The following is an agglomeration of my thoughts on Gamestop throughout the week. All is taken directly from my submitted assignments or text conversations with friends... I wish I had audio from my Clubhouse sessions too...
Jan. 25th
...Humans make a lot of irrational decisions, but specifically in Finance, it seems as though we are constantly going against the efficient market hypothesis on an individual investor basis. Why is this? Because we have emotions and biases tied to each and every decision we make... just look at the people trading Gamestop in the past week. It has seen a wild ride after a short squeeze and the seemingly gambling Robinhooders.
Jan. 26th
"That's the thing with investing these days... it's all gamified so it almost doesn't even feel like the money is real."
Jan. 27th
On the idea of a bubble: While Eugene Fama (Nobel winning economist) points out there is no such thing as a bubble until there is an end (or a sudden return to an underlying value), Richard Thaler (also a Nobel winning economist) suggests bubbles exist anytime prices exceed rational valuation. This point is extremely timely in this week's volatility in stocks like Gamestop and AMC Theatres which have relatively little fundamental value, yet their share prices are at 100x+ price points. This irrationality, or absurdity I venture to say, is the perfect example of one such bubble. These “meme stocks” which have been trading without regard to fundamentals is solely due to irrationality. For these dying industry companies to be receiving such steep valuations essentially goes against Fama's “efficient market” hypothesis. However, as Fama noted early in the conversation, irrationality does in fact exist. So how exactly will the "efficient markets" account for that? Well, I venture to say Fama would suggest they would act in an according fashion: the market will eventually autocorrect itself.
Jan. 28th
So the market has been irrational the past few days, namely in the “meme stocks” that have been trading without regard to fundamentals. Essentially the irrationality of the market is something that is going to be more commonplace with more investors having access to the market, and that irrationality is a key part of what makes the “efficient market” exactly that - it will eventually autocorrect itself.
When it does auto-correct though, who will get hurt? Well, if retail investors don’t divest from GME soon enough, they’re going to be the ones feeling the pain. I think that’s why Warren Buffet came out and suggested the SEC implement some sort of protective measures to ensure prices reflect fundamentals…
Why would a company in a dying industry ever be traded at a forward earnings multiple? With no underlying innovation or market advantage, there is little future for these companies, so there is no justification for a valuation multiple out the wazoo. Look at companies like Apple, Shopify, or Salesforce, and you'll see they are all traded at earnings multiples. This makes sense - they are all innovating companies at the top of their game that have long horizons ahead of them. This hyperinflation in dying companies will ultimately lead to their shareholders' demise.
...would love to entertain further conversation. Get a clubhouse and let's hop on!
There was a great discussion on the NPR podcast A1 today regarding some strong observations about GME, Reddit, Robin Hood and the stock market in general. I will forward it to you when it becomes available.