[NOTE: I started writing this last Friday when GameStop closed at $325 per share. As of publishing today (Wednesday) it’s down 70% to $95/share.]
As you’ve probably seen over the last few weeks a bunch of “investors” on Reddit decided to bid up the stock of GameStop. And they were so committed that they actually succeeded.
GameStop was trading at around $17 per share when it all started. As of the close today, it’s STOCK is now worth $325 per share – a 1900% return in just 3 weeks!!!
Notice I said the “STOCK” is worth that much. The company, however, is not. And therein lies the lesson.
Two ways to make money in the stock market
- Invest – Buy the stock of a company that’s producing goods and services that the world needs and wants. As the company adds value to our lives, they add value to their company and therefore their stock price.
- Speculate – Buy something that someone else will pay you more for. Gold is a good example of this one. Gold itself holds no value. You can’t use it to make things and the price of gold is completely dependent on what people think it’s worth. (Bitcoin also falls under this category.)
How should we invest?
There’s only one way to invest. Anything else is speculating.
We only invest in companies (and therefore stocks) who are adding value to their companies and the world and the shareholders.
Speculating that someone else will pay more for our stock later (we hope) is not investing. That’s just Vegas with better odds. (Which is fine for fun money in your play account, but not your serious money.)
The hard truth about GameStop
GameStop the stock is now worth WAAAY more than GameStop the company. And the people who made money in GameStop will likely lose it just the same.
As speculators take profits, they’ll sell it to the suckers who missed the boat and didn’t realize the party’s over. And then just as quickly as it went up, it will likely crash.
And instead of the SEC worrying about new regulations about how to prevent a massive bid up that hurts the shorts, they’ll be back to protecting Joe Schmoe who didn’t understand the rules of the game a lost a ton of money.
The lesson from GameStop
Only invest in companies that are adding value. That’s how Warren Buffet invests. And if it’s worked for the most successful investor in the history of the world, then it’s good enough for me.
Something tells me Warren Buffet didn’t buy GameStop.
Leave the speculation for other people (or your play account).
