GameStop Frenzy Reinforces Need for Quality in US Stocks
The GameStop drama that has rattled US stocks reflects the growing power of individual investors to shape market events. But there are lessons for traditional, long-term investors, too. When markets ignore fundamentals, redoubling a focus on quality is the best way to produce consistent returns while reducing volatility.
Since late January, investors have been captivated by an unfolding showdown in the US stock market that’s been widely reported in the mainstream media. GameStop, a physical retailer of video games and hardware, was a struggling business. With the video game industry transitioning away from physical disks, GameStop’s stock has traded at about $5 per share over the past 18 months. Hedge funds smelled opportunity, and many sold GameStop shares short—totaling 140% of shares outstanding at one point—expecting that the business was about to disappear.
Calls to action circulating on internet trading discussion boards summoned large numbers of individual investors. Aggressive buying pushed GameStop’s stock price from under $20 per share at year-end to a peak of almost $470 per share in late January. The stock continued to gyrate daily, valuing the company at many times more than its real worth. Similar stories have played out around other stocks, including AMC Entertainment and Bed, Bath & Beyond.
Three Lessons from the GameStop Story
What’s the moral of this story? Much has been written about the heroic campaign by individual investors to slay giant hedge funds. It’s easy to understand why this narrative is compelling, but we think focusing on the democratization of markets misses the broader lessons from this story. Here are three thoughts on what we think the GameStop story really means for markets and investors.