What a crazy time to be alive! Not only are we still living through a global pandemic, working mostly from home, confined to our communities, pushing back weddings and other events, but we also got to live through a wonderful behavioral finance experiment. The GameStop experiment resulted in some people making big profits, some people losing their life savings (and then some), and a lot of people learning about the stock market and how it works. I was a finance major in college, thus the last science class I took was about 13 years ago when I was a senior in high school. One thing I do recall is that experiments always end with scientists looking back at the process and extracting information from the results. Here are five lessons I learned from the GME mania.
Financial markets can be impacted by social media
I don’t think there is any debating this although a debate could be had on how big an effect and for how long. A subreddit took an almost-bankrupt company’s stock and made it rally for absolutely no financial reason. Yes, the rally began behind the short squeeze theory but then continued on pure emotion and e-social pressure. R/WSB users kept convincing each other that buying more and more GME stock was a reasonable thing to do and people followed this, which further extended the rally.
The stock market is being played like a casino
Robinhood and other free and easy trading applications have allowed the masses the opportunity to invest in the stock market. This is a great thing; the stock market (and investing in general) should be easily and readily accessible to everyone. However, in my opinion, the problem is that these apps turn the stock market into a digital casino. The apps are so easy to use, and so pretty to look at, that users feel like they are playing a game. This is not necessarily a bad thing, when the end user is an 18-year-old buying one or two shares of Apple. It is a problem though, when the end user is buying boatloads of stocks with borrowed money. Short-term focused investing has been proven time and time again to be a sure fail. Investors should not play the stock market like a casino; it is not for placing bets. Just like in Vegas, you can be sure that if you gamble, the house will always win.
New investors rarely factor taxes into their decision
I was asked by someone if they should buy into GameStop when it was at $400 because “r/WSB said it was going to $500 that week”. This person wanted to “throw in $1,000, just to be in the game”. Of course, my answer was no but since this was an emotion-driven rally, I needed to make a strong case. So, I walked them through the facts: assuming they would sell at the goal price of $500, their 2.5 shares would have a gain of $250. This would be a short-term gain, so it would be taxed at their combined ordinary Federal and California rate of 33.3%. This means their after-tax gain would be only $166. At that point, the person convinced themselves that a $166 profit was not worth risking $1,000 of their hard-earned money.
My generation is desperately looking to hurdle the wealth gap
I don’t mean THE wealth gap, as in the general socio-economic gap that exists in our society. My generation (I was born in 1989) is desperately trying to bridge the gap between what we have and what our parents have now. We are trying to buy a house that looks like the one we grew up in, drive the same car, take the same vacations, etc. The problem is that we rarely take a step back and think about the how long it took our parents to get there and how it is okay if it takes us that long as well. Whether it be via GME stock, Bitcoin, or working an excessive number of hours, we are all searching for a financial wellness express lane.
People need advice
As a financial planner, one of the biggest takeaways from this whole frenzy for me was that a lot of really smart people fail to understand basic personal finance concepts. Not only that, but a lot of people dove right into this without fully understanding what was happening. Yes, investing is complicated. So are taxes and insurance, and so is estate planning. Yet, that does not mean that they are impossible concepts to understand.
Our job as financial planners and advisors is to break these concepts down into simple, actionable items so that you and your families can rest assured that every safety net is in place. Will we try to stop you from investing in the next GME? Probably, because it is most likely not the best place to invest your money. That said, if you decide to go against our advice, we’ll provide all the information that you should have to help you make the best decision for yourself. Most of the time, the information we provide and the education that comes with it results in our clients making the same decision we would have recommended.