An Old Boomer WarningI have made and lost significant amounts trading stocks for almost 50 years.
The price of a stock, in a perfect market, is the consensus of the present value of the assets and earnings projected for the enterprise. Of course markets aren’t perfect, as WallStreetBets has noted, reacted to, and now made an example of GameStop. There are differences of opinion, manipulations, unknown future events which will make the estimates made today incorrect to,orrow for better or worse. If you are good at estimating and valuing, predicting what will happen with market and economic trends, this is where you make your money. You identify undervaluation, you identify overvaluation. You buy or sell short, if you have predicted correctly you profit when you close out your trade. Elementary and apologies if you think that is all very clear and simple.
When valuation departs from asset value and future earnings and becomes a momentum assumption that a stock will continue to rise or fall because there will always be more buyers or sellers, a mistake is being made. The laws of valuation can be stretched in time, but like gravity they will always pull market prices towards true value in time.
GameStop in having stampeded buyers created a short squeeze and success in a political statement. It also made a lot of paper profits for those who went long. But now the low priced options and shorts will be closed out or gone, and new shorts will be coming in. Why? Because as pricesnrise as the market cap grows the cost of pushing the stock higher exhausts the buy side. It is one thing to buy 100 shares at $8, another to spend the same $800 but only get two shares at $400. The buyer’s influence has been reduced 50x.
The stock will collapse, it will be heavily shorted at current prices, eventually there are no more buyers. It will go no bid as the last buyers capitulate. Your money will evaporate.
Personally I wouldn’t touch it with a ten foot pole not because I don’t believe the social campaign to make a political point can’t be extended further, perhaps it can. It is that there is no foundation for current valuation and it will collapse, and when it does it will do so without long positions having any ability to exit.
Don’t ask me about Nortel, Bre-X, the Dot Com Boom and Bust. My knowledge has been paid for many times over.
Good luck. I don’t like the many institutional advantages and cheats played by Wall Street andntheir political puppets every day either. Vote! Get politically active. Young people need to press for wage rate and tax reform, assistance in housing, all kinds of things. But don’t recklessly throw around and put at risk what savings you do have. No doubt you have worked hard for every penny.
cg