GameStop Stock Was a Terrible Lesson For New Investors

Financial literacy in America has always been put on the back burner. As such, the subject is highly obscured and often not taught at home, in most schools or colleges. Since we're going to be covering a topic on stocks, the GameStop stock trading frenzy is a prime example of teaching the wrong lessons about investing to new investors and traders.

GameStop's stock soared to $483 per share in late January 2021 - up from less than $4 last July 2020 - then came crashing down to earth to $40.59 on February 15th of this year. It is currently trading around $143 as of this blog. My God, what a rollercoaster ride. Are you dizzy yet?

What's Robinhood Got To Do With It

Fintech and social media apps like Robinhood and twitter added fuel to the fire, encouraging retail investors to pool together and push stocks. Some of Wall street's largest hedge fund firms were negative in regards to the GameStop's stock price and positioned to short-the-stock (short-selling). In contrast, the Reddit stock-trading discussion group - WallStreetBets - went against the hedge funds and investors began purchasing large amounts of GameStop stock that sent the price soaring. The small investors trampled the big boys for once!

So, the pandemonium over GameStop sent the message that investing in the stock market is a lot like gambling. Stock market speculation is a very bad idea and GameStop presented a perfect example of it. Some people did get lucky and bought the stock as it was riding high and then sold it a few days later. But many got burnt and held onto the stock too long-not knowing when to sell. That's why this was a terrible lesson for new investors.

The trading in GameStop ignored the basic lessons of patience, diversification and investing with goals in mind. People need to understand that there is a big difference between investing and gambling. Trading GameStop stock was like throwing darts blindfolded. It may land in the bulls-eye but it may totally miss the board too.

I've witnessed and worried that many new investors looked at the GameStop situation and thought that this is easy and they can get rich in the stock market by placing a bet on an individual stock. Well, it's easy to learn the wrong lesson. The stock market is not a game but a tactic to build wealth if you know what you're doing. .

However, the GameStop and AMC Entertainment phenomenon has created a renewed interest in investing - especially amongst the millennial generation - and there is a safer way to get an introduction to the stock market. There are online simulation games conducted by Robinhood and "ThinkorSwim" from TD Ameritrade that are fun, interactive, and educational in ways to get their toes wet. This is a good thing.

The Dark Side of Gamification

Critics warn that Fintech apps such as Robinhood employ tactics to get users addicted to trading. For instance, Robinhood send daily push notifications and display confetti across your mobile screen after each trade. This system generates more revenue for the app because it lures customers into consistent participation, more trading, and long-term engagement with the platform.

Robinhood did announce recently that it scrapped its confetti design and replaced it with images of floating geometric shapes when a user trades for the first time. The confetti piece has caused multiple lawsuits and is just one example of the increasing pressure Robinhood has faced over its gamification strategies. Last year, Robinhood user Alex Kearns took his own life after mistakenly believing he lost $730,000 in an options trade.

Double-Edge Sword

Financial literacy can be a complicated subject. Financial education is just a map but financial advise is the GPS that help investors arrive at their destination-giving them direction along the journey. Fintech apps are popping up all over the internet these days due to the high demand of new investors. They are in the pockets of retail investors that can manipulate markets like GameStop and AMC Entertainment. If for not easy-to-use free trading apps like Robinhood, millions of retail investors wouldn't have the access to move markets.

While digitalization has done a tremendous job of smoothing the barriers for entry in financial services, it is the responsibility of the finch apps to create a user design that places education and financial literacy at its core.

While much information such as white papers, books, articles, and webinars has been put out there from advisors and money managers for the public to consume, it still doesn't appear to be helping much. Day trading and groups pooling funds together to challenge Wall Street pros seems to be much more exciting.

Back to School

Investor education has its place online but I still believe "live" in-person interaction works best. Outside of apps, financial literacy can be taught in a traditional classroom setting. For example, I've been teaching a "live" in-person basic evening investing 101 class, "Sick & Tired of Being Broke" at Temple University for the past 20 years (I'm getting old). It's an excellent way for people to learn about the stock markets and how to invest. It has changed the financial lives of many.

In Closing

The GameStop saga continues to this day but the volatility of this stock is certainly not the correct way to learn about stocks. Gambling is one thing but investing in quality stocks is another. One of the most popular methods used to estimate the intrinsic value of a company's stock is the price to earnings ratio. If you looked at GameStop's P/E ratio, it is N/A. That should tell you something.