Dear Dr. Per Cap
After the GameStop fiasco I keep hearing the stock market is rigged against us little guys. Is that true?
– Scared Money
Dear Scared Money
Rigged is a really strong word. I won’t shy away from a tough question though, but first let me clarify two things.
- Stocks and other capital markets have always been weighted to favor large institutional investors over individual investors.
- This doesn’t mean a person shouldn’t invest in the stock market.
GameStop is a complicated, fascinating story. Here’s a quick recap. A tired brand of one stop shops for video game enthusiasts, GameStop’s outdated stores have struggled for years to adapt to the e-commerce economy.
The outlook was so bleak that some hedge funds, high power institutional investors, thought GameStop’s stock price would suffer. So they shorted the stock by borrowing shares and selling them. Hoping to buy them back later at a lower price before returning the borrowed shares and scoring a nice profit – easier said than done.
Other investors envisioned a brighter future for GameStop and chose to buy the stock hoping it would rise in value instead of drop. An online grassroots movement of investors emerged who fired up social media on a Reddit forum called WallStreetBets. Not exactly a confidence inspiring name for an investment strategy but it worked.
Instead of a GameStop crash, its stock price went through the roof rising from $17 to almost $350 in three weeks! As a result the hedge funds got pinched in what’s called a short squeeze. They had to buy GameStop stock back at a higher price than they sold it for and lost billions of dollars. Meanwhile some everyday Joes and Janes trading stocks in their basements made fortunes overnight.
But wild parties never last long before someone calls the cops. In this case online brokers stepped in to restrict individual investors from trading GameStop thereby restoring order to the market and salvaging a few hedge fund balance sheets.
Naturally everyday investors, a few politicians, and even some celebrities screamed foul at another example of the little guy getting squashed by the man. While the dust is still settling GameStop has created some big winners and some big losers but it’s still too early to gauge what the long term impacts will be on the market, investment firms, and regular investors.
Now back to the original question. Big investors like hedge funds have always had an edge over us little folks. GameStop is just a recent reminder that the system is a flawed. Hedge funds spend millions on high tech electronic trading algorithms that can spot market trends and fire off after-hours trades while we’re relaxing over a nice dinner. In the time it takes us to tap one trade on a mobile trading app, they’re blasting off thousands of trades using super computers and specialized high-frequency networks.
Then there’s old school tricks like starting rumors to incite wide spread selling or buying of a stock. Yep, it happens. All this and more means you and I can’t compete against faster information, better data, experienced analysis, and structure designed to maximize all edge.
But a regular person investing for the long term shouldn’t run scared. Throughout life we walk across a lot of uneven playing fields while facing many risks. When we invest we need to measure those risks, align them to our goals, and pay attention.
Sequoyah Fund’s Russ Seagle and I recently presented a very informative and entertaining livestream conversation about the ongoing GameStop stock saga. To learn more about what all went down and how to move ahead with your personal investing goals check us out on YouTube at https://www.youtube.com/watch?v=h9wSobxb2i4
Ask Dr. Per Cap – EBCI Money Smart is brought to you by Sequoyah Fund and Shawn Spruce Consulting. For more information, visit www.sequoyahfund.org. To send a question to Dr. Per Cap, email agoyopi@gmail.com.