JUST PLAIN TALK: GameStop and the psychology of money

Buz Livingston
Buz Livingston

In a rare convergence of literary inspiration, my deadline hit the same day I finished Morgan House's chapter on financial bubbles. Then GameStop trading dazzled the financial world. The SEC initiated a preliminary investigation, too, but that's another story. I woke up wondering what else I could glean from "The Psychology of Money" and whoop, there it was.

GameStop (GME: NYSE) sells video games along with consumer electronics. Video games never appealed to me, likely because of my poor eye-hand coordination. A few years ago, my optometrist, Dr. Korrie Lalim, 30A Opptik, diagnosed my inability to focus, a condition undiagnosed for decades. Not to throw shade on previous optometrists; my poor vision likely obscures other eye problems.

Some attribute GME's dizzying rise to a short squeeze against a hedge fund's (Melvin Captial) short position. Investors who believe a stock is over-priced can sell short the position and profit when the stock price drops. Speculators bid up GME. Its soaring price attracted further speculation compounded by retail investors who saw a chance for quick bucks. Apps like Robinhood allow traders to place orders with a few clicks on their smartphone. I don't recommend the strategy, but professionally it keeps

markets liquid, which works for me. The process feeds on itself. Rapid, short-term returns attract additional funds from people with ever-narrowing timeframes.

Housel observes, a lightbulb moment for me, market bubbles occur because investors have different time horizons and goals. Importantly, no one is irrational; instead, with GME, people are somewhat rationally focusing on short-term gains. A single sensible price doesn't exist, and it doesn't matter if it's Florida real estate or video game retailer.

People shoot themselves in the foot when they allow those playing a different game to influence their decisions. Housel warns, "An anchor of psychology is not realizing that rational people can see the world through a different lens than their own." Know what game you are playing. It's critical to understand your time horizon and goals and not let others' behavior influence you.

A social media thread praises Melvin Capital's short squeeze as an example of sticking it to the man. Melvin Capital, according to news reports, borrowed billions to shore up its finances. If Melvin Capital can't pay back their loans, no one knows how that affects the lenders. The Panic of 1907 began when an attempt to corner the copper market went awry. Banks linked to the speculators went belly-up, and the dominoes started to fall. In the subsequent fallout, GDP dropped twice as much as it did during the Great Recession of 2008. Don't let fleeting moments of schadenfreude color your vision. History may not repeat itself, but it rhymes. The stock market provides a useful function for companies to raise cash and gives long-term investors a way to benefit from economic growth.

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.