What is going on with GameStop and how should I respond as an investor?February 9, 2021
As many of you have seen in the financial news within the last week(s), social media forums are having an increased influence on specific shares of companies or precious metals. We have had several of our clients as well as friends and family members ask us to explain what is happening.
For those who have not heard about it, here is a quick background: Hedge funds often have large short positions on companies they expect to decline in share price. To “short a stock”, means to sell it with plans to buy it back later; hopefully, at a lower price. These positions are public as large hedge funds are required to make their holdings known. Recently, forums on some social media platforms have taken notice and leaders of these are encouraging people to buy stocks of a few of these companies to run up the price and cause large losses for the hedge fund managers.
A few thoughts and reminders:
- When you are buying a stock of a company, that company does not receive any money. Stocks (after the IPO – Initial Public Offering) are traded on the secondary market. So, when you are buying a stock, it is like buying a used vehicle – the manufacturer does not get a dime.
- Use caution if your heart is attracted due to a quick gain or fast profit. Proverbs 13:11 says, “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it”.
- Understand how your investment creates wealth. If you are going to buy an investment, make sure you or your advisor knows how it works. In this case, with companies like GameStop, look at the underlying company you are buying, in this case GameStop had 3 years of declining income, increasing debt, and the increasing use of borrowing to fund cash flow. Proverbs 14:15 says “The simple believes everything, but the prudent gives thought to his steps.”
- Consider the ethical side of an investment decision not just the financial side. Contemplate questions like “Am I making the right investment choice if I’m hoping for the demise of another for the sake of personal gain”? Proverbs 24:17 says, “Do not gloat when your enemy falls; when he stumbles, do not let your heart rejoice.”
- Just like joining in partnership with someone in business – know what your exit strategy is. If you plan to get in on trends or investing in individual companies, know what your exit plan is. Do not buy based off excitement with no plan of when to sell after gains or losses occur.
- Seek the counsel of those whom you trust. Be cautious trusting your investment decisions to those you do not know.
There is nothing inherently right or wrong about purchasing stock in a company. However, we do know that every financial decision has more than just financial implications and it is good for each of our hearts to pause and consider the above thoughts before making any investment decision.