GameStop Revisited

A couple of months ago, I weighed in the GameStop controversy that was all the rage that week. Briefly, a down and out retailer of video games had seen its stock rise from less than $10 per share to nearly $350 due to a once-in-a-lifetime short squeeze of some hedge funds who made a big bet that the stock was going down.

I confidently predicted how it would all end:

The way it always does — badly for most involved. A lucky few will make a killing but the rest will only be wiser for the experience.

Like any game of musical chairs, the music will stop and there will be a rush for the chairs. While the Wall Street short-seller pros may have already lost billions of dollars, the reddit amateurs will be next when they’re unable to cash out their investments during the stampede. Maybe this bubble is different, but I doubt it…

… Some combination of greed and fear could burst the bubble and however it happens, I’d guess the stock price would eventually return to roughly where it was when the lunacy began.

How did I do?

For a fleeting moment, my financial acumen and predictive powers were rock-solid. Soon after I wrote those words, the stock collapsed from the $300s into the $40s and appeared to be heading to $10 just as I had foreshadowed. I was feeling omniscient.

But a funny thing happened on the way back to $10 per share.

It reversed course and with some zigging and zagging settled in around $190 per share. This past Monday, the company announced that they were going to do a secondary offering of 3.5 million new shares and anyone who’s taken Econ 101 knows that an additional supply of new shares for sale should put significant pressure on the stock price. How much did the stock tank on Monday after the stock sale news emerged? Not that much.

What are the lessons? Well, first, it’s always rejuvenating to have a good laugh at oneself (i.e., me).

More importantly, as Yogi Berra said, “It’s hard to make predictions, especially about the future.” The bigger lesson is that it’s a fool’s errand to try and outsmart the collective wisdom of the crowd even when it seems obvious that a stock may be wildly overpriced.

In my prior note, I also quoted Keynes’s famous quip that, “The market can remain irrational longer than you can remain solvent.”  Truer than I — or those hedge funds — ever knew.

I’m asked all the time about where I think the stock market or interest rates are heading and my answer is always the same, “I don’t know.”  I’m pretty sure that no one else does either.

Instead, it’s much better to pick the right asset allocation for your circumstances, diversify broadly, and minimize fees. When you check those three boxes, you can sit back and ignore the GameStop noise, be confident that your long-term investing strategy is sound, and find something else to worry about.