Early Investing

GameStop Losses: Right Strategy, Wrong Asset

GameStop Losses: Right Strategy, Wrong Asset
By Adam Sharp
Date February 5, 2021

A lot of people lost a lot of money in GameStop this week. I feel for them — especially since I have been there myself. As I write this, GameStop is trading at around $66, down from a high of more than $450 last Friday. It was trading around $255 when I wrote the following last week.

The game these traders are playing is a risky one. Yes, a lot of them made massive gains on GME. And I’m happy for them. But I’m pretty sure a lot of people will get burned in the end. GameStop is trading far above whatever the fair value of the company is. Eventually there will be a rush to the exits, and those who don’t time it well will be left holding the bag. 

The GameStop phenomenon was a remarkably effective — yet decentralized — stock promotion. In many cases, it worked too well. People on the WallStreetBets (WSB) forum and elsewhere became absolutely convinced that the short squeeze wouldn’t end until at least $1,000. They posted hundreds of times about having “diamond hands” that wouldn’t sell. “Paper handed b****es” who sold were made fun of.

Even the man who is credited with starting it all on WSB — Keith Gill — held through at least some of the crash before posting a screenshot of his $13 million paper loss. Shares have gone down significantly since then, and we don’t know if he’s still holding or not.

For a while, the squeeze worked really well. But eventually, people sold — as they always do during a speculative episode. Sure, GameStop could rise again, but I’d say the odds are not great. It’s a wounded brick and mortar retailer in the age of ecommerce. 

Traders who held onto GME through the crash have demonstrated they have the discipline to buy and hold long-term. They used the right strategy — but with the wrong asset.

Try Diamond Hands With Better Assets

Why not buy and hold some cheap emerging market stock exchange traded funds (ETFs) instead of meme stocks? Let the 3%-to-7% dividends compound for a decade or so. Emerging market shares are priced a lot lower than expensive U.S. ones. They also have less debt paired with much higher and more sustainable dividends. A few ETFs to consider include VWO, EYLD, EWZ, and RSX. 

Here’s another long-term idea I’m investing in. Buy some quality gold and silver miners. Plan to hold them for at least five years (or buy miner ETFs like GDX and SGDJ). Reinvest the dividends using a DRIP. This decade is almost certain to see unprecedented money printing, and low interest rates are almost certainly here to stay for a long time. Gold and silver should continue to rise in price, benefitting miners. Precious metals and miners are a long-term buy and hold for me.

Buy a little bitcoin — and a smaller amount of quality altcoins. The reasoning here is once again simple. I think the outlook for bitcoin, especially, is bright due to the state of the economy (too much debt and deficit). Once you buy, don’t touch it. Don’t try to time the market — unless you’re buying during a big dip. Crypto should be a small part of your portfolio at first, but it may grow into a larger chunk over time. More in-depth bitcoin analysis is available in this article.

Invest in startups. Startups are the ideal long-term investment. You basically have to buy and hold startups — at least until an acquisition or initial public offering happens. If you invest in one big winner when the company is worth $5 or $10 million, even a small investment can turn into serious money. But it takes patience (5-to-10 years or more). Read more about startup investing in this article. And if you’re looking for guidance on picking investments, take a look at our research service First Stage Investor. We identify promising startups open for investment and help you learn how to evaluate them better on your own (sign up here if you’re interested). Like crypto, startups should make up a small portion of your overall investment portfolio (5%-to-10%, depending on your risk tolerance and investment horizon). 

That’s how I’m putting my diamond hands to work these days. 

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