What Goes Up Must Come Down

Trading mania

Gravity is a force of nature, and it’s also often a force in the markets.  I could see that the trading mania in red-hot Reddit wallstreetbets (WSB) stocks were peaking late last week when a couple of 30-somethings asked me if they should buy GameStop. At almost $400 per share. Yikes.

My answer may have disappointed them, but hopefully, they denied their inner-FOMO urge to buy at those lofty levels in a stock that had been trading at under $10. What did I say to them? “Ask yourself – if you lost all of that money you want to invest in that hot stock, can you afford it, and how would you feel if you lost all of it?” This may sound a bit simplistic in the complex, emotionally-charged world of investing, but thinking that a stock can defy gravity and keep going up indefinitely usually turns out to be a sucker’s game. Someone ends up being the bagholder. Don’t be that guy (or gal).

Who profits?

Who really profits from retail trading manias like what we just experienced, is it mostly the small retail investors who are part of the feeding frenzy? Unfortunately, oftentimes it’s not. At least with one of the hottest WSB stocks, Koss Corporation (KOSS), some of the Koss family were able to take advantage of the spike in their stock that had been trading as low as $0.82 per share last year. They collectively sold millions of dollars worth of stock while retail investors were buying. What’s more, their stock sales totaled more than the entire market value of Koss stock at the end of last year. Wow. So… while retail traders were gobbling up the stock up at higher and higher prices, insiders were busy selling and taking their profits off the table. That’s probably not the outcome WSB investors had in mind.

Hire a professional

Even though this may turn out badly for some retail investors, that doesn’t mean that retail investors don’t have a place in the markets, or that they can’t succeed at investing. Smaller retail investors are part of the lifeblood of markets, they contribute ideas and energy that markets need, they can act as a counter-weight to slower-moving institutions, high-frequency traders, and hedge funds, and they can add liquidity to the markets. But we’re reminded yet again that retail investors should better educate themselves (or hire an experienced financial consultant) before diving headfirst into the latest ‘hot’ stock.