Why Investing Isn't Gambling

The GameStop bubble has been fun to watch, but don't put your savings on the line trying to guess what the herd will do next

Sarah Newcomb 28 January, 2021 | 9:13AM
Facebook Twitter LinkedIn

Poker chips

Watching the GameStop "microbubble" in real time is fascinating. What's so interesting to me is that the short squeeze that Twitter and Reddit groups have orchestrated is an example of when the value of a stock changes (temporarily) for reasons that are unrelated to the fundamental value of the company. So we're, in a sense, able to watch the pure effect of human psychology on the market value of real assets. It's fascinating and fun to watch.

But what's happening here? Put simply, a group of investors got organised and found a few companies whose price they could manipulate if they acted en masse to create a microbubble, if you will. Playing the game of price arbitrage is, in this context, both legal and fun, but it is also based largely on speculation about human behaviour, not underlying value.

Wise investors will see it for what it is: a temporary price adjustment based on nonfundamental factors. Some people like to keep a small portion of their money in brokerage accounts for exactly this kind of speculative event, but just like you wouldn't take your rent money to Las Vegas, don't put your life savings on the line trying to guess what the herd will do next. In other words, play safe. If you can't afford to be wrong, don't make the bet.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

Do You Want To Take Control Of Your Finances?

Find The Tools Here

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Sarah Newcomb  is a behavioural economist for Morningstar.