Until last week, most people recognized GameStop, a retailer with 5,000 stores around the country, as the video game store their children or grandchildren dragged them into when they went to the local mall.
But the recent frenzy over the price of GameStop stock is an excellent example of how anybody can get burned when they make bets — instead of investments — in the stock market.
The story is tantalizing: A bunch of people on a Reddit.com message board, upon learning that large investors were betting that GameStop’s price would fall, bought shares in hopes that the price would rise.
There’s no telling how many people got in on the plan, but the strategy worked. On Jan. 12, GameStop’s price was $20. A week later it was $43. It peaked last week at $483 before tumbling down rapidly: Wednesday’s close was $92 — still way overvalued for a company in distress.
Large investors lost a lot of money as the price of GameStop rose. But it easy to see that many of the small guys who got in the game are now taking a hit as the price keeps declining. High-five to anybody who bought in early and then had the foresight to sell within a few days, before the price crashed.
It may take a little while, but eventually GameStop’s price will return to where it was in December, between $12 and $20. Only then will the episode be seen for what it was: a textbook lesson on what happens when a dangerous emotion called the Fear of Missing Out encourages people to treat the stock market like a roulette table.
To a degree, everyone is susceptible to FOMO, whether it involves fashion, cars, houses or money. And if somebody has found an easy way to play the market, why not get on board?
Why not? Well, because of the past few days watching GameStop’s price tank. Which points to the roulette mindset that can be so costly: Anybody at a casino can put a chip on a single number at the roulette table, but you literally have only one chance in 38 of winning.
News coverage of the stock market understandably tends to focus on stories like GameStop’s. The fact that an online message board spurred the buying made it more fascinating — although there is no way that individual investors stoked the price on their own. They had to have help from some big players who piled in when they saw what was happening.
Once things settle down, some people will be reluctant to invest in stocks, thinking that the game is rigged. They should look at it differently.
While it is certainly harder for people who trade every day to win consistently, those who buy into companies that do something useful and have a bright future usually do quite well — if investors are willing to be patient for a few years and let their companies grow.
If you doubt this, go to a financial website and look at a chart of stock market indexes over the last 50 or 100 years. Even with recessions and depressions, stocks regularly increase in value. Great success awaits investors. Bettors simply have to hope they’ve guessed correctly.