The GameStop Saga: Our Thoughts
By Jason Staley, CFA, CAIA®
Director of Research & Due Diligence
Schneider Downs Wealth Management, LP
|
|
Most of us, at one time or another, have heard the story of David vs. Goliath. Whether it was in Sunday School, a Church pew, or an analogy to describe an upset win on ESPN. The story of the underdog has been a part of English lexicon for as long as I can remember. The last several weeks in the financial markets has seen a series of David (smaller retail traders) vs. Goliath (Hedge Funds) battles, with GameStop stock (symbol: GME) moving to the forefront as the preeminent example in this battle of wills and capital. Our thoughts are below, but for those that are interested in a more technical/deeper dive into the subject, we are also linking a very good article below by Liz Ann Sonders, who is the Chief U.S. equity strategist for Charles Schwab. |
|
SDWMA has received many inquiries into our views on GameStop (as well as similar moves in AMC, Macerich, and the commodity Silver). These questions have ranged from our general thoughts on the frenzied markets to explaining the mechanics of a “Gamma short squeeze.”[1] At SDWMA, we believe that the foundation of any portfolio is a diversified asset allocation that is anchored around each individual/family’s goals and objectives. This means exposure to U.S. stocks (large cap, mid cap, and small cap), International stocks (developed and emerging), fixed income (mostly core high quality mixed with a modest amount of low quality/high yield), and real assets (real estate and infrastructure). In some asset classes like U.S. small cap, there will be exposure to growth and value strategies, whereas other asset classes like U.S. mid cap, a core index exposure, is most appropriate in the opinion of our investment team.
|
|
The investment team does not believe in putting shorted stocks, which are for the most part binary positions, into client portfolios. First and foremost, shorting stocks, whether through outright short sales or through purchasing put options, are incredibly difficult and a skillset that very few investment managers can execute on a consistent basis. In order to successfully “short” a stock, you need to 1) identify and obtain the ability to short the stock, 2) pick the price to short at, and 3) set the price to cover (both at the lower bound, where if you are right and the stock goes down in price you close it out and make money, and at the upper bound, where if you are wrong and the stock goes up in price you limit your losses). |
|
|
|
Melvin Capital, the hedge fund that came to prominence over its GameStop short position, compounded capital at 30% per annum for five years until it lost over 53% [2] in January. Other prominent hedge funds like Point72 (headed by Steve Cohen) and Citadel (headed by Ken Griffin), long known for their risk controls, were reported to have lost 10% and 3% respectively in January. These prominent hedge funds, who are among the best at what they do, weren’t able to avoid losses, and in the case of Melvin Capital, needed to quickly tap outside investors in order to regain solid footing.
|
|
Similarly, those retail investors (David) that thought that GameStop stock wouldn’t ever stop going up, and purchased it as high as $480, have lost significant sums of money as the stock is currently trading at $47. Day trading is very difficult, whether you are shorting a stock or trying to swing/momentum trade (buy a stock and sell it a short time later at a higher price). |
|
At SDWMA, we believe that one of the hallmarks of successful investing is staying within your capabilities; sometimes, that means watching GameStop stock shoot up and resisting the urge to get FOMO (fear of missing out) and trying catch the wave. Slow and steady wins the race more often than not, and that is the approach SDWMA deploys for its clients; creating an asset allocation and constructing a portfolio that aligns with each individual’s goals and objectives and growing that capital prudently and judiciously over time.
|
|
As always, we are here to answer your questions. Please do not hesitate to reach out to your dedicated advisor.
If you don't currently work with an advisor at SD Wealth Management, we would love to hear from you too. Contact [email protected] to be connected to an advisor.
|
|
[1] As a someone who put in a lot of time studying derivatives during the CFA curriculum, I’ve often asked myself if I would ever use this in practice. It turns out that all that studying wasn’t for naught; so, I send a special thank you to Matthew Conway, CFA, a friend and former colleague who helped me with these studies. As a former options trader, his advice and teaching were invaluable.
|
|
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training. |
|
Schneider Downs Wealth Management Advisors, LP
1 PPG Place, Suite 1700
Pittsburgh, PA 15222
412.697.5200
|
|
|
|
|
|
|
