It’s been a month since GameStop stock, Robinhood and Reddit captured America’s attention. Here are some good things that came out of it.
On the surface, there’s a lot to dislike about last month’s soap opera starring Robinhood, GameStop stock (GME) and the mushrooming crowd of social media-driven investors one of my colleagues labeled “pajama boys.”
On Robinhood’s side, there’s the fiction that offering its customers commission-free trading would make it easier for small investors to profit. In fact, the opposite is likely true, because by eliminating those fees, Robinhood encourages more trading, and that can lead to churning—lots of activity that achieves minimal progress.
On the side of those “investors” (in reality most are traders), there are the cheerleaders that found a stock that was heavily shorted and then used social media (mainly Reddit) to incite other individuals to buy up the stock (eventually pushing it to unsustainable heights) in an effort to hurt professional investors—“the big boys.” Hurting someone else is a terrible reason to invest.
And in the background, there’s the broker-dealer network that required Robinhood to put up more cash to cover potential losses, an unexpected demand that led Robinhood to temporarily shut down trading in GameStop stock. Yes, the broker-dealer was just practicing good risk management, but it doesn’t seem right that the little guy was the one who was inconvenienced—or worse.
Still, I see numerous good outcomes from the affair.
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First, in the wake of the testimony of the involved parties in Washington, I expect some kind of regulation that will tip the scales a bit more to the side of the individual investor. Already, Robinhood has modified its options trading screens in an effort to better educate its users.
Second, I expect the movement to democratize investing (one of Robinhood’s stated goals) to grow. Already, the firm’s zero-commission model has led other brokers to cut their fees to zero as well. The difference is that the older firms are making money from the big deposits their customers hold in cash. Robinhood, lacking those big cash deposits, gets paid when its customers trade, and that’s a bad incentive. In a frictionless world, customers who recognize this might transfer their assets out of Robinhood to another broker. Trouble is, Robinhood assesses a fee of $75 for that.
Third, and most important of all, I expect that the wave of traders who pushed up GameStop stock (as well as those who rode it back down) will work, over time, to improve their education about how the stock market really works. Call me an optimist, but I have great confidence in the ability of education to bring about positive change.
What Robinhood Investors Should Do Next
As I write, Rocket Companies (RKT), the leading mortgage originator as well as the owner of Quicken Loans, is the latest target of the Reddit trading crowd; it’s zoomed from 20 to 43 in less than a week. Of course, as with GME stock, this won’t last. And as with GME, those who were late to the party will lose money.
A strategy that works much better for the vast majority of investors is long-term investing. Trouble is, long-term investing doesn’t deliver the adrenaline rush that comes from watching your stock gap up in response to social media posts. And it doesn’t bring the camaraderie among fellow investors/traders (admittedly anonymous) that the Reddit/Robinhood crowd enjoy.
But if you truly care about your financial future, you’ll realize that investing is not a game. It isn’t meant to replace poker games or sports betting or visits to the casino—all of which have been in short supply thanks to the pandemic.
Investing is serious business—and it should be treated as such.
In fact, the original investment bible Security Analysis, published by Graham and Dodd way back in 1934, explained, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
They go on to explain that an investor may be defensive, in which preservation of capital is of utmost importance, or he may be “enterprising” or “aggressive,” in which case he strives a bit harder to increase his principal—but in both cases he does his research thoroughly and thus is well-informed about the prospects of his investments.
The Best Way to Learn About Investing
I was lucky; my father was a passionate investor who focused on growth stocks and he was happy to share his passion with others—which is how the Cabot business got started over 50 years ago.
But there are plenty of other ways to learn.
You can read books. Some Cabot favorites can be found in this story on “The 7 Best Stock Books to Read this Year.”
You can learn more about the value of charts. One favorite Cabot source is NewHome.com, by the people who publish Investor’s Business daily.
And of course, you can become a regular reader of the advice published by any of the Cabot analysts, focusing on growth stocks, value stocks, options, global stocks, small-cap stocks and even marijuana stocks. There’s truly something for everyone. You can browse through all our investment advisory options by clicking here.
So Where is GameStop Stock Going Next?
A month ago, when GME was trading at 100 (down from 483) I did a poll of the 11 analysts at Cabot, asking them to predict (individually, not as a crowd) where GME would be at the end of June, and at the end of December.
Their average guess for the end of June was 72 (with a median of 50), while their average guess for the end of December was 34 (with a median of 31)—though one analyst predicted that GameStop would be acquired by year end, at 52.5.
Additionally, one analyst (our growth stock expert Mike Cintolo) predicted a Phoenix formation, in which the stock would experience a temporary rebirth that would take it to 185 before it collapsed again.
Well, last week the stock popped up to 184.7 (kudos to Mike!), but that was short-lived, and now it’s drifting lower again, and the odds are extremely high that it is going to 70—and then even lower.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More