhaps turn around GameStop’s brick-and-mortar business model and transform it into an online machine.
Then, Reddit caught on. Suddenly, buying GameStop became the newest trend and a variety of stock market mechanisms only interesting to business frat bros and finance Ph.D. students (if it wasn’t for this debacle, would anyone have heard of the gamma squeeze or the short squeeze?) came into play. For the faithful acolytes of Wall Street Bets, it was a “stick it to the man” moment when retail investors finally got the better of big evil institutional investors like hedge funds and banks with more capital, more manpower and more knowledge. In many ways, this episode mirrored the kind of political populism that yells power to the people without knowing the nitty-gritty details of the power. Only this time, it was in the stock market.
In truth, though, what happened was a lot more complex than that. Many hedge funds won, because they figured out the Redditors’ game and only a few institutions — the infamous example of which is Melvin Capital — actually lost. Robinhood, the trading app used by most of the Redditors, probably also won, since they make money off of each transaction. On the other side of the retail-institutional divide, quite a few Redditors seemed to have lost, based on the vitriolic anger when the stock nosedived. Even now, the negativity on r/wallstreetbets is impressive.
Bloomberg writer Matt Levine’s “boredom markets hypothesis” might actually have some explanatory power in these situations marked by what seem to be irrational calculations: Retail investors are stuck at home because of the pandemic and have nothing better to do. So, they buy stocks for fun. For the same reason, I’m greeted every day by a friend who never forgets to create a meme that riffs on “TSLA go up” (and go up it does). It’s striking to me that anybody in this position thinks they can beat hedge funds that put literal billions into analyzing every microsecond of a stock’s movements. To think “Chad” could win from their phone with a few hundred dollars is either naïve or impressively obtuse.
While stock market gimmicks are cool on the outside, the reality is that they’re unsafe investment mechanisms for the average person, and especially unsafe for the average college student who’s trying to build up some savings.
It doesn’t take an investment banker or even a Dyson student to figure it out. The reason is that our risk aversion should be higher. After all, most of us have very little income, less disposable income and even less to throw into the market. The downside risk of buying a highly volatile stock like GameStop is massive, especially for those who got in the game late and bought shares when the price was already rising. Getting caught in the free fall could have proven disastrous.
None of this goes for those who are sitting on thousands of dollars from their mommy or daddy or their trust fund, for whom the stock market is only a game. If you can afford to lose money and buying GameStop is really just the first part of the company’s name (a game), then by all means, go for it. It may not be smart, but it also doesn’t matter. You’ll only add fodder to the boredom markets hypothesis.
The flip side is the average college “investor,” who’s only starting an account for the first time and just trying to save some income from a summer internship or a work-study job. The first few months and years of any portfolio are important for building up capital and some market volatility could cancel out any gains. Or, in a worst case scenario, a portfolio overexposed to a single stock or sector could be wiped out.
I’m not giving any investment or legal advice. There are much more qualified individuals and better forums for that. But, my opinion based on this newest market saga is that looking for investment safety as well as slow and steady returns is the way to go. Whether or not you believe stocks and investing in a capitalistic system are ethical, the rule that, “There is no such thing as a free lunch” holds true: There is no way to “get rich quick.” If it sounds too good to be true, it probably is. The market’s penchant for wild swings will repeat itself as small groups of zealots find a new stock or new idea to fawn over.
This time, it was sold on Reddit and spread by word of mouth by a generation of people who didn’t know or care much about their money. This time, it took some money from a lot of people and a lot of money from a few people. Next time, who knows what contours the newest anti-institutional rage will take?
Darren Chang is a senior in the College of Arts and Sciences. He can be reached at [email protected] Swamp Snorkeling runs every other Thursday this semester.