Hope Won’t Make GameStop Go Up

Everyone already knows this but having watched the euphoria around GameStop
GME
GME
over the past week or two, I think it’s worth reiterating. Hope is not an investment strategy, getting rich quick usually doesn’t work, and internet forums aren’t the best places to get financial information.

To be clear, I’m not looking down on retail investors or defending the hedge funds who were on the other side of the GameStop trade that’s dominating market news. Investors on both sides took risks and took losses when the trade didn’t go their way. Rather –what I’m really trying to say to everyone out there who’s looking at the news and wondering if they should be buying GameStop or anything else being pumped up irrationally – please, please, please be careful. The opportunity to make some quick gains isn’t worth the risk when share prices are disconnecting from the underlying businesses like this.

Yes, there will be some people who make money during the wild market moves and there will be a lot of people who are tempted to jump in and pursue some short term profits – but at the end of the day there are also going to be a lot of people who lose a lot of money. This has happened before, and it will probably happen again.

Think back to the tech bubble in the late ‘90s. Companies saw their share prices disconnect from the underlying fundamentals of the businesses and rocket higher week after week. A lot of people made money! But then, when prices finally started to reconnect with the underlying intrinsic value of the businesses, people lost a lot of money. To put it simply – the bubble popped and a lot of people suffered.

The losses you incur on a volatile trade like what we’re seeing with GameStop and other similar names can be hard to recover from. Remember the math around losing and what it takes to recover from a loss. A 10% loss requires you to earn 11.11% to get back to even. A 25% loss requires you to make 33.33% to get back to even. The more you lose, the greater the gap is in how much you need to recover in order to just break even.

So avoid the hype, avoid the crazy valuations and exciting chatter. There are plenty of other companies out there that look investable right now, so don’t get caught up on something just because it’s a headline.

I mean come on – it’s earnings season. Companies are giving real updates on their businesses; more than 300 including big names like Alphabet and PayPal
PYPL
reported this week alone. These are concrete numbers, actual performance metrics and outlooks you can build an investment thesis around. None of it is certain – you can definitely still lose money buying established companies, but your odds are probably better than if you’re trying to time a euphoric trade that everyone on Reddit is crowding into.

Investing Themes Worth Investigating:

The first theme worth investigating is the trend towards socially responsible investing, renewables, and innovation. The whole space is growing quickly, and the green aspect of it is potentially the most exciting for investors. New innovations in semiconductors, battery technology, autonomous driving, and more are disrupting existing business models and creating significant investment opportunities.

Plus, not only is the space rapidly catching the eyes of investors, it’s also becoming more popular with politicians. We expect strong support for renewable initiatives, new infrastructure, and other green technologies to come out of a Democrat dominated Washington D.C. With money pouring into the space we think there will be opportunities that astute investors will be able to take advantage of.

The second opportunity out there worth considering is the reopening trade. Covid-19 has ravaged the economy and while the data for Covid-19 vaccines has been impressive, the vaccines are being distributed slower than a lot of people expected. This has led to dips in a lot of economically sensitive names. These could be buying opportunities if the companies whose shares are struggling can hang on a little bit longer before they get back to business.

Think about airlines, hotels, consumer names, companies that people want to spend money on when they get back out into the world. That desire to spend is there; we’ve seen some payment and transaction companies report great numbers, and credit card balances look healthy, so really we just need people to have the opportunity to spend. That opportunity is coming and there are a lot of companies who stand to benefit from it if they can just hold on a little longer.

Bottom Line:

Regardless of how you choose to invest, be careful in who you listen to and where you get your information. Have a plan, diversify your risk, be patient, and let time work for you.