Two weeks ago, I got a call from one of my clients. He owns almost 40,000 shares in an unknown local technology company that he bought from the founder many years ago. He paid around $20,000 for it at the time. The stock trades on the pink sheets, meaning it’s unlisted with minimal trading volume. “Google it,” he says to me over the phone in bewilderment. I quickly scan an article about a high profile tech billionaire who is touting a new app for messaging. The investing public misunderstood and thought he recommended the sleepy stock my client owns, whose ticker is similar to the messaging app’s name.
I shift to my TD Ameritrade trading software and type in the ticker. I can’t believe what I see. Millions of shares of this stock are trading in a relatively tight spread at a price that puts his initial investment just shy of $1.5 million, all driven by investor stupidity.
At its core, the recent run-up in GameStop is more of the same, except a little more organized and a lot more dangerous. With a kind of “stick it to the man” angle, social media boards are encouraging individual investors to band together and drive stock prices up against Wall Street short bets. Called a “short squeeze,” this strategy forces short-sellers to close their positions at a loss.
I’m not a big fan of this type of activity. I don’t like it when powerful hedge funds try to manipulate stock prices for personal gain. Just because the message board pundits on Reddit are not wealthy insiders, it doesn’t make it okay to manipulate stock prices for the same selfish reasons. And believe me, they are doing it for personal gain, not for social justice or any other reasons they may state, or you may think.
Don’t expect to make a quick fortune just because you see others doing it. My client held his position for almost 25 years before his windfall, so his gain wasn’t quick and easy by a long shot. Unfortunately, the very predictable outcome from this GameStop mess and others like it is that those individual investors hoping to win big will keep betting until the day the music suddenly stops, and they are left standing without a chair. Don’t let that be you.