Last month, a horde of new investors flipped the stock market rulebook on end and introduced a new way to play the game.
Steve Wyett, BOK Financial® chief investment strategist, said the frenzy around January’s meteoric rise (and inevitable crash) of GameStop stock taught investors some valuable lessons, changed some strategies and provided glimpses into the possible future of stock market investing.
The backstory
After learning that many hedge funds were betting on GameStop, a video game retailer, to lose value, a group of people banded together on the Reddit forum WallStreetBets to turn the tide. They were ultimately successful in driving share prices up by 1,500%—from a low of $17 to a high of $483—before the bubble popped.
The takeaway
“One thing we all need to remember is to speculate responsibly,” said Wyett. “Speculation has a different set of outcomes than investing and this was not investing, it was speculation.”
There’s nothing inherently wrong with speculation, he added, as long as people understand the big picture.
“There were a lot of people playing the GameStop scenario that really had no idea what the game was,” he said. “There were a number of people who couldn’t have identified what their potential upside was or the potential downside.”
Being able to define the risk and understand how money can be made or lost is all part of responsible speculation.
“Slow down, think about what you’re doing. Think about potential outcomes, good and bad. Then, if you’re still comfortable, proceed,” he said. “That’s responsible speculation.”
Many involved in the GameStop phenomenon learned valuable lessons about when to walk away and the danger of putting money on the line that you can’t afford to lose, Wyett said.
“Investors need to know their limitations. Just because someone else is doing it doesn’t mean it will work for you,” he said.
Same game—different strategy
While some suggest that the Redditors’ actions weren’t playing by the rules—others say they simply weren’t playing with the same outdated rulebook.
“Many investors stick to traditional strategies. But, many of the ‘rules’ pre-date this mass access through technology,” Wyett said. “Things are different now.”
The way people receive financial information has changed dramatically in just a few years he said, from monthly announcements, to a weekly newsletter, to daily news coverage to non-stop social media chatter.
Wyett said it’s less about shutting down one way of doing things, and more about understanding all possible options. The GameStop investors on Reddit used technologies not available a generation ago. They took advantage of real-time access to people with similar motivations and desires.
Outlook
Wyett doesn’t expect the incident to change the future of the stock market—or the strategy by hedge funds.
“The market was already in a huge state of change,” Wyett said. “GameStop was a symptom of the change; it’s not causing it.”
Those changes include the democratization of the investment process, access to information, and access to the market as a whole.
One change possibly underway is how some investors employ a short-selling strategy.
“This could very well change the size of their short bets. Hedge funds are going to re-size to avoid getting caught in a short squeeze,” he said. “And it probably will change how they publicize the bets that they have on. They want to keep that information close to their chest, but it’s public information and they now know that people are paying attention.”
Like any other anomaly, GameStop will be difficult to replicate.
“More people are looking at the information and studying what happened,” he said. “The opportunities for that anomaly to produce that same outcome going forward are way less. It stops having the same impact on the market because investors and hedge funds change their behavior. Even people on these forums change their behavior.”
There are always anomalies.
“What they are and how long they last is ever-changing,” he said. “There is no single market anomaly that exists and allows investors to always make money. Anomalies appear, disappear and then reappear, so it can be said the markets always provide some level of opportunity.”
Wyett said moving forward, “we need to understand what part anomalies can play in our process—and what part they shouldn’t play.”
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