Don't Roll the Dice on GameStop

With meme stocks like AMC and GameStop back in the headlines, enjoying meteoric gains of 75% yesterday and pushing yet higher today, it can be tempting to jump on the bandwagon and try to make a few quick bucks before the current frenzy dies.

Especially for those who missed the last rallies in 2021.

But if you leave these stocks alone, you're actually the smart one. As Warren Buffet likes to famously say, "Stick to what you know." His stance is always, "I just need to know how a business makes its money. Once I know that, I can understand the business and determine if it is worth owning."

That's really key when understanding why it is so dangerous to play along in something like these meme stocks. They aren't rallying because these are solid companies making massive profits with strong fundamentals to back up their share prices and the current surges. They are rallying because the same man who fueled the last big surge has resurfaced for a second round of squeezing the shorts.

In other words, the rally won't hold and when the smoke clears the same as it did last time, it will be a swift and strong pullback, and the reality is that most people won't get out soon enough before their money is all gone.

It's gambling, pure and simple. Something that is never appropriate to do in the stock market. 

It's that temptation to wonder, "But what if it jumps another 50% today?" That's the same mentality of someone sitting at a slot machine wondering, "What if the very next pull is the one that hits the jackpot?" 

I'm a bit of a seasoned guy. I feel like I could smartly navigate the rallies and make some money. But it's just a game I refuse to play—because it doesn't make sense. It defies all of the logic I have learned over the years regarding share prices and why stocks move. Or more importantly, why they should move.

If it doesn't make sense, I'm going to leave it alone. 

Granted, some part of it makes sense. For example, we know that the short positions of GameStop were around 24% of the total of outstanding shares. So basically, buyers of the stock are running up the price through a frenzy of buying essentially forcing the short sellers to have their short positions squeezed and forcing them to sell their shorts to cover their positions.

But again, it's an artificial move. There's nothing to back up the share prices. Therefore, the prices are doomed to fall back sharply. The question is exactly when, and no one, even the most seasoned of investors, can time the markets.

I say hold onto your money and continue putting it into long-term investments that make sense. Like I said, it is tempting. Some may experience a sense of FOMO. But it's a fool's game to be sure. And the old saying that a fool and his money will soon be parted holds very much true in this case.

If one is going make a play, you have to consider it in the same way a responsible gambler would consider it. "This is money I can afford to lose and that I am willing to wager knowing I may walk away empty handed."

And, "I'm okay if I walk away empty handed." Because more people will likely walk away with nothing than will cash in on a big prize.

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© 2024 Jim Bauer

This blog post is for informational or entertainment purposes only and does not substitute for seeking advice from a licensed professional before making any investment decisions.