A manic surge – and subsequent decline – in stock prices fueled largely by social media has garnered much attention from news media, analysts and amateur investors looking to make a quick buck.
But a professor at the University of Cincinnati (UC) says buying into the mania likely isn’t a smart bet.
“Go to the local casino and have fun while you're doing it if you really want to lose money,” said Richard Curry, an adjunct instructor of economics at UC. “And you probably will lose money.”
In just a little more than a week, stock for GameStop – the Texas-based videogame retail chain – went from trading at $38 to a high of $483, largely due to an effort by amateur traders on social media to raise the stock’s price and resentment toward big investors on Wall Street.
The struggling retailer’s stock was driven up more than 3,000% since the beginning of January, though it’s now experiencing sharp declines, according to a report from CBS News.
Curry, co-founder of the Cincinnati-based wealth management firm Curry Moore & Associates, likened the recent stock market frenzy to the Dutch tulip mania of the 17th century, which is often cited as the world’s first example of a market bubble.
At that time, the value of tulip bulbs soared as society became fascinated with rare varieties of the flower and traders began selling at ever-increasing prices. That is until the price eventually got too high that no one could afford them and the market for the flower disappeared.
“It’s called the Greater Fool Theory,” Curry said.
That theory states there’s profit to be made from buying an overvalued asset because there will always be someone willing to pay more.
“I think some people made a lot of money,” he said. “But think about the investor that bought it at $453. They didn't make any money, they bought at the high.”
“It happens all the time. But this is one of the most dramatic examples I've ever seen in my 38 years in the business,” he added.
Curry said stock market trading used to require going through a professional broker.
Now, trading apps like Robinhood, which has come under fire in recent months, have allowed inexperienced traders to begin trading stocks haphazardly.
“I would guess that most people don't make money doing that. Because the problem is … it's fear and greed,” he said. “If I'm managing my own portfolio, I could be scared about what could be happening in the market.”
While some hedge funds that were short-selling GameStop’s shares may have to sell off stock in other companies to recoup their losses, Curry doesn’t believe this frenzy will have an enormous impact on the market in the long term.
Short selling, says Curry, is the process of borrowing stock from another investor to sell it in hopes that the stock will plummet and it can be bought back for less than it was sold.
“However, when the stock starts going up on a short, every dollar the stock goes up, you lose more money,” he said, adding those losses are potentially infinite.
Damaging these big-time investors was likely more of the point of this frenzy than the chance at making a profit.
“I think there's a lot of resentment about the rich and powerful always getting a better deal than anybody else,” Curry said.
While occasionally someone can make quick cash – and maybe even thumb their nose at the 1% – off a short-term trade, making money off a long-term investment generally requires expert advice.
“The average person has very little feel for the investment world,” he said. “I don't think it's ever going to change that much. Because who's got time?”