The Story of GameStop Reminds Us There Are No Personal Finance Shortcuts
Many of today’s millennials and Gen Zers tend to blame their parents or the educational system for the lack of formal instruction in personal finance. Even something as simple as getting a loan from a Singapore moneylender will present you with several options. It takes a certain level of financial literacy and awareness to choose terms that best suit your needs.
Managing your finances is a complex personal skill. This high level of challenge is a key reason why so many people today struggle to make ends meet, sustain their preferred lifestyle, and build long-term wealth. And it also drives interest and increases the temptation of promised shortcuts or get-rich-quick schemes.
Recently, the unexpected surge in the price of GameStop shares has captured the world’s attention. As prices have risen by as much as 1,700%, some people have made millions overnight with ease. But the story ultimately serves as a warning to the layman.
The narrative of GameStop
Hedge fund managers and professional traders often engage in a practice known as short selling, or ‘shorting.’ This involves speculating that a particular stock is overvalued and will soon decline in price. They borrow those stocks from lenders, sell them to a buyer at current market prices, and repurchase them later when the price drops.
If the bet works, the trader has made an easy profit, often at a large volume. But if it doesn’t, they are forced to recover their positions by buying back those shares at a loss.
That potential vulnerability was seen as an opportunity for retail investors to exploit. Through Reddit, several individuals shared tips and planned moves to buy shares in GameStop, AMC, Blackberry, and similar beaten-down stocks. And the results exceeded anyone’s expectations.
The narrative is frequently portrayed as one of David versus Goliath, the everyday investor taking on Wall Street bullies. Many people are still smarting from the not-too-distant suffering in the Great Recession of 2008. Hedge funds make for a convenient villain, the retail investors a heroic, tech-savvy Robin Hood (ironically, the name of one popular trading app where these moves took place).
Madness and gambling
The problem with narratives is that they really have no place in any serious discussion of the economy or our personal finances.
If we could pick out patterns of cause-and-effect in the economy as easily as spinning a narrative, getting desired results would be simple. There would be no recession in 2008, and none in 2020, pandemic or no.
Economies are dissipative structures with a life of their own. They are subject to more simultaneously operating factors than anyone can process. Even professionals whose jobs depend on accurate forecasts and who use sophisticated algorithms get things wrong all the time.
The would-be Robin Hoods of the GameStop saga may be portraying themselves as trying to take down the establishment. But on a fundamental level, they are simply individuals making bets in a speculative mania.
There’s no difference between a retail investor and a professional trader. Both are essentially gambling on stock prices, except that the latter has access to considerably greater resources, insider knowledge, and AI-backed expertise.
Some hedge funds, such as Melvin Capital, have