A couple of months ago, I wrote an impassioned article about the psychological risks of 'free' when it comes to most things in life, but in that case, brokerage in particular.
A couple of people thanked me for it.
But a couple of people said, 'Can you tell me what broker you're talking about'?
The sound you could hear was me hitting my head against a brick wall.
I was trying to warn people to be careful, and all some of them heard was 'hey, this guy knows where I can get free brokerage'…
Such is life, of course.
And it's a free country, so they're entitled to respond that way.
But it makes me reluctant to raise today's topic.
Still… I will. On the off chance it'll help someone.
You might have seen the carry-on regarding Gamestop, a US-listed retailer of gaming consoles, games, merchandise and the like.
There's been, for a while, a lot of people expecting the business to die.
And many of those people have used a financial instrument to attempt to profit from that expectation.
They've been short selling: a pursuit that allows you to make money from falling share prices… if you're right.
It's a dangerous sport… unlike owning shares themselves, when you short sell, the upside is limited, but the downside is unlimited.
That's usually not a great starting point (compare it to owning shares where the downside is limited but the upside is essentially unbounded).
I have my issues with the way some short sellers behave – some of them seem hell-bent on using the media and other outlets to try to push prices down – but there are some very decent ones, too.
Still, this isn't about short selling, per se.
You see, some retail investors on an internet forum decided they'd try to make money by causing pain for short sellers.
I won't go into the details, partly because it's boring, partly because it doesn't matter, and partly because I really, really don't want our readers playing chicken on this particular freeway.
In any event, at the time of writing, the Gamestop share price is up some 12-fold this year (no, not the last 12 months… I'm talking just in 2021!) as the 'day traders vs. short sellers' game plays out.
Thus far, the day traders are winning.
It might end up sending some fund managers broke, too, as they liquidate their positions at hugely inflated prices (remember, that's bad, if you were betting on the price falling!).
But here's the thing: No-one – literally no-one – thinks Gamestop is worth the current share price.
At the moment, that share price just reflects a temporary imbalance between supply and demand.
When – not if – the share price falls, there will be a lot of carnage to inspect.
Some short sellers will probably go broke.
Some day traders who end up with almost-worthless shares will probably be sitting on losses of 90–95%.
In the meantime, they're all playing an extraordinarily high stakes game of chicken.
Why do I care?
Well, many of those so-called day traders are just average, novice investors, caught up in the FOMO frenzy.
And many more, who haven't yet taken part, are frothing at the bit, waiting for the 'next Gamestop' to be unveiled.
Right now, for many of them, it looks like fun. And easy money.
And the stories of the 'winners' are the things that FOMO dreams are made of.
No-one wants to miss the next one.
Uh-oh…
If this feels like the dot.com boom all over again (in style, but not in size or breadth), then you're on the right track.
The worst part?
There are actually two:
First, I feel for those poor bastards who are probably going to lose their shirts, playing a game they barely understand.
Second, I feel for those – a group many, many times larger – who are watching this unfold and feeling like it only confirms their view that the stock market is a casino, and the smart money holds all the cards.
I mean, how could they not see it that way, given the reporting?
So, please don't ask me how you can get in on the Gamestop trade. I'm not going to tell you.
And please don't take the wrong lesson from this.
Just because a small, if temporarily prominent, minority are treating it as a casino, please remember that, for the other 99.9% of us, it isn't, and doesn't need to be.
Or, as Warren Buffett put it, remember that:
"…[L]ike Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence…"
One of the worst characteristics of our stock market is that regulators allow what is, for all intents and purposes, barely disguised 'gentrified gambling'.
A market that was designed to allow you and I to exchange ownership interests in businesses has been instead used, in its darker corners, as something of a mix between an SP bookie, a TAB and a high stakes game of blind man's bluff.
If it was up to me, that part of the market would be excised and euthanised.
Alas, I don't have that power.
You and I have something almost as powerful, though: we can simply choose to stay away from those dark corners.
The rest of the stock market is a wonderful place (on average, over time), which has allowed business owners (shareholders) to compound extraordinary wealth.
So, please do me a favour. Don't read the Gamestop stories.
Or, if you must, treat it as a guilty pleasure: be the voyeur, enjoying it as you would reality TV.
But, just as your life isn't MasterChef-meets-Love-Island-meets-Big-Brother, nor should your investments be.
Getting rich, slowly, by regularly adding to a well-chosen portfolio that steadily marches higher (with the occasional pullback, like in March and April last year) is the best path I know.
Playing silly buggers with 'hot stocks' is like buying lotto tickets or betting on the dogs: just because someone wins, every now and then, doesn't make it a sensible way to fund your retirement (and walking away with nothing is a terrible, but regular outcome).
So do me – and your future self – a favour: stick to the straight and narrow, please.
