by Baruch Labinsky
Who, apart from game enthusiasts and niche market players, had even heard of GameStop this time last year? Until it became the hottest stock in the universe! The recent GameStop frenzy brought back memories of the glory days of the dot-com era when the technology-based Nasdaq index rose five-fold, until the bubble burst in 2000-2001 and the market plummeted 77%, only recovering its dot-com peak in April 2015. In the 1990s people left their day jobs to start trading as they were sure they had discovered their way to a fortune in an ever-growing easy money trading environment. Today, unemployed or underemployed millennials are buying shares or partial shares through Robinhood (the new darling of the brokerage world), trying to make easy money by combatting wall street hedge funds.
For those unfamiliar with the recent excitement here’s a quick summary. Several hedge funds had bet on GameStop, the video game retailer, losing value by shorting the stock. The retail chain was losing money and planned to close 450 stores this year. As the short sales grew, individuals banded together, fueled by online sites like WallStreetBets and drove the share price up by 1,500% causing major losses to hedge funds. It has become a battle not dissimilar to that of David and Goliath with small investors pitting themselves against Wall Street.
Despite the fact that the GameStop story is an education about investing in an era of social media and apps, and the potential pitfalls of shorting a market, there are some striking similarities between it and the dot-com era. Both share the euphoric market atmosphere where almost every adult, regardless of age and profession, regularly discuss the market. This feeling of widespread market embracing is often a sign of the end of a bubbling market. I am not here to predict the market top as there are enough professional investors and prognosticators taking care of that. Instead, I want to address how the average long-term investor should be thinking about the recent market events and their impact on their investment plans. When choosing an investment profile, take a long-term perspective and expect the unexpected. While stocks have been known to crash and lose large amounts of value, history is not necessarily 100% indicative of what could happen. Extreme events are by definition, unexpected, so we need to expect potentially greater extreme events and conditions than we have been used to.
- Yes, markets do generally recover, but not all markets in all conditions (for example the Tulip mania of the 17th century, Wall Street crash of 1929, and the Rio de Janeiro Stock Exchange Crash of 1989 to just name a few). If your assets are exposed in a concentrated manner such that a major market collapse could ruin your financial plan, then think twice about whether you have too much money invested in the market.
- Ensure you have enough cashflow to weather any extreme event with an emergency fund, to give you enough flexibility to find the opportunities after the crashes.
- Invest long term on a consistent basis, during market downturns, like many Israelis do through their kranot hishtalmut and pension funds as it reduces risk and is often the best way to ensure long-term consistent returns through all market cycles, even if you are investing part of your money at market highs.
- Very few investors can time the market and know when to get out before a fall and therefore they shouldn’t try it. Instead, invest consistently at the correct risk profile (which is not easy for inexperienced investors to determine) in enough different asset classes (including but not limited to real estate, different currencies, countries) to spread out your risk.
- The opportunity cost of not investing can also be high. The average person needs to invest, and see long term growth in their investments to keep up with inflation. Investing needs to be done with long term vision and consistency. Seek the correct advice if you can’t decide how to structure things yourself.
Everyone wants to make that quick and easy buck (or million), but the chances are it won’t happen so we need to plan accordingly. For all those who invested and made huge returns from GameStop there are countless more who lost money (the ones on the other side of the trade). Many small investors got caught up in the excitement without ensuring that the funds they were investing were part of their well-constructed investment strategy. And that unfortunately is a gamestopper.
Baruch Labinsky is the founder of Labinsky Financial, specialists in budgeting, retirement planning, investment management and pre- and post-Aliyah financial planning. Licensed by the Israel Securities Authority as a portfolio manager, Baruch specializes in working with olim who are looking to grow their wealth successfully, and is the author of the olim’s ‘bible’ “A Financial Guide to Aliyah and Life in Israel”. Contact us on 02 9910029 or email email@example.com.