Power to the People? February 2021 Market Commentary

Stocks
By: Mark Paccione, CFA, CFP®, BFA™
5 Minute Read

Chances are you’ve heard about GameStop recently. Every family member and friend I spoke to over the past week had the same questions: What’s going on at GameStop? Should I buy GameStop? What’s a short-squeeze?

For those who missed the news, a group of retail traders on Reddit message boards decided to buy GameStop as it was a heavily shorted stock targeted by hedge funds and other institutional investors. People who short a stock are betting on a stock going down. Several hedge funds were betting on the stock going down as they believe GameStop may eventually declare bankruptcy due to the shift away from video game purchases in a physical store.

Similar to how Netflix and other streaming services led to the demise of Blockbuster, downloading games directly to a video game console like Sony Play Station, or ordering a game from Amazon could lead to the demise of GameStop.

The buying pressure by Reddit retail traders eventually led to a historic short squeeze, which is when a heavily shorted stock goes up and investors who shorted that stock are forced to buy back the stock, thus causing the price to escalate even higher.

What does shorting stock mean?

Shorting stock refers to selling a stock that you don’t own. If you short a stock, you believe you will be able to buy it back at a lower price in the future. Shorting stock is a difficult trading strategy because your maximum potential loss is unlimited.

If you buy a stock at $100, the most you can lose is $100. However, if you sell short a stock at $100, potential losses are infinite as stocks are not constrained by a maximum price. As a hypothetical example, if you short one share of stock at $100 and the stock goes to $300, you lose $200— 2x your original investment.

In GameStop’s situation, hedge funds were short a $4 stock that went to over $400. They were trying to make $4 and potentially lost $400. In fact, one hedge fund in particular had to be bailed out by other hedge funds.

What does it all mean?

A lot has been said about the GameStop situation, so much so that it seems to be 2021’s Rorschach inkblot test. Some see it as a classic David and Goliath story where small retail traders slay large powerful hedge funds, or maybe it’s more of a Robin Hood story of ordinary retail investors taking from rich hedge funds. Others see it as a sign that this is the late 1990s all over again, and we’re in a speculative bubble about to pop.

Maybe it’s more about the power of the masses and the decline of centralized power.

My initial take on recent events was that GameStop demonstrates populism is alive and well. In fact, many recent phenomena can be sewn together with the thread of populism: Bitcoin, SPACs, MAGA, BLM, Occupy Wall Street, and the Tea Party. These movements represent ordinary people who feel that their concerns are disregarded by established elite groups and institutions.

Like most things in life, GameStop’s “meaning” is in the eye of the beholder.

What does it mean for investors?

The real questions we must try to answer are the implications for investors. One trend we have written about in the past, relevant to the current situation, is QE infinity. QE infinity refers to the unprecedented amounts of fiscal and monetary stimulus that have been injected into the system since 2008 and especially in 2020.

In my opinion, GameStop occurred, in large part, because there’s been an enormous amount of stimulus put into the system and some of that stimulus ends up flowing to financial assets. The most direct link are stimulus checks sent from the federal government to U.S. citizens who then deposit some of the proceeds to their Robinhood, Coinbase, Square, or Paypal accounts. With many people stuck at home with unanticipated extra cash, why not spend time trading stocks like GameStop, or cryptocurrencies, like Bitcoin?

What portfolio actions should you take?

Bottom line: You do not need to be concerned about GameStop, Bitcoin and cannibus stocks, or a SPAC, or any other financial fad if you’re in a globally diversified portfolio that’s aligned with your long-term financial objectives.

At Curi Capital, we are focused on investing and helping our clients achieve long-term financial objectives; we are not short-term traders looking to make a quick buck by buying the hottest fad.

Our recommendation, as always, is make sure your portfolio matches your unique profile and is well-positioned to achieve your long-term goals without taking too much risk.

We are firm believers in behavioral finance at Curi Capital and recognize that most investors have biases that get in the way of investing. One such bias that we feel is extremely relevant: investment FOMO, or “the fear of missing out” on stock market gains. This can occur when watching stocks you almost invested in soar to new heights while you sit on the sidelines. Investment FOMO can make you feel anxious and depressed or that you’re falling behind your peers.[1] It’s hard to watch a stock or asset go up daily and not be part of the action.

Over the past year, we’ve seen a handful of investors become enamored with tech stocks, IPOs, Bitcoin, SPACs, and now GameStop. When these emotions and urges arise, ask yourself: “What is my investment philosophy?” Doing this may bring the present moment into perspective and help you remain true to your long-term plan.

For those investors who absolutely can NOT resist the urge to speculate, consider setting aside a VERY small portion of your portfolio, less than 3%- 5% (depending on your risk tolerance), for speculation. This tiny portion of the portfolio can be used to satisfy those urges with less potential damage to your overall portfolio.

Determine the amount you personally can afford and are willing to lose. One of two things will likely happen: either the speculation bucket will go to $0 and you will realize “investment gambling” doesn’t pay off in the long run, or the speculation bucket will not go to $0, and you’ll have a place to satisfy those urges. The key is to not put more money into your speculation bucket than you’re willing to lose if it does go down. That’s the price of bad bets.

Partner with Your Wealth Advisor

Before you take any actions, we encourage you to connect with your wealth advisor for a comprehensive look at your portfolio and your long-term plan. If you are interested in reviewing your portfolio, discussing potential actions, or exploring what Curi Capital can do for you, please reach out to a member of the Curi Capital team at 984-202-2800.

 Please note: This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Curi Capital is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about Curi Capital can be found in its Form ADV Part 2, which is available upon request.

 Past performance is not a guarantee of future results. All investment strategies have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

 

[1] Investing FOMO (Fear of Missing Out).

Mark Paccione, CFA, CFP®, BFA™

Mark Paccione is Curi Wealth Management, LLC’s, Chief Investment Officer, based in Raleigh, NC.

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