If you were able to get out of GameStop's (NYSE 🙂 trading frenzy at the right time, congratulations. You've been extremely lucky to save yourself from the losses that retail investors, inspired by Reddit's WallStreetBets forum, have suffered this week.
According to a Bloomberg estimate, $ 167 billion was wiped out in just a few days this week, following a speculative bubble that collapsed GameStop and other Reddit-loved stocks.
Until last Monday, GameStop, an unprofitable physical video game seller, had risen a whopping 1.745% from the start of the year after posters at WSB converged to go after short sellers, mostly hedge fund managers betting these stocks would drop.
Movie theater chain AMC Entertainment (NYSE :), another much-loved Reddit stock, peaked at 839% profit. GameStop was down an additional 25% yesterday after falling more than 70% in the past five trading sessions. AMC has lost more than 70% of its value since the high of January 27.
AMC Entertainment Weekly Chart.
If you are not a day trader and punishing hedge funds is not your mission, now is a good time to learn that stocks don't always go up. If you follow a herd mindset when investing, the high risk you will buy is when it comes time to sell. Anyone who bought GameStop at the top has likely been burned, while early players who bought it for $ 17 at the start of the year are still enjoying significant winnings.
In summary, here are three lessons new do-it-yourself investors could learn from the GameStop debacle:
1. Managing Your Risk
Investing is all about managing of your risk. Simply buying one or two stocks whose fate is closely tied to speculative calls is a sure recipe for disaster. Seasoned investors work diligently to diversify their portfolios by not over-investing in a few stocks.
They build their portfolios and take positions in different asset classes such as bonds, stocks and commodities – assets that usually move in opposite directions when volatility peaks.
2. Become a Partner
Another important lesson to learn from the GameStop saga is that investing in stocks is a long-term game. Investing successfully requires you to become a partner in companies you like.
You shouldn't focus on the daily market fluctuations. Instead, you should look at a company's long-term viability and its ability to compete and survive in a tough economic environment.
With this strategy, you can fill your portfolio with both growth and dividend stocks that pay increasingly higher payouts, have plenty of cash, and have services and products that continue to be in demand in both good and bad times.
3. Hold Your Portfolio
If you really know and understand a stock you have invested in, wait for the normal corrections. According to Benjamin Graham, the great investment analyst of the 20th century and Warren Buffett's mentor, investors should come to terms with the likelihood that equities will fall 33% or more at least once every five years
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GameStop and other associated names do not fall into this category in my opinion as they are purely speculative transactions. But if you have identified and bought solid stocks through your research, you should keep them.
The March pandemic sell-off is a good example of the success of this strategy. Those who held on to their assets after that massive crash not only gained their losses in many cases, but they have since added considerable wealth to their portfolios
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