Should I Worry About the GameStop Stock Debacle?

It’s not often that ordinary people pay close attention to a stock market story. Most folks put money into a 401(k) or IRA and only think about it when tax time comes.

GameStop (ticker GME), a tiny stock, nevertheless made huge headlines and took up a lot of mental space among casual investors and even non-investors curious to understand what happened and why it mattered.

Spoiler alert: It doesn’t. But the reason why GameStop doesn’t matter should give you some reassurance about how markets work and your own retirement investing goals.

Think of GameStop as the Blockbuster Video of gaming. It has the same problem as Blockbuster did. People stopped buying physical game discs and moved to renting (briefly) and now they just stream games.

You subscribe to a game, rather than owning it. No discs, just log on and play.

So GameStop as a retail stock is a bit of a dead letter. It trades normally at very low volumes and low prices. You might wonder why firms like this are even listed, but delisting would wipe out shareholders so many of these kinds of firms simply exist.

Eventually, someone buys control to get the remaining assets or to attempt to turn the brand around. It might as well be privately held, but it isn’t so there’s a ticker and people can, technically, trade the stock for any reason.

What happened next to GameStop the stock is intriguing. Big hedge funds often short stocks, that is, they bet the stock will go down in value, not up.

If the bet is large enough (in dollars) the stock only has to go down a little to make the fund a lot of money.

Increasingly, too, a lot of small, individual investors are online, talking all day about their speculative bets on various stocks. Some of them noticed the hedge fund short positions on GME and decided it would be funny to bid the stock up.

A quickly rising price for GME meant the hedge funds would lose large amounts of money quickly rather than make money. And that’s what happened. The online speculators drove up the price dramatically (300%!) and “burned the shorts” as they say.

The hedge funds had to close out at large losses, billions of dollars of investor money incinerated. Arguably, the small investors won, but soon enough they too began to sell. Many were left holding the bag as GME fell sharply (made worse by brokerages freezing GME trades for a time), and recriminations ensued.

No harm

So, a funny story, but does it matter to you as a retirement investor? No, and for two reasons.

One, if you are sufficiently diversified there’s almost no chance that you own any GME stock and, if you did, your exposure would have been a rounding error on a rounding error in terms of dollars gained or lost.

Most retirement investors are in index funds or large stock mutual funds and those fund tend to own only the largest, most profitable companies in the market. GameStop is not a large company anymore.

Secondly, most retirement investors do not participate in large hedge fund pools. So the losses racked up by these specialized funds fell only to their investors. Generally, you have to be an “accredited” investor to even take part in these kinds of funds, precisely because of the risk involved.

An accredited investor is a person with income above $200,000 and a net worth north of $1 million. That’s not most people. And most accredited investors know better than to put a large percentage of their wealth into a single hedge fund.

So does the GameStop saga matter? Perhaps to regulators and most definitely to the small number of hedge fund operators who lost money. And certainly to the small investors who dumped cash into the stock at its high point only to watch their stake vaporize in the inevitable crash.

Whether new regulation comes out to discourage a repeat of the GameStop affair is yet to be seen, but even if that happens the vast majority of us can just read along and chuckle — no harm done.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.