Nick Hodge,
Publisher
June 1, 2021
The “Gamestonk” trade is easily the most famous trade of the 2020s so far. And it’s a contender for one of the most famous trades of the 21st century.
I mean, just look at this chart of GameStop (NYSE: GME) over the last year…
As you can see above, the stock’s proponents pushed it up to record highs at the beginning of this year — before dumping it in epic fashion.
It went up more than 10,000% over the past year. And the bulk of those gains came during a few days in January of this year.
GameStop, along with other stocks being whipsawed at the fancy of the social hive, have been branded “meme stocks” — and they continue to trade with wild swings six months later.
Who are the investors dumping their savings into these stocks?
And what does the incident have to teach us about stock selection going forward?
Before we answer these weighty questions, we should probably start with a quick review of the relevant events…
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What’s a “Gamestonk?”
The story of the rise and fall of GameStop shares starts back in 2019 on Reddit’s “WallStreetBets” stock trading forum — an irreverent message board where investors brag, commiserate, and share memes about their most impulsive trades.
Back in 2019, a WallStreetBets user named Keith Gill — better known by his Reddit handle, “DeepFuckingValue” — posted about buying 50,000 GameStop shares and 500 GameStop call options.
Over the next year, he began posting his reasoning on WallStreetBets and on his Youtube channel, where he goes by the moniker “Roaring Kitty.”
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His thesis — that GameStop was undervalued based on its large population of rewards points members, excessive short interest and new e-commerce-focused board of directors — resonated with other WallStreetBets users, setting off a wave of frenzied buying in late 2020 and early 2021 that became a sort of financial meme in and of itself.
The “gamestonk” phenomenon — a portmanteau of the company’s name with the meme slang word “stonks” (“stocks”) — sent the company’s share price to record highs in such a short span that several brokerages, most notably Robinhood, had to halt trading on it, citing inadequate liquidity to fill all orders.
Eventually, however, the momentum faltered, the Gamestonk community fragmented into multiple uncoordinated forums… and the stock came crashing down to earth.
What Happened to the Bag-Holders?
WallStreetBets is not just a forum which glorifies risky trades.
It also glorifies using reckless option plays to leverage risky trades.
And when a horde of largely-inexperienced and uncoordinated retail investors use such option plays… the results can get ugly.
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Many investors who entered short-term call positions while the stock was declining woke up to find that their brokerage accounts had been closed out with a zero balance — or worse: that they owed their brokerage money.
What followed was a wave of GoFundMe’s and other desperate efforts by spurned investors to recoup their life savings…
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What Investors Can Learn From the Gamestonk Fiasco
In hindsight, the rise and fall of Gamestonk looks like a cautionary tale about the risks of momentum investing… and of making trades with risks you don’t fully understand.
It’s also a cautionary tale of excess capital and liquidity and the lengths institutions will go to maintain order.
And it served as a massive distraction from much bigger investment stories that were unfolding at the time.
Investors who want to speculate for outsized gains while avoiding the fates of bag-holders like Justin Fisher should instead consider following someone with a proven track record of doing so.
Here is one such speculation I’ve made recently.
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Call it like you see it,
Nick Hodge
Editor, Daily Profit Cycle
Nick Hodge is the co-owner and publisher of Daily Profit Cycle and Resource Stock Digest. He's also the founder of Hodge Family Office, the umbrella organization for his three premium services: Foundational Profits, Family Office Advantage, and Hodge Family Office . He specializes in private placements and speculations in early stage ventures, and has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world.
*Follow Nick on Twitter.
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