3 Investing Lessons from the GameStop Fiasco; 5 Stocks with Much Better Long-Term Potential

GameStop, GameStop, GameStop! That’s all the news channels—even those that rarely talk about stocks—have been buzzing about for the last couple of weeks. The whole situation just makes me mad: It’s a prime example of hype that ends up hurting the little guy—the retail investor. And there are some very important investing lessons to be gleaned from this fiasco.

You know what happened. A group of young investors got together on Reddit, on a WallStreetBets (no relation to my Wall Street’s Best investment newsletters) chatroom and decided to take the short sellers of GameStop (GME) down.

As of January 15, the number of GameStop’s outstanding shares was 69.75M and the short interest was 61.78M. You must agree, that’s a lot of short interest!

A quick review on short selling. It simply means that lots of folks on Wall Street decide that the future of a stock doesn’t look so good, so they bet that’s it’s going down. To do this, they borrow the shares to buy the stock at what they consider today’s inflated price. Then, if/when the stock declines in value, they buy it back at the lower price, return the borrowed shares, and make a profit on the difference.

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You see, GameStop hadn’t made any money since 2018, and the Wall Street crowd didn’t see that improving much, with gaming mostly moving to the Internet. They felt that GameStop—a multichannel video game, consumer electronics, and collectibles retailer in the United States, Canada, Australia, and Europe—would continue to lose market share. And since earnings are the main driver of rising stock prices, and GameStop wasn’t showing a lot of earnings prowess, shorting made sense—although the level of shorting was pretty crazy, in my opinion.

WallStreetBets’ strategy, on the other hand, was to push the shares of GME up, forcing a “short squeeze,” with the short sellers facing huge losses if they “covered” their shorts by buying the shares back at the inflated price. WallStreetBets traders started promoting the GME shares, and sent them up to almost $400—from the $10 where the stock was trading just a few short months ago. Normally, the shorts would buy back the shares to keep from losing even more money. But in this case, they mostly held tight, figuring this would be a temporary situation. By January 29, it was estimated that if they did buy the shares back, they could lose almost $20 billion.

But most of them didn’t. Instead, it was the young investors who rode the shares up who lost their shirts. It was reported by CNBC that one investor lost $13 million.

3 Investing Lessons GameStop Taught Us

There are lessons to be learned here. I don’t want to beat a dead horse, and on these pages this week, both Jacob Mintz and Tim Lutts wrote great articles about this situation. Jacob talked about the hedge funds that had to shore up capital in the wake of their short bets, and how the overall situation caused unneeded market volatility. Tim has deep experience in the markets, and in his article, he noted that this isn’t the first, nor will it be the last, instance of mania in the markets. I heartily agree with both of them.

As for the investing lessons, here’s what I hope will be taken away:

1. As Tim noted, a lot of the folks participating in the hype were newer investors, and unfortunately, they were led like lambs to the slaughter. The markets are pretty sophisticated, and efficient, and the more you know about them, the better your long-term returns are going to be. So, first things first—start learning.
2. Ignore the hype and mania; the only people who get rich in those phases are the first ones in and the first ones out. Over my years in the markets, I’ve seen a few manic stages, especially the tech boom and bust of the late 1990s and the hysterical subprime mortgage craze of the early 2000s. Millions of investors lost everything. Just remember this: If it sounds too good to be true, it almost always is.
3. Investing is a long-term game. That doesn’t mean you can’t trade stocks (as long as you are educated about it) or can’t speculate on some potential 10-baggers. But the majority of your portfolio should follow your long-term plan, and not be based on “what’s hot today.”

5 Stocks that Actually Have Staying Power

I’ll finish off by saying that there are plenty of stocks to buy whose earnings are rising, making the stocks potential candidates for your portfolio. I’ll leave you with just a few that I reviewed this morning which have some of the highest five-year earnings growth rates in the S&P 500.

As always, this is just a starting point—just a few ideas to research and determine if they fit into your overall investing strategy and goals.

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