It has been an interesting week on Stock Markets, especially Wall Street.
ICYMI: the shares of GameStop, a computer games retailer, have gone wildly up and down on price as a group of private investors have attempted to inflict losses on hedge funds who have been shorting the stock.
There’s no getting away from this: the story contains a load of financial jargon. But it has an enormous human element. Read on to discover the bits most relevant to you.
The Jargon bit: going “short” is selling shares on the expectation they will reduce in price, then buying them back again at a lower price. Usually this involves borrowing the shares from an existing shareholder, so you have shares to sell. Some hedge funds specialise in this activity, some do very well at it. Views about this activity vary from it being one way of making capitalism efficient, to other views about it being totally immoral. There have been instances where scare stories are circulated to effect a drop in share price which shorts are looking for.
But the last week has been different. Having established that Games stop was being ‘shorted’ by hedge funds, group so individual investors chatting on the Reddit forum, and often using the Robinhood trading platform, then bought shares in GameStop to push the price up, and cause losses for the hedge funds doing the shorting.
The human element – you can argue this many ways. One argument is that the actions of individual investors here is deterring hedge funds from immoral activity. Other arguments suggest investors acting together – even through social media – is a form of market manipulation, which is illegal. The regulatory authorities are keeping a close watch (though as I write, not actually doing much. Being a regulator who is AHEAD of the game is a tough call).
The debate about individual investors beating capitalism is curious – if they make money doing so.
What this does cause is price volatility – have a look at chart:
https://www.marketwatch.com/investing/stock/gme
(If you’re keen, look at the 5 day and 6 month movements too for greater context.)
Which brings about an important question: if buying shares for the short term – are you investing or gambling?
I can still recall a practice examination question from my ‘A’ Level Economics days: “The Stock Market is just a casino for the privileged. Discuss.” That was over 40 years ago – we are still discussing. The last week in Gamestop (and others!) could be seen to reinforce the idea of a casino: the use of social media to spread the word may make it less ‘priviliged’.
This reminds me of the quote from Ben Graham, the author of one of the most famous books on Staock Market Investing, ‘The Intelligent Investor’: “The individual investor should act consistently as an investor and not as a speculator.”
Do the comments on Reddit and other forums encourage investment or speculation? Maybe that could be another good ‘A’ Level question.
What happens next? We don’t know. Key word is know. Keep an eye on this story in the news over the next few weeks. Here are some possible scenarios:
The prices in the stock market will go up and down.
With GameStop – someone is going to lose uncomfortable money. It may the hedge funds, the private investors, or both.
There will be a stock market crash BUT I cannot say when. We will have a crash because that is what stock markets do periodically. The more interesting questions are when and by how much will it drop. This may not be next week. (Or maybe I try the ‘curse of the commentator’, and say it will not be next week)?
The US stock market by most measures is in a ‘bubble’. Bubbles eventually burst. Whether you look at typical P/E ratios, CAPE index, or compare market graphs to 1929 and 2000, a price correction is overdue. (Some jargon here. See below for one description, try Investopedia if you can’t wait for my take.)
The gradual effect of vaccination combined with huge government borrowing for supporting people and businesses during the pandemic will lead to the greatest growth story of the last 100 years.
I will leave the conclusion to another quote from an investing ‘great’ – Sir John Templeton.
“The four most dangerous words in investing are, it’s different this time.”
Now, where’s those graphs about 1929 and 2000?
(These articles may help… https://seekingalpha.com/article/4332702-2020-crash-compared-1929-1987-2000-and-2008minus-2009 & https://www.macrotrends.net/2324/sp-500-historical-chart-data )
Buzzwords of the Week – Price/Earnings Ratio
Definition – Used to describe the relationship between a company’s net profit and its market value. Calculated by Dividing the Net Profit (after tax & interest) by the number of issued shares, giving Earnings Per Share. This is then divided into the market price. The lower the ratio the more value the investor buys. The higher the ratio, the greater the expectation of future profits.
Alternate View – Firstly: beware of companies – especially in the US, legally manipulating the EPS figure – see definition above. Secondly. Lower P/E means more value in theory: remember it may be lowly valued for a reason. You sometimes get what you pay for, even when buying shares. P/E is better viewed over the long term and across the market to get proper context for whether it really is high or low, let alone good or bad.
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I will be joined on this by Helen Brewster from ATL Solutions – who I first met around 20 years ago – while networking at the Chamber of Commerce. You can find more details here: https://www.eventbrite.co.uk/e/the-why-and-how-of-networking-with-phil-ingle-tickets-136343169089?aff=ebdssbonlinesearch
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