If you are thinking of buying GameStop (NYSE: GME)stock, you are not alone.
Google searches for “should I buy GameStop stock” soared this week, and the stock name has trended several times in Twitter. A combination of a huge short squeeze and gamma squeeze caused the video game retailer’s stock to rise more than 2,000% this year, and many other heavily sold consumer stocks increased along with that, as AMC Entertainment, Blackberryand Express.
In one version of this story, a group of retail merchants chatting on the social media site Reddit faced Wall Street hedge funds and won. But for other retail investors in other versions, this story will not have a happy ending.
As exciting as the GameStop craze may seem, there is a simple reason for investors to avoid it and the other actions being squeezed.
Image source: Getty Images.
A zero-sum game
At best, the stock market is a vehicle for creating generational wealth that can benefit all participants. While there are always buyers and sellers, everyone can win if sellers are taking out long-term gains to use these funds in retirement, for example, instead of eating short-term losses.
But, at worst, the stock market is a casino, a giant group of gamblers looking to score a quick goal. Not everyone can come out on top in this case, and it quickly turns into a zero-sum game, with a winner and a loser in each deal. The risks are only exacerbated by options trading, which has driven much of the activity at GameStop and other restrictions.
When stock trading divorces the fundamentals, as happened with GameStop and AMC, buying them is no different than taking a spin at the roulette wheel. In doing so, you are essentially betting that someone will show up and pay more for that action. This type of speculation – when traders bid up an asset regardless of its fundamental value – is sometimes called the theory of the biggest fool, based on the premise that you can exchange those shares for some other sucker. This thinking is common in market bubbles.
Understand loss aversion
One of the most powerful psychological forces in investment and behavioral economics is loss aversion. According to this theory, developed by psychologists Amos Tversky and Daniel Kahnemann, the pain of loss is twice as powerful in the psyche as the joy of gain. So, as a stockbroker, you will feel the loss of every dollar you lose by betting on a stock like GameStop twice as much (on a psychological level) than you would feel the joy of winning $ 2 in share value. However volatile this action is, it is very difficult to compensate if things go wrong.
With short-term trading and options trading, where greed can easily trigger excessive behavior, I would take this idea a step further. Even a price gain will not be satisfactory because you will still feel that you could have made a bigger gain if you had entered earlier, and this type of approach often leads to greater risk taking and large losses that are easily avoidable in the end.
When trading on GameStop and AMC now, the normal odds-making suggests that you have a 50/50 chance of the price going up or down, but psychologically the odds are already against you, and the risk of a big financial loss is not psychologically worth it worth it.
Easy sleep
One of the benefits of long-term purchase and maintenance investment is that there is much less stress involved than what is essentially day trading. Buying and keeping means you don’t have to monitor every movement in the market. You just need to find high quality companies to invest and stay with them. Consider Warren Buffett, one of the best stock investors of all time and a man who built a fortune on exactly that philosophy. Buffett advised, “Buy just something that you would be perfectly happy to buy if the market closed for 10 years.”
Remember that a stock is a shareholding in a company, not a turnaround in the data table, and companies don’t double or triple in value overnight – certainly not without relevant news.
Make things easier for you and your state of mind. Buy top-tier stocks and save the game for the casino.