In the past couple of weeks, we’ve gotten a number of questions (and seen many news hours) devoted to GameStop. What’s going on, what does it mean, and should you be concerned?
In short, the heart of the situation is that a group of individual traders, influenced most notably by the social media platform Reddit, devised a plan to bid up certain stocks that were carrying large “short” positions by institutional investors. The idea was to flood the market with buy orders, bid up the price, and “squeeze” those who had bet against the stock. They, in turn, were forced to buy shares to cover their short positions, and it drove the price even higher. Others, both individual and institutional, joined in, and we had the sensation known as GameStop.
When it was all said and done, a stock that started the year around $19 shot as high as $483.
Long-term investors need not fret
As you might expect, the momentum that drove GameStop up—the stock gained 1,700% within the month of January—lost steam pretty rapidly. On February 2nd, GameStop dove back below $100, and we can only imagine that many late buyers were burned.
While the short-term volatility was disruptive, in the sense that it occupied a lot of media time, we don’t believe that this is a demonstration of any kind of weakness or systemic change in the markets. In fact, they continued to work: Robin Hood’s decision to halt trading was due to collateral requirements in the face of volatility, so that orderly trading could be maintained.
Of course, there is likely to be regulatory scrutiny over what happened, and the SEC has opened an investigation already.
However, from our point of view, these events mean little to the long-term investor. At the end of the day, market shocks can and do happen (many of you might remember the “flash crash,” for example) but markets continue to function.
We make investment decisions based primarily on fundamentals, and this was a great example as to why that approach makes sense: the noise from short-term events can be loud, but that doesn’t mean it’s meaningful.
If you have any questions about GameStop or similar situations, please feel free to reach out!