As I’ve been investing in shares for 34 years, folks often ask me about investments. Generally, I offer time-tested wisdom. For example, “it’s time in the market, not timing the market” and “investing isn’t day trading; it’s a minimum 10-year commitment”. One friend is so keen that we keep in frequent contact. Here’s the tale of his trip on the GameStop (NYSE: GME) roller-coaster.
Riding the GameStop roller-coaster
Like many millennials, my friend (alias ‘Tooda Moon’) got swept up in the R/WallStreetBets (WSB) Reddit revolution. Tooda joined WSB last September and started trading in January, as GameStop skyrocketed. Tooda backed several WSB ‘meme stocks’, starting with video-game retailer GameStop. Caught up in the GameStop short-squeeze frenzy, Tooda bought a few thousand dollars of stock. His punt was profitable, as he bought GME before the share price peaked on 28 January. Tooda made a great return trading in and out of GameStop. He also invested in two other popular WSB stocks, BlackBerry and Nokia. Across all three shares, Tooda made a net profit of $6,000. But then disaster struck.
GME’s meltdown
Having ended 2020 at $18.84, GameStop stock peaked at an incredible $483 on Thursday, 28 January. It then crashed hard. Friday, 29 January was GameStop’s last big day before financial gravity collapsed the stock. On Monday, 1 February, GME plunged by $100, followed by another $135 on Tuesday. In 48 hours, the stock had imploded from $325 to $90. Today, it trades at $43.80, down a further 51.3%.
On Friday, 29 January, Tooda showed me a further $1,700 profit from GME for the day. I begged him to sell, arguing that the stock had been artificially manipulated. I explained that, in 2020, GameStop’s sales had slumped by 30% and it shut 462 stores. Also, I argued that a market valuation of $22bn for a struggling retailer was wildly unrealistic. I valued the stock at $20 at most. I warned Tooda: “The trend is your best friend, until it’s your worst enemy”. I pleaded with him to get out, quoting Lord Rothschild: “No-one ever went broke taking a profit.” But, as GME’s stock cratered, Tooda ‘averaged down’ by buying even more.
Tooda’s $24,000 loss?
Eventually, Tooda invested his entire life savings (earmarked as a house deposit) into GameStop, more than $36,000. Screenshots showed he’d lost most of this sum, leaving him with just $12,000. I implored him to cut his losses, because further falls would follow. He ignored me and his losses mounted. On the Wednesday, this bubble burst — but in the best way possible. Tooda revealed that he had actually closed his real-money position on the previous Thursday. All subsequent GME trading losses were only in his virtual-trading portfolio. I was having sleepless nights worrying, so I was hugely relieved. It turns out that this was just a prank, as revenge for an earlier prank by me. Whoa.
What are the lessons here for UK investors? First, steer clear of manipulated stocks and bubble shares, because bubbles always pop. Second, if you want to try day trading, test it out in a virtual environment where you don’t lose real money. Third, day trading is fiendishly hard, but investing in great businesses isn’t difficult. That’s why Tooda is now building a share portfolio of quality UK companies that should do well as the economy recovers. No more crazy GameStop trading for him — except virtually, of course!
