When mainstream news covers the stock market it’s usually how the major indices performed that day, significant drops or all-time highs, or if something political moved the market. Recently, we saw something new: The story of GameStop and a Reddit forum group called WallStreetBets.
To summarize, a hedge fund manager decided to bet against GameStop, a video game, consumer electronics, and collectibles retailer. The hedge fund practiced short selling, a common practice in hedge funds where shares are borrowed from other holders and sold by the hedge fund manager. Except for the size of their short bet, this was pretty insignificant, until users of Reddit, a social news forum, content rating, and discussion website, decided to buy shares of GameStop.
When an institutional investor spends hundreds of thousands of dollars to drive up the price of a stock, that can be considered market manipulation. However, this was hundreds of thousands of individual investors purchasing a few shares of stock each. The result was the same—GameStop’s price went from just under $20 to more than $347 in 11 trading days. Investors who shorted the stock were forced to buy the stock at more than 17 times the original price, which created huge losses for hedge funds who shorted millions of shares. –
Some individual investors made a lot of money in what was intended as a “middle finger to The Man.” Of course, by the time the average investor heard about GameStop’s meteoric rise, it was far too late to profit from the event. However, that doesn’t stop investors from asking their financial advisers, “Why don’t you take advantage of these market opportunities?”
The simple reason is that financial advisers are paid to manage, grow, and protect your wealth, not gamble or speculate. This fad was far too much risk exposure for retirement funds. This social media influence on the stock market is not indicative of a move away from fundamentals. Generally, investors are looking for a future cash flow, whether that comes from a business venture, stock ownership, or real estate. If an investment is promising a high return, consider the risk taken to achieve that attractive return. This is why Henssler Financial has strict investment criteria that begin with financial strength and safety. The company should be a leader among its peers and be poised to provide long-term growth and value. Drilling down further, our Analysts look at the company’s financials, business risk, strength of management, and competitive advantage. We’ve always said we want to select stocks that will not only weather the next recession but the next depression. Looking back at 2020, investors should realize that anything can happen.
Ask yourself, “If the investment promises to grow my money tenfold, how great are my chances to lose money?” If you can’t afford to lose money, then this type of investment isn’t for you. Furthermore, if you cannot understand how your investment makes money, chances are you are not the one who will profit. Fundamental analysis of a company’s financial positions and performance, the market in which it operates, competitors, and the economy has been around for more than 80 years. It dates back to the economist, professor, and investor Benjamin Graham whose books taught Warren Buffett to invest.
Investors are irrational, and the markets are efficient, at least in the long run. Those who took a chance on GameStop when it was skyrocketing may still be holding a stock that is selling for around $50 today. As with any company with a shady history, weak fundamentals, and a new leader with a history of success, it is very likely that the price will reflect its true value as it becomes more apparent in the future. Until then, GameStop will remain an industry joke among conservative investors, and Henssler will continue to focus on company fundamentals to grow clients’ wealth without incurring any unnecessary risk.
If you have questions on how Henssler selects stocks for investment, our Experts will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
1Morning Consult, 2020
Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
