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Disappointed GameStop Traders Should Take These Lessons to the Next Mania
Suzanne Woolley
February 8, 2021, 9:09 PM GMT+8
To judge by the Reddit-fueled rollercoaster ride in shares of GameStop Corp., AMC Entertainment Holdings Inc. and silver, you might think investing is supposed to be exciting, the financial world’s equivalent of a stadium packed with screaming Super Bowl fans. And financial planners are killjoys — diversify holdings, don’t chase hot stocks, don’t try to time the market. Where’s the fun in that? The sense of being part of something bigger?
The advice may not seem quite so fuddy-duddy now that GameStop’s shares have fallen rudely back toward earth. That said, investors who have entered the stock market for the first time in the past year or so do remain part of something greater: They have written themselves into financial history books, for better or worse. One unfortunate fact that history shows us, however, is that we humans have a long pattern of not really learning from our mistakes.
With that in mind, Bloomberg asked financial planners — and Robinhood traders — what long-term lessons they took from the short-term mania.
If you were left holding the bag when GameStop shares closed at $63.77 on Friday, here are some things to keep in mind next time:
Don’t get greedy. “Be the blackjack player who says: ‘You know, I’ve been doing quite well tonight. I’m going to go to the cashier right now, cash in two-thirds of my chips, and then come back and play some more, though with fewer stakes on the table,’” said financial planner George Gagliardi of Coromandel Wealth Management in Lexington, Mass. “Be the person who gets up before the movie is over and quietly makes their way to the exit door before everyone else does.”
Put another way: “You never go broke taking a profit,” said Ian Weinberg of Family Wealth & Pension Management in Woodbury, N.Y. You do, however, pay capital gains taxes. If that’s stopping you, Weinberg suggests at least rebalancing tax-deferred accounts like IRAs or 401(k)s. Rebalancing distances you a bit from the herd instinct, since if your stock position has gone way up, you’re selling while the stock is on an upswing. Which is the opposite of what many newer investors do, which is buy near a top and sell near a low.
Beware of trying to time the market. Market timing requires not just picking a top but knowing when to get back in. Market timers who pulled their money out of the stock market at or near the March 6, 2009, market bottom and stayed in cash for a year or two paid a big price. One year later, the S&P 500 was up 66.6% and by March 2011, it was up 93.4%.
“Understand that market volatility is the cost of long-term capital growth,” said Ajay Kaisth of Princeton Junction, N.J.-based KAI Advisors. “Who would have guessed that in 2020 we would have experienced the fastest bear market in history — 16 days for the S&P 500 to close down 20% from a peak — only to be followed by the best 50-day rally in history?”
Get real about risk. Our perception of how much risk we can stomach can be colored by our recent circumstances. “This is especially true when markets are on the upswing,” said financial adviser Peter Palion of Master Plan Advisory in East Norwich, N.Y. “It’s like, yesterday the Dow was up, and it was up a week ago, and up a month ago, and therefore it will continue ad infinitum, and it makes me forget how I really feel about risk.” The technical term for how our brains tend to project short-term results onto the future: “recency bias.”
A good litmus test for how much risk you can tolerate is to weigh the impact of any missed upside versus potentially devastating losses. Think about how you’d feel if you had a less aggressive portfolio and missed out on some potential upside of a booming market, versus how you’d feel if your portfolio fell 40%, Gagliardi said. If you’re young, that may not faze you: You could pick up some bargains, after all. If you’re nearing retirement, though, you might have to move your retirement date out 10 years to make up for the loss.
Being overly conservative could mean missed opportunities. Jacob Remian, who began trading a year ago on Robinhood, said his biggest regret was looking at GameStop in June and July when it was trading near $4 a share and convincing himself that the company was dead. “Had I let my inner child ride, I might not have missed a big opportunity for growth,” said the 34-year-old graphic designer. “Sometimes our brains get the better of us for the sake of security, but with no risk there’s no reward.”
Don’t fall in love with a stock. Some investors in GameStop are now lamenting the fact that they got pulled into a “cult mentality” and hung on to the stock for too long. Professor Terrance Odean, of the University of California-Berkeley’s Haas School of Business, ran a classic study in the late 1990s looking at the “disposition effect,” which he described as “the tendency of investors to hold losing investments too long and sell winning investments too soon.” With the exception of December, when people are thinking about the end of the tax year, Odean’s paper found that individual investors “realize their profitable stocks investments at a much higher rate than their unprofitable ones.”
Going with the herd on a popular stock can be fun, but figuring out when to sell is hard if you haven’t set any rules. “I regrettably dabbled into the hype train, and while I haven’t lost big like some, I realized how important exit strategies can be,” Remian said. Some people sell when a stock has appreciated beyond a certain amount or has underperformed compared with peers for a few quarters in a row.
Focus on what you can control. Markets are unpredictable, but you can diversify across asset classes, industries and geographies, rebalance your portfolio regularly and trade in a tax-smart way. Not keeping short- and long-term capital gains in mind when trading can lead to unhappy realizations come tax time.
Also, if you invest in funds, really know what you own: Look at the top stocks in your funds to see if there’s a lot of overlap with your other funds. With a handful of mega-cap tech stocks making up 25% of the S&P 500, many people may have a lot riding on just a few stocks in essentially one industry.
Not understanding how your funds are invested can bring nasty surprises. In 2008, investors who were just a few years from retirement saw their 2010 target-date funds fall more than 20%. The funds, it turned out, were more heavily invested in stocks than many savers realized.
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