GameStop, and why ‘Fomo’ should never override investment discipline

The GameStop farrago is a timely lesson that ‘Fomo’ should never be allowed to override investment discipline, writes Annamaria Koerling

Earlier this year the integrity of financial markets was called into question when frenzied day traders banded together to bump up the prices of several stocks after noticing that hedge funds were betting against them.

The stock price of video games retailer GameStop jumped 1,700 per cent, prompting widespread, albeit temporary, bans on short-selling and trading. It eventually plunged 90 per cent from its peak.

While this roller-coaster ride may have been short-lived, several hedge funds were forced to crystallise heavy losses and were given a painful reminder of the rise of retail money. Some would argue that they got a taste of their own medicine. But for other institutional investors, this was an unexpected money-making opportunity.

BlackRock made more than $1bn on its holding of GameStop shares according to some estimates.

Readers of this column will know that I have written before about the growing power of the retail investor. According to an estimate by JMP Securities, brokerage firms added 10 million new accounts in 2020; the no-fee platform Robinhood experienced three to four times the number of app downloads this year.

Rich Repetto of Piper Sandler points out that daily volumes in 2021 are in the region of 15 billion shares a day compared with 7 billion in 2019, with a greater percentage of transactions accounted for by retail investors. Incorporating social media analytics such as Dataminr and RavenPack is rapidly becoming a prerequisite for institutional investors seeking to avoid being wrong-footed.

This, however, is not a David and Goliath story. At least, not one in which David vanquishes the giant.

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There have been many losers among small retail investors who have learned a costly financial lesson. The platforms have been accused of unethical behaviour by failing to allow retail investors to trade when they wanted to and, more generally, by turning investing into a game with user interfaces that encourage frequent and risky trading strategies.

It is all too easy for inexperienced investors to ‘bet’ on stocks they know nothing about, often with borrowed money they can’t repay. Much of the pain could have been prevented with a little more financial education.

But we cannot rely on the platforms to provide this; they are hopelessly conflicted. As my savvy 20-year-old daughter pointed out, they have no incentive to do so if it reduces their fees. And don’t think we can rely on regulators to stay ahead of all the new apps and social media platforms.

The salutary lesson, which applies to all investors, is not to allow ‘Fomo’, the fear of missing out, to override investment discipline. As Warren Bu ett said, ‘Risk comes from not knowing what you are doing’. Although some short-term speculators may get lucky, abandoning important principles (or never adopting them in the first place) and getting swept along by a tide of social media posts and headlines is a recipe for disaster. And if an opportunity looks too good to be true, it probably is.

The world appears to be changing rapidly. As many of us review our portfolios with a post-Covid lens from the comfort and confinement of our home offices it is easy to lose perspective. That fear of missing out on the emerging winners of the pandemic could tempt us into decision-making that is not totally dissimilar to that of the GameStop boosters.

Even usually disciplined investors can sometimes give in to herd instincts; we all want to invest in the next unicorn. In times of upheaval, it is all too easy to persuade ourselves that a different world requires a different approach.

The world and the companies which thrive in it may well be changing, however the disciplines needed as an investor are not. The old adage of caveat emptor remains as relevant today when looking at future-proofing your portfolios as it did in the 16th century when it was first used. Research, discipline and diversification remain key principles.

Self-awareness, too, is particularly important when confronted with uncertain situations.

Behavioural expert Greg Davies of Oxford Risk points out that human beings are capable of ‘creating highly bolstered edifices of nonsense’ to support what we believe. The more ‘facts’ we can marshal into the equation the more we can delude ourselves. This is part of the reason that the echo-chamber effect of social media platforms like Reddit can legitimise questionable ideas so effectively.

The whole GameStop farrago reminds me of James Montier’s wise counsel in his The Little Book of Behavioural Investing: ‘Success in investing doesn’t correlate with IQ… what you need is the temperament to control the urges that get other people into trouble in investing.’

Or as a friend with 30 years’ experience investing in China put it to me rather succinctly, ‘You don’t need to be clever to make money, just not too stupid. You always need to do the math.’