What really happened with Gamestop & what will the repercussions be?

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It started when GameStop’s fanbase identified that institutions were manipulating the stocks of the chain by selling more shorts with leverages than stocks that were available. They decided to fight back by pushing the price of the stock up.

Some of the retailers involved ended up making millions in profit, before this the average cost of GameStop stock was $20 and it went up to $450. One of the institutions involved in manipulating the market ended up having to be bailed out to the tune of several billion dollars.

Although we believe that the institutions were wrong in their manipulation, we find the lack of strategy used to fight back is concerning. One of our core teachings at Investment Mastery is not to let emotions coming into trading and investing, many a trader has suffered major losses because they have been ruled by their heart, not their head. It would be interesting to know, of the people who got involved…

...what their strategy was?

Was the result always to feel vindicated in their cause or were they trying to make money? To us, this has elements of a Ponzi scheme. Many people were encouraged to join through online forums such as Reddit and we would bet those encouraging others had already put money in.

The more people they get in, the higher the price goes and the more profit they make.

Many believe that the key to trading and investing is when to get in but it is actually when to get out. Looking at the GameStop chart, you can see people getting in and pushing that price up but what we can not seem to identify is a clear exit strategy.

(Photo Credit: NYTimes.com)

Since the rise, it has gapped own and the stock has dropped to around $60 which we predict will go even lower. With the cost of the stock declining, those who entered at the high stand to lose a lot of money. Somebody will be making money from this and it is the people making the price go down. It’s the institutions who, once again, are manipulating the stock and forcing the price down. This manipulation has forced people out of their long positions and forced them to sell at stupid prices.

This to us says that there was no exit strategy in place or any strategy at all. When entering the market, there are 5 things to take into consideration:

  1. When to get in
  2. What price to get in
  3. When to get out
  4. How much money to invest

Lets apply this to the Game Stop scenario…

  1. Where to get in – Before buying stocks, always look at the company’s fundamentals. With the global pandemic, GameStop, as a non-essential retailer, does not have good fundamentals. This is a short sell, used to add liquidity into the market. This also prevents the exuberance displayed in the GameStop chart.
  2. What price to get in – The price to get in was $20 but the chart shows people were still buying when it was at $450. Looking at the company’s fundamentals and previous prices, the company was not worth this, so why do people continue to buy when it was reaching this astronomical price?
  3. When to get out – To ensure you are in control, you should have a stop-loss in place to ensure minimal losses and risk. There does not appear to be a point where people were getting out.
  4. How much money to invest – Our rule is to never risk more than 1% of your portfolio so it would interesting to know how much people invested and what % of their portfolio they risked in this.

We would say it is too early to predict what will happen but the repercussions of this could be less selling short in the market which would be a mistake. It is not selling short that pushes the price down, it is just selling. People who got in around the $20 mark and then got out, yes, institutions put in and sold short, but a lot of people simply just got out.

It would be interesting to hear from people who made money from this and if they did have a strategy. From looking at the chart and seeing the conversations on forums, it would appear a lot of people joined to be part of the movement but trading with emotions at its core is a dangerous game.

This is not what we recommend, we always rely on our strategies and ensure we have a clear plan on how to invest, including the rule of never risking more than 1% of your entire portfolio.

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