Observations And Lessons From GameStop

Courtesy of Charles Rotblut, CFA , who is the VP and Editor for American Association of Individual Investors (AAII).

Like many others, I’ve been watching shares of GameStop Corp. (GME) with a bit of disbelief. For those of you who have not seen the headlines, the stock’s price soared from a closing price of $19.95 on January 12 to an intraday high of $482.85 earlier on January 28.

 

The chart on the right shows the price action. It’s a three-month chart. I could have used a six-month, one-year, three-year or five-year chart. None would have looked drastically different because of the magnitude of the recent surge. GameStop has taken off like a rocket after years of trading below $25 per share.

GameStop is a good example of a lottery stock. The term is used to describe highly risky stocks with a small chance of a big return. As the name implies, there is a big element of luck involved in hoping to realize a gain on them. The video game retailer’s revenues and net income have been on a downward trend for several years. This is why GameStop has an A+ Investor Growth Grade of D. The company’s business model is facing the existential threat of a growing number of digital downloads of games. (The base version of Sony’s new PlayStation 5 console only takes digital downloads, no discs.)

Despite this threat, shares of GameStop have jumped due to a combination of herd mentality and speculation. A stock-trading group on social media platform Reddit is being particularly singled out by the media for driving this mania. Posters encouraged each other to keep trading and making bold predictions of where the stock is heading. It can be very hard not to act when others are claiming to make money, and the stocks they are talking about are making huge gains over a short period of time. The fear of missing out (FOMO) frequently crowds out a person’s ability to stop and ask objective questions. These questions include (but are certainly not limited to): “If most people think they’ll know when to sell, what gives me the confidence to think I’ll know the right time to sell before they do?”

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