Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Investing shouldn't feel like a trip to the casino

Sarah Newcomb, Ph.D  |  28 Jan 2021Text size  Decrease  Increase  |  
Email to Friend

As someone who specialises in consumer and market psychology, watching the GameStop' (GME) "microbubble" in real time is fascinating. What's so interesting to me is that the short squeeze that Twitter and Reddit groups have orchestrated is an example of when the value of a stock changes (temporarily) for reasons that are unrelated to the fundamental value of the company. So we're, in a sense, able to watch the pure effect of human psychology on the market value of real assets. It's fascinating and fun to watch.

But what's happening here? Put simply, a group of investors got organised and found a few companies whose price they could manipulate if they acted en masse to create a microbubble, if you will. Playing the game of price arbitrage is, in this context, both legal and fun, but it is also based largely on speculation about human behavior, not underlying value. Wise investors will see it for what it is: a temporary price adjustment based on nonfundamental factors. Some people like to keep a small portion of their money in brokerage accounts for exactly this kind of speculative event, but just like you wouldn't take your rent money to Las Vegas, don't put your life savings on the line trying to guess what the herd will do next. In other words, play safe. If you can't afford to be wrong, don't make the bet.

MORE ON THIS TOPIC: Easy money: download Robinhood, buy stonks, bro down

This event has been interesting from a cultural perspective as well. In this case, a smallish group of individuals managed to pull off a coordinated market event that has made and broken a few real fortunes. It could catch on, and we may start to see things like this happen more often as people try to organize other such events in their own favor. Again, wise investors can avoid having these things adversely affect their own portfolios by the usual means: well-diversified funds and long-term holding periods, to name two. Large-cap stocks are also less vulnerable to being manipulated because of their size.

Speculation is fun. It's why a lot of people love investing, and if you speculate with only moneys you can afford to lose, events like these can be exciting and sometimes profitable. Still, if you are new to investing, don't understand the difference between fundamental value and market price, or you are considering putting money on the line that you need for your present or future security: stop, breathe, and walk away. No crowd of anonymous Redditors deserves your life savings, period.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

is a behavioural economist for Morningstar.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend