A Tale of Two Stonks
A few weeks ago, the world went mad due to a popular uprising. The little guy was fighting back against the entrenched powers, and even managed to temporarily stun and overwhelm the oligarchic forces that so often swamp their proletarian dreams. I'm not talking about the invasion of the US capital by Trump supporters, I'm talking about the meteoric rise of Gamestop, and the battle between _wallstreetbets and giant hedge funds with billions of dollars at their beck and call.
If you were living under a rock the last few weeks, I'll give a very quick summary, but there are plenty of great sources that break this down in far more detail than I will here, because this article isn't really about Gamestop or reddit. Basically, a group of people on the internet noticed that massive hedge funds were betting that the price of Gamestop (a store in many American malls where you can buy and sell secondhand video games) would go down, and a lot of them decided that they would buy the stock and, due to a lot of complicated stock market mechanisms, the price ended up going up a lot. A stock that started at $4 a share ended up peaking at $396.51 per share. The world went nuts. Stock trading platforms stopped allowing people to buy or sell the company, various government agencies got involved, the internet caught on fire. A new term was added to the cultural lexicon: meme stock, which is where a stock will move in price because people on the internet decide to make it popular.
And this, dear reader, is where I personally got involved. No matter how much I preach about the benefits of low cost Index fund investing, and no matter how much benefit I've seen in my own financial life from that strategy, I'm still human. When I see people making a ton of money very quickly, I still get the ol' Fear Of Missing Out (FOMO), even if I know that, on an intellectual level, individual stock picking is a very risky strategy that is not likely to work out for the vast majority of people doing it. A friend of mine, who is very much tapped into the world of _wallstreetbets sent me a message saying that the next stock they were going to send skyrocketing in price was AMC, an American movie theater company. He told me he was putting $20,000 into the stock at the opening of the market and I needed to get in on the action. I got excited. Fortunately, I was not excited to the tune of $20,000. I did put $1,000 into AMC as soon as I could as the market opened, I ended up buying at a price of $17.90. And it was precisely at this point that the stock started dropping in price. By the end of the week, the stock was down to around $5 a share, and most of the value of my investment had evaporated.
I knew better, and I did it anyway. Fortunately, the loss wasn't financially crippling. What it was really was a lesson in the danger of FOMO and the power of the Reversion to the Mean, which is why individual stock investing really isn't worth your time anyway. The main idea behind Reversion to the Mean is that over a long enough timeline, the vast majority of investors in individual stocks will at best only get the same return as the overall market. Warren Buffet even bet the most successful hedge fund managers in the world $1,000,000 that over a 10 year time frame, they wouldn't be able to beat the average returns of the market. He won that bet, and they lost. For every Gamestop, you'll have an AMC.
This is why low cost Index Fund investing is so powerful. You end up getting better returns, and it's a lot easier. You don't have to pay attention to financial news, or ANY news. You don't have to worry about timing the market or obsessing about when the top or bottom of a stock's price is. You just buy low cost index funds that cover a lot of the stock market, and keep doing it no matter what. It's simple, and it works.
Don't let FOMO or meme stocks get you overly excited. Go for the simple, boring path. Save your energy for something better.
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